Briefly enumerate the important sources of recruitment.

Answer :

Recruitment refers to the process of searching and attracting the required personnel for a job.
In other words, it is the process of finding the potential candidates and instigating them to
apply for the job. The following are the two important sources of recruitment.
i. Internal sources: Internal sources of recruitment refer to the sources that are within the
organisation. That is, through internal sources the jobs are filled up from inside the
organisation. It can take the form of transfers and promotions. Through transfers, the job of a
specific profile is filled by shifting a suitable person working in another department of the
organisation to the concerned department. Similarly, through promotions, higher position job
vacancies in the organisation are filled by promoting the lower level employees.
ii. External Sources: External sources of recruitment refer to the sources of recruitment that
are outside the organisation. Through external sources the jobs in an organisation are filled by
bringing in new people. For example, one of the external sources of recruitment is 'direct
recruitment' which involves putting up a notice board outside office and then following the
recruitment process on a specified date. Similarly, placement agencies work as an external
source as they act as a match maker for the job seekers and job providers.
Answer needs Correction? Click Here
Q2 :
Define the staffing process and the various steps involved in it?

Answer :

Staffing process refers to the procedure of filling the vacancies and keeping them filled. It
focuses on timely fulfillment of the human resource required within the organisation.
According to 'Theo Haimann', 'staffing pertains to recruitment, selection, development,
training and compensation of subordinate managers. This definition includes the steps
involved in the staffing process. Following is a brief description of various steps involved in
staffing.
(i) Estimation of the Required Manpower: The process of estimating manpower requirement
is the basic step in the process of staffing. It refers to knowing the number and the kind of
persons that are required in the organisation. Estimation process involves two steps-workload
analysis and workforce analysis. Work load analysis implies an estimation of the number and

the kind of persons required for various jobs. On the other hand, workforce analysis implies
an estimation of the existing persons. The two-step analysis reveals whether there is any
overstaffing or understaffing in the organisation and thereby, forms the basis of the staffing
process. For example, a situation of understaffing would imply that more personnel are
required to be appointed and a situation of overstaffing would imply that some of the existing
personnel need to be removed.
(ii) Recruitment/Searching: It refers to enlisting and searching the suitable candidates for the
job. It is the process of searching the appropriate people for the job and influencing them to
apply for the job. Recruitment creates a pool of prospective candidates for a job. It involves
searching through various sources that includes internal sources (transfers and promotions)
and external sources (advertising and placement agencies). It forms the basis for the selection
process by attracting the aspirants towards the organisation.
(iii) Selection: Selection involves choosing the right candidate out of the gathered pool of
aspirants which is created after recruitment process. It is a rigorous procedure and comprises
of series of tests, interviews, etc. The candidates who are not able to negotiate the selection
process are rejected. It ensures that only the competent and the best ones are selected for the
job. It is a highly important process as it forms the basis for working efficiency of the
organisation.
(iv) Induction and Placement: Once the selection is done it becomes important to make the
selected employees familiar with the working environment of the organisation. Induction
involves giving a brief overview about the workplace, introducing them to other employees
and the managers and making them comfortable with the work environment. Placement refers
to occupying the position by the employee for which he has been selected.
(v) Training and Development: Next step in the staffing process is training and development
of the employee. Both the process emphasise on improving the employee competence.
Training is a process of increasing the employee's capabilities and skills required for
performing the job. Development, on the other hand, focuses on the overall growth of the
employee by enhancing his thinking and understanding capabilities. They help the workers to
upgrade their knowledge and increase their efficiency. Moreover, training and development
motivates the workers and provides them opportunities for growth and career development.
(vi) Appraisal: Performance appraisal is an important aspect of any organisation as it helps in
evaluating the work of the individuals. Appraisal implies assessing the performance of the
employee against certain predetermined standards. In addition, under performance appraisal
the superior provides proper feedback to the employee so that right measures can be taken for
increasing the working efficiency.
(vii) Promotions: Every employee needs encouragement and motivation for continuing the
work with right efficiency. Promotion of the employee in terms of position, pay, etc. helps in
providing job satisfaction to the employee and encourages them to realise their potential.
Promotions serve the long term interests of the employees.

(viii) Compensation: Worth of the job is an important aspect to determine. All organisations
need to establish the right pay or salary for each job. Compensation entails the price of a job
along with the rewards that the employee deserves. Compensation provided to the employee
can be in direct terms (that is, wages and salaries) as well as in indirect terms (such as
insurance, bonus, etc.
What is meant by recruitment? How is it different from selection?

Answer :

Recruitment refers to the procedure of finding and stimulating the required candidates to
apply for a particular job. As against this, selection is the procedure of screening and
choosing the required candidates out of the gathered pool.
The following points highlight the difference between recruitment and selection.
Basis of Difference
Meaning

Sequence
Employment Contract

Characteristic

Recruitment

Selection

Recruitment refers to the process Selection refers to the process of
of finding and instigating the
choosing the right candidate out of the
required personnel for a job.
gathered pool developed at the time of
recruitment.
In the staffing process,
In the staffing process, selection is at the
recruitment is at the second
third stage and succeeds recruitment.
stage.
The candidates gathered under
The candidates who successfully
recruitment are not offered any
complete the selection process are
employment contract from the
offered an employment contract by the
organisation.
organisation containing such information
as date of joining, terms and conditions,
etc.
Recruitment process involves
Selection process involves choosing only
attracting as many persons as
the appropriate candidate and rejecting
possible for the job.
the non-suitable ones.

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Q4 :
Explain the procedure for selection of employees.

These characteristics can be regarding skills. The job offer is given after they are declared fit by a medical practitioner. (vi) Medical Examination: Few organisations emphasise on conducting a medical examination to check the health of the candidates. Personality test. emotional control. . This is done through preliminary screening by examining the information provided in the application forms. etc. For example. Moreover. (v) Selection Decision: After the tests and interviews are completed. in-depth conversations are conducted to judge the suitability of the individual for the job.Answer : Selection is a procedure to choose the appropriate candidates out of the numerous aspirants. (iv) Background Checks: Once the individuals pass through the interviews. Trade test and Interest test. etc. Following are the steps involved in the selection process. the individual may also seek information regarding the organisation in such interviews. Various forms of testing are Intelligence test. From these references the organisation aims at verifying the information provided by the candidate. These forms may be in the form of online application or paper applications. Such letter generally comprises of such information as date of joining and the time of reporting. They assess the individuals on different platforms and find out the suitable candidates for further selection process. help in rejecting the misfits. Selection process aims at getting the best out of the recruited pool so that work efficiency can be maximised. Aptitude test. these references also act as a source of additional information of the candidate. some organisations ask for references of other persons such as previous employers. trade test examine the skill and knowledge of the individual. (vii) Job Offer: Next step is offering the job letter to the selected applicants. The appropriate candidates are chosen by the concerned managers. Sometimes. (iii) Personal Interview: Personal interviews are an integral part of selection process that includes conversation of the candidates with the managers. personality tests judge the candidate for characteristics such as maturity level. preliminary interviews can also be conducted to bring out the facts which are not written in the application forms and thereby. Herein. other known persons. it is necessary to eliminate those candidates who do not fulfill the basic criteria and qualification required for the job. intelligence. knowledge. Similarly. the final selection is done. Along with this. (i) Screening: To begin with. It refers to an appointment letter given by the organisation to confirm that the individual has been selected. It is a rigorous process as it involves various stages of tests and interviews. (ii) Test: Test is a mechanism that helps in judging certain characteristics of the aspirants.

Answer needs Correction? Click Here Q6 : What are the advantages of training to the individual and to the organisation? Answer : Training is an important aspect of any organisation. The following points highlight the difference between training and education. Training is an essential part of the job which attempts at . abilities and competence required for a specific job profile. leave rules. Another document is the contract of employment. the candidates have to fill-up some forms that are necessary for the future references. One such form is attestation form that holds information about the candidates which are attested by him/her. date and terms of joining. Training is a narrow concept and relates to development of understanding relating to only a specific job. It aims at building the skills and abilities of the individuals to perform a job. allowances. Answer needs Correction? Click Here Q5 : Define training. It comprises of details such as salary. How is it different from education? Answer : Training refers to the enhancement of skills. Basis of Difference Meaning Scope Focus Training Training implies increasing the skills and abilities required to perform a specific job.(viii) Employment Contract: Once the job letter is given. It focuses on the goals of the organisation. working hours. education refers to the process of improving the overall knowledge and understanding of the employees. Education Education implies increasing the overall knowledge and understanding of the employees. It focuses on the individual goals. etc. On the other hand. Education is a wider concept and relates to the overall development of understanding.

Thus. The following are the highlighted benefits of training to the employee and the organisation. the complexity of the jobs has increased. Thereby. Due to increase in both qualitative and quantitative productivity. (iv) Reduced Absenteeism: Effective training helps in boosting the morale of the employees. (ii) Higher Profits: By developing the individuals and making them more efficient. it improves their efficiency and performance. Thereby. contributing to higher job-satisfaction. Thereby. . (iii) Managerial Efficiency: Training prepares the employees to face new challenges in different situations. helps in improving their career prospects. the profits of the company rise. Benefits to the Organisation (i) Less Wastage: Training is a concept that involves systematic learning of work. it gives them a chance to earn more. Benefits to the Employee (i) Better Career Opportunities: Training enhances the skill and knowledge of the employees and thereby. This helps them in building effective responses to various situations. (ii) Earn More: By helping the individual to learn more it assist them to earn more. Training also equips the future managers to take precautionary step in case of emergency. Training enhances the individuals understanding and knowledge. It increases their selfconfidence and self-reliance thereby. Answer needs Correction? Click Here Q7 : Distinguish between training and development. it makes the employee less prone to accidents. as it helps them in taking precautionary actions. training enhances their productivity in work. It is a more efficient way of learning than any hit and trial method. (iv) Self-Confidence: Development and training direct the individuals to work more efficiently that in turn builds up required morale within the individuals. Thereby. it helps in optimum utilisation of resources. training has become all the more essential. Jobs that require the employees to work with complex machines and in more accident-prone areas need to emphasise strongly on training and development. As a result. it helps in reducing the rate of absenteeism and employee turnover.improving the aptitude and knowledge of a person as per the job requirement. (iii) Less Accident Prone: Training attempts to make the employees more adept and efficient in handling the machines. This leads to less wastage of time and money. With the ever changing business environment.

careeroriented. . joboriented. The focus of development is overall growth and is thereby. It is an important aspect of management as it ensures that the right people with the needed qualifications are chosen for the work. Development on the other hand. It ensures that the vacancies are filled and always remain occupied. Explain. placement and orientation. success of any organisation depends on how effectively this function can be performed and to what extent the productivity can be increased with efficient staffing. Basis of Difference Meaning Focus Scope Training Training refers to the process of enhancing the skills and competence of an employee that are required to perform a specific job. Answer needs Correction? Click Here Q8 : The staffing function is performed by every manager and not necessarily by a separate department. The following points highlight the difference between training and development.Answer : Training and development are related yet distinct concepts. Though both the concepts focus on improvement of an individual but the perspectives are different. training of the employees. Thus. Answer : Staffing refers to the function of finding the right people for the right job. Development is wider in scope and focuses on the overall personality development of the employee. Training is narrow in scope and focuses on how one can become more efficient in the intended job. Training is a part of development. refers to the concept of growth of an individual as a whole. Managing the human element is a requisite function of any organisation as it serves the basis of the level of efficiency of the organisation. Development Development refers to the process of overall growth of an employee. The focus of training is the specific job requirement and is thereby. right selection out of the applicants. Training on one hand refers to providing the skills and abilities for a particular job. Staffing involves various stages including recruitment through various sources. etc.

may it be internal or external sources. There are two ways of filling the jobs internally. the various tasks of staffing are performed by specialised managers. However. maintain a separate department for dealing with this function. promotions and career planning. Answer needs Correction? Click Here Q9 : Why are internal sources of recruitment considered to be more economical? Answer : Internal sources of recruitment refer to the sources that are endogenous to the organisation. appraisal. For example. depending on his needs. Human resource management thus act as a link between the workers and the managers. On one hand. they should work on how the recruitment has to be done. managers can also perform other important aspects of staffing namely. they can perform the task of recruiting the personnel more smoothly as they would know what kind of personnel he would require and through what source he can gather an efficient pool of applicants. is a function to be performed by every manager himself. Along with this. it can be said that staffing function is performed by every manager and not necessarily by a separate department. Under this department. Managers here play an important role as they make sure about the optimum utilisation of the manpower. Along with staffing they also take care of the labour grievances. As the main seekers of the employees. On the other hand. if a manager needs two subordinates to work under him then he'll be able to mention the requirements more clearly. Staffing forms an essential part of management. if any extra manpower is needed. As managers are more closely related to the workers. that is. Along with this. Subsequently. and to what extent. They can set the required qualifications for a particular job according to their need and work. it lowers the cost by saving the expenditure on advertisement and other related processes. namely transfers and promotions. it is seen that organisations that are large in size. the time spent in the whole recruitment and selection process is diminished to a large extent through internal recruitment. Filling the jobs through internal sources is cheaper in terms of time as well as money. It is their task to watch if there is any vacancy and also.Nowadays. It has an advantage of being more economical than the other sources of recruitment. Similarly. they can carry out the selection process of the right candidate in the best possible manner. they can work on the staffing process more efficiently. This department is generally known as 'Human Resource Department'. within the organisation. Thus. what qualifications are necessary for the applicants to apply for the job. . training is necessary for that particular job. staffing does not necessarily require a separate department and rather.

(iv) Optimum Utilisation of Human Resources: Through proper manpower planning. in advance if there is any unfilled job. (ii) Improves Efficiency: By ensuring that right people are placed for right jobs. (i) Finding Competent Personnel: Staffing helps in finding and choosing the right personnel required for a job. In such a scenario. Thus. (v) Job Satisfaction: Compensation and fair rewards given to the employees provide them self-confidence and job-satisfaction. It encourages them to work diligently and give their best to the organisation. finding the right people for the job becomes critical. Following are the highlighted benefits of staffing in the current world scenario. Answer needs Correction? Click Here Q10 : What is the importance of staffing function in today's environment? Answer : Staffing is an important function of management as it takes care of the manpower requirement of any organisation. etc. In addition. . In today's environment with rapid changes taking place in technology. in contrast to other sources. (iii) Growth of the Organisation: It ensures survival and growth of the organisation by appointing efficient and competent employees for various jobs. Chapter 7 Q1 : Distinguish between leaders and managers. Answer : The following points highlight the difference between a manager and a leader. the internal sources of recruitment are more economical in nature. size of the organisations. proper staffing process plays an important role in the organisations. the overall efficiency and performance increases. staffing prevents over-utilisation or under-utilisation of manpower. it avoids interruption in working efficiency by suggesting.the money spent on training of the new employees is also curtailed.

an individual's focus may be on earning greater income while the organisation aims at increasing the production. certain principles have been developed. For example. organising. It should encourage the workers to work towards the goals of the organisation. the worker . A manager can be a leader as well. it creates confusion and clashes that leads to delay in the work. Harmony of Objectives: Often the objectives of an individual diverge from the overall organisational objectives. directing should work towards converging the individual goals with the goals of the organisation. A leader does not command formal authority and can only influence the behaviour of the followers through such means as trust and faith. To help in the directing process. Unity of Command: As per this principle. A leader may not be a manager. 3. In such a case. For example. If a worker receives orders from more than one superior. suitable incentive and motivation techniques can be used by the managers to urge the employees to perform better. For example. The functions of the manager are widespread and include planning. staffing and directing. Leader A leader can exists in formal as well as informal organisation. A manger focuses towards influencing the behaviour of employees towards achievement of the goals of the organisation. 2. 1. an individual should receive commands and instructions from only one superior. The following are the principles of directing. Maximum Individual Contribution: According to this principle. A leader focuses towards the satisfaction of the individual and group goals of his followers. Answer needs Correction? Click Here Q2 : Explain the principles of directing? Answer : Directing as a function of management is quite complex. That is.Manager Basis of Difference Existence Objective Power and Authority Interrelationship Functional Spread A manager can exists only in a formal organisation. each individual should contribute the maximum towards the organisational goals. a manager should use such directing techniques that induce the workers to perform to the best of their capabilities. Functions of a leader are limited to directing. A manager holds formal authority and can exercise power and control to influence the behaviour of the employees.

In addition. Moreover. the subordinates must also be able to communicate with the superiors in an unhesitant manner. In an organisation motivation can take various forms such as promotion. For example. Use of Informal Organisation: The manger should realise the existence and importance of informal organisation. etc. In other words.might get confused whose order to follow. Appropriateness of Direction Technique: According to this principle. 6. one employee might get motivated by a praise while other requires monetary incentive. He must strategically use them. Managerial Communication: Effective communication plays a key role in directing. Thus. an appraisal may act as a motivating factor for an . If required suitable corrective actions must also be taken. an effective two way communication must take place between the superior and the subordinates. In addition. 8. Through a proper follow up he must ensure that the commands are properly followed and implemented. the manager should use suitable directing techniques on requirement basis. appraisal. motivation implies encouraging and urging the employees to perform to the best of their capabilities so as to achieve the desired goals of the organisation. For example. He must be able to influence the behaviour of the employees such as to boost the willingness of the employees to work towards the organisational goals. he must also be able to work effectively towards the satisfaction of the individual goals of the employees. Leadership: Leadership is an important element of directing. It should suit the need and attitude of the employees. For example. In the context of an organisation. it might also happen that a conflict is created between the two superiors. Follow Through: According to this principle. 4. the direction technique to be used should be appropriately selected. a manager's role is not just limited to giving instructions to the subordinates rather. recognition. Answer : Motivation refers to a process of inducing and stimulating an individual to act in certain manner. The instructions and commands given by the superior must be clear and easily understandable by the subordinates. Thus. 5. A manager must be able to bring out the capabilities of the employees. it refers to driving the individual psychologically so as to induce his willingness to work and perform better. Answer needs Correction? Click Here Q3 : Define Motivation. informal communication can be used to divulge true and real feedback on policy matters. 7. depending on the expectations and desires of the employee. he should continuously review the implementation of the instructions. They must be able to express freely their feedbacks and suggestions.

3. He should hold the responsibility of being answerable for the mistakes of his subordinates. He must be able to develop willingness among the subordinates to work to the best of their capabilities. Physical Attributes: People with good physical features such as height. He should be sincere and should follow ethics and values. On the other hand. Inspiration: A leader should be a source of inspiration and motivation to others. 4. he should also be a patient listener and counsellor. 1. integrity and values. health etc. 7. However. Some of the qualities of a good leader are as follows. as a mark of encouragement he must share the credit of the success with his subordinates. That is. Responsibility: A leader should command responsibility for the work and tasks of his group. 5. he can induce his subordinates as well to work and perform better. He must also be able to maintain his confidence in difficult situations as well. He should be competent enough to effectively examine and solve the problems encountered in the course of work. Intelligence: A leader must have a good presence of mind and knowledge. are attractive. He should be able to effectively pass the problems and suggestions of the subordinates to the seniors. Confidence: A leader should be high in confidence. he must be exemplary in terms of work. 2. Effective Communication Skill: A leader should be able to clearly express his ideas and instructions clearly to the subordinates. Answer needs Correction? Click Here Q4 : Explain the qualities of a good leader? Do the qualities alone ensure leadership success? Answer : It is said that to be a successful leader an individual must possess certain qualities. he can boost the confidence of his subordinates. He must have the required intelligence to take proper decisions based on logic and facts. has the capability of being looked up to. a leader also forms the link between the higher authorities and the subordinates. for another employee praise from the senior may motivate him to further improve the performance. appearance. Only when a leader is confident himself. Thus.employee to improve performance. . Honesty: A good leader should maintain high degree of honesty. He should be an idol for others in terms of honesty. performance and values. Similarly. Besides. A healthy and active person can himself work hard and efficiently and thereby. 6.

the mere presence of these qualities does not ensure leadership success. He must be able to take up new initiatives and break the old paradigms for the benefit of the organisation. the actual talk may even get distorted and the final piece of information may come out to be much different from the original one. Under informal communication. Knowledge of these needs helps the manager in understanding the behaviour of employees.8. Moreover. It is difficult to determine the source of such information. Dynamic: A leader must be dynamic and outgoing. a piece of information flows in all directions without paying any heed to the level or authority. It arises out of social interactions among the employees and then spreads throughout the organisation. Though the above mentioned qualities are necessary for being a good leader. facts and figures. a conscious effort must be made by the managers to acquire them. Moreover. appropriate motivation can be provided to them. Answer : Maslow's Need Hierarchy theory provides an understanding of the complex phenomenon of motivation. no single individual can possess all the qualities. In fact. 9. However. within each individual there exists a set of five needs that can be arranged in a hierarchy. Answer needs Correction? Click Here Q5 : What is informal communication? Answer : Informal communication refers to the communication that flows without following the formal defined path. According to Maslow. For example. he should be confident enough to hold on to his decisions and not get confused. With identification of the needs of the employees. It can take the form of a rumour or a gossip. An informal communication system is also known as grapevine. however. 10. . Ability to take Decisions: A leader should be able to take appropriate decisions based on logic. Answer needs Correction? Click Here Q6 : Discuss Maslow's Need Hierarchy theory of motivation. He must be able to understand people and maintain good social relations with them. a talk over lunch regarding the attitude of a senior is an informal communication. Social Behaviour: He should maintain a friendly and supportive behaviour with his subordinates.

as every individual wants to command respect and acknowledgement in the peer group. work satisfaction. sometimes it can happen that needs of an individual do not follow the exact order of hierarchy. Maslow's theory is widely appreciated and is used as basis for motivation by the managers. etc. etc. (ii) Needs of the individuals can be arranged in a hierarchical order. (i) People's need influences their behaviour. Esteem Needs: These needs include such elements as respect. (iv) Once a need is satisfied. Self-Actualisation Needs: This need refers to achieving what one aims or aspires. 5. (iii) An individual can move to a higher level need only when the lower level need in the hierarchy is satisfied. 1. 3. as every individual yearns for social acceptance and belongingness. etc. 4. clothing. They are at the top of the hierarchy. Physiological Needs: Such needs comprise of essential requirements for sustenance of life. For an employee such needs relate to growth. Belongingness Needs: Such needs comprise of the social needs of an individual such as affection. Answer needs Correction? Click Here Q7 : What are semantic barriers of communication? Answer : . an individual can be motivated only through the next higher level need.Assumptions Maslow's theory is based on the following assumptions. income stability. an employee desires job security. shelter are physiological needs. etc. However. recognition. An employee requires a certain basic salary for the satisfaction of these needs. The fulfilment of these needs is necessary for survival. It is the highest level need in hierarchy. Security Needs: These needs relate to physical and economic security and well being. For example. dignity. 2. Theory The following is the hierarchy of needs as given by Maslow. acceptance. companionship. Nevertheless an understanding of the needs as given by Maslow helps the managers in practicing efficient motivation. food. For example.

sentences or phrases remain ambiguous or difficult to understand. In such cases. iv. Sometimes due to poor vocabulary or wrong use of words. Answer needs Correction? Click Here Q8 : What are the common barriers to effective communication? Suggest measures to overcome them. For example. Thereby. at times there arises misunderstanding or misinterpretation of the information as it is passed from the sender to the receiver. .Semantic barriers of communication relate to the use or understanding of language. a translation of the information is required in the language which is understandable to the workers. Answer : Barriers in Communication Sometimes the information that reaches the receiver is not in the manner that the sender had intended. ii. Sometimes certain words. At times while giving out instructions the senior or specialist uses technical vocabulary that might be difficult to understand for the subordinates. i. The following are some of the causes of semantic barriers. 1. sentences or phrases are misinterpreted or misunderstood. sometimes while giving out instructions the senior or specialist uses technical vocabulary that might be difficult to understand for the subordinates. In such cases. in a translation of an instruction from English to Hindi. the meaning of certain words might change. For example. In certain cases the proficiency of a language differs among the workers and the mangers. effective communication is obstructed. That is. iii. at times two or more words have the same pronunciation (such as access and excess). At times a word may have more than one meaning or two or more words may have same pronunciation (such as idle and idol). Such barriers in communication that arise out of ambiguity or difficulty in understanding of words and sentences are known as semantic barriers. the correct interpretation of the word remains ambiguous. However. Similarly. Such barriers in communication that arise out of ambiguity or difficulty in understanding of words and sentences are known as semantic barriers. Sometimes it happens that certain words. In such cases. the information may not be clearly expressed. they are likely to get misinterpreted. in the process of translation some of the words or sentences may get misinterpreted. that results in confusion regarding the correct interpretation of the word. This creates barriers in the effective flow of communication. Semantic Barriers: Semantic barriers of communication relate to the use or understanding of language. Barriers to communication can be classified as follows.

he must be encouraged to respond during the conversation. It should be easily understandable and should not harm anybody's sentiments. a highly centralised organisational structure obstructs free communication. it might result in delay in the flow of information. (iii) For the communication to be effective proper feedbacks must be taken from the receiver. out of frustration over a certain matter. rules. In a similar manner. due to preconceived notions regarding a conversation. That is. superiors do not share such information that they fear will harm their authority. Answer needs Correction? Click Here Q9 : . fright may also obstruct effective communication.2. barriers to communication arise due to such factors as authority. subordinates may lack the incentive to communicate freely with the superiors. often in formal organisations. That is. For example. (v) The core idea of the communication must be clear between the sender and the receiver. it must be conveyed properly what the communication is about. (ii) The language. Similarly. etc. due to lack of trust on their subordinates. Similarly. That is. tone and content of the information should be appropriately chosen. (vi) The sender of the information should also be a patient listener. an individual's mind may be preoccupied and he may not be able to attentively grasp the information given to him. Measures to overcome Barriers in Communication The following are some of the measures that can be adopted to overcome various barriers of communication. 4. Organisational Barriers: In formal organisational structures. relationships. regulations. Personal Barriers: Sometimes personal factors related to the sender or the receiver act as a hurdle in communication. it must be ensured that the receiver is clearly able to understand the information. (iv) It must be ensured that the information is complete in all respect and nothing is left ambiguous. 3. if an organisation follows long vertical chains of communication. (i) The communication should take place as per the understanding level and capabilities of the receiver. in such cases effective communication is hindered due to personal factors pertaining to the sender and the receiver. For example. He should be open to communication from the other end as well. they may not be willing to pay attention to the information provided by them. Thus. For example. Similarly. Psychological Barriers: Sometimes psychological factor such as frustration. an individual might derive conclusions even before the information is completed. anger.

Through supervisor. ii. This instils a feeling of ownership and . iii. He is in direct contact with the workers and thereby guides and supports the workers. some organisations grant bonus during festival times such as Diwali bonus. iv. Stock Option: Under this incentive scheme. It can take the form as cash. A supervisor performs the following functions. gifts. iv. He also helps in maintaining harmony and unity among the workers. Answer needs Correction? Click Here Q10 : Explain different financial and non-financial incentives used to motivate employees of a company? Answer : Financial Incentives Financial incentives refer to direct monetary incentives offered to the employees to motivate or reward people for better performance. In the organisational hierarchy he lies immediately above the worker. For example. This induces the workers to improve their efficiency and performance. the employee is offered the shares of the company at a price lower than the market price.Who is a supervisor? Answer : A supervisor refers to a person who directly oversees the activities of the workers. i. etc. the management communicates the ideas and policies to the workers and on the other hand. The following are some of the financial incentives used in the organisations. the workers are able to communicate their problems and grievances to the management. i. paid vacations. on one hand. Salary and Allowances: In every organisation salary and allowances given to the employees forms the basic form of financial incentive. Bonus: Bonus refers to the extra reward over and above the basic salary. Supervisor ensures that the workers work efficiently and as per the set targets. He provides the required knowledge and skill to the workers. Regular raise in salaries and grant of allowances acts as a motivation for the employees ii. iii. Performance Based Incentives: Often organisation offer monetary rewards for good performance. He acts as a link between the manager and the workers.

Thus. medical allowance. a promotion may satisfy the esteem and self actualisation needs of an individual. Involvement: If an organisation allows the participation of the employees in the policy and decision making matters. climb the professional ladder. Job Security: An employee should have a certain extent of security regarding his association with the organisation. recognition of performance. i. However. etc. a challenging work endowed with greater responsibility and requiring higher knowledge and skill enhances the interest of the employee. Answer needs Correction? Click Here . it encourages them to work more efficiently. the organisation shares a portion of the profit with its employees. responsibility provides a psychological boost to the employees. For example. authority. iii. Career Opportunities: If the organisation is endowed with appropriate growth and career opportunities for its employees. This encourages the workers to contribute actively towards the growth of the organisation. vi. vi. The following are some of the nonfinancial incentives used in the organisations. v. etc. Constant fear of losing the job hampers their efficiency. incentives and rewards play an important role in influencing the behaviour of the employees. it strives then to perform better and thereby. gratuity. Work Enrichment: Often. if the employees get due recognition for their performance. then it instils a feeling of belongingness in them and motivates them to work towards the organisational goals. vii. Position: Rise in status in terms of power. Sharing of Profit: Herein. a complete security can also result in loss of interest in work. Retirements Benefits: Many organisations offer certain retirement benefits to its employees such as pensions. Fringe Benefits: Besides the basic salary an organisation may offer certain additional advantages also to its employees such as housing allowance. This provides a sense of security and stability to the employees. iv. It provides the employee prospects for personal growth. Non Financial Incentives Non-financial incentives refer to those incentives that focus on non-monetary needs of the employees such as the social and psychological needs.belongingness in the employee and urges him to contribute towards the goals of the organisation. it proves to be a good source of motivation for him. v. ii. provident fund. For example. Organisational Characteristics: Certain characteristics such as employee freedom.

Without good communication network efficient management becomes difficult. boosts their confidence.Q11 : What are elements of directing? Answer : Directing refers to the process of instructing.Communication: Communication refers to the process of exchange of ideas. Directing involves the following four elements. . appraisal. Good leadership brings out the capabilities and talents of the workers and thereby. The following points explain the process of motivation. motivating. guiding and leading the people to achieve certain goals and objectives. Answer needs Correction? Click Here Q12 : Explain the process of motivation? Answer : Motivation implies inducing and stimulating an individual to act in certain manner. Besides this. motivation helps in improving their performance. i. Leadership plays a key role in the success of an organisation. ii. They act as guide to the workers and induces a feeling of initiative in them. recognition. it also plays a key role in maintaining harmony and unity among the workers. among people.Unsatisfied Want: The motivation process begins with an unsatisfied need of an individual.Supervision: Supervision implies the process of guiding and instructing the subordinates towards achieving the desired goals. It provides a psychological boost to the workers and drives their willingness to work. iv. feelings. By satisfying the needs of the employees. etc. i. A smooth functioning of an organisation requires a good communication. iii. In other words.Leadership: Leadership implies influencing the behaviour of the employees in such a manner that they willingly work towards achieving the objectives of the organisation. Moreover.Motivation: Motivation implies encouraging and inducing the employees to perform to the best of their capabilities so as to achieve the desired goals of the organisation. Motivation can take various forms such as promotion. A good supervision helps in improving the efficiency of the workers. it implies overseeing the work of the subordinates. Supervision ensures that work takes place as per the desired objectives. it also helps in reducing the turnover and absenteeism in the organisation. Communication forms the basis of management. facts. It fosters coordination among various departments and individuals in the organisation. etc.

That is. iv. Answer needs Correction? Click Here Q14 : . the frustration and tension of the individual finally gets reduced. He may think of working harder and improving his performance. Answer needs Correction? Click Here Q13 : Explain the different networks of grapevine communication? Answer : Grapevine communication or informal communication refers to the communication that arises out of social interaction among employees and spreads without following the formal communication path. v.Reduced Frustration: Once the need is satisfied. Single Strand Network: In this network. one person shares the information with many other people.ii. suppose an individual desires promotion. he assesses if his need is satisfied. iii. The following are the types of grapevine communication network.Satisfaction: After following a particular alternative for some time. information is first shared between two people who trust each other. an individual shares the information randomly with other people. the person is indifferent about who he shares the information with. Cluster Network: In this network. iii. he may get recognition and the promotion that finally satisfies his want and reduces his frustration. the information spreads from one person to other in a sequence. Probability Network: Under a probability network. That is. one person communicates to another person who turn communicates to some other person. One of them then passes the information to some other person who in turn shares it with another and so the information spreads. Gossip Network: In gossip network.Behaviour: Among the various alternatives he chooses one and starts behaving according to it. i.Drives: The frustration drives the individual to look out for alternatives to satisfy his need.Frustration: As the want remains unsatisfied frustration builds up in the mind of the individual. This makes him uneasy and he starts looking out for alternatives through which he can earn a promotion. After consistently working hard. For example. ii. vi. iv.

Answer needs Correction? Click Here Q16 : The communication network in which all subordinates under a supervisor communicate through supervisor only is: (a)Single chain (b)Inverted V (c)Wheel (d)Free flow . This need of an individual refers to achieving what one aims or aspires. etc. work satisfaction. etc. Answer needs Correction? Click Here Q15 : The process of converting the message into communication symbols is known as: (a) Media (b) Encoding (c) Feedback (d) Decoding Answer : The process of converting the message into communication symbols is known as encoding.The highest level need in the need Hierarchy of Abraham Maslow: (a)Safety Need (b)Belongingness Need (c)Self Actualisation Need (d)Prestige Need Answer : The highest level need in the need Hierarchy of Abraham Maslow is self actualisation need. The communication symbols in the process of encoding can be in the form of pictures. such needs relate to growth. For an employee in an organisation. gestures.

(i) Setting Standards Setting up of standards involves developing the benchmarks against which the actual performance is to be measured. take the required corrective actions. The standards can be set in qualitative as well as quantitative terms. Qualitative benchmarks can be in the form of improving coordination in work. The subordinates cannot communicate among themselves. rather they need to communicate through the supervisor. Answer : Controlling refers to the function of evaluating and assessing the progress of the work done. In a wheel network. Answer : Controlling is a systematic approach of managing and controlling the organisational actions. Chapter 8 : controlling Short answerslong answers : Solutions of Questions on Page Number : 234 Q1 : Explain the meaning of controlling. forms the basis for future actions and planning. to improve the . The following are the steps involved in the controlling process. etc. It ensures that everything goes as per the plans adopted. It also ensures full and efficient utilisation of resources. Answer needs Correction? Click Here Q2 : Explain the various steps involved in the process of control.Answer : The communication network in which all subordinates under a supervisor communicate through supervisor only is wheel communication network. higher goodwill or increased motivation level of employees. It helps in finding the deviations from the set targets and thereby. Controlling is an imperative managerial function as it keeps a close check on the progress of work and thereby. It involves setting a specific criteria or standards for the work and then comparing the actual work with the set standards. the supervisor is at the centre of the communication network (wheel). For example.

(iii) Comparing the Performances Performances once measured are then compared with the set standards. it is important to find the deviations that are in the permissible range. in a shirt factory completing 10 pieces a day is a quantitative target. under utilisation of resources. For example. These comparisons are easier when they are in quantitative terms. etc. this technique of controlling aims at focussing on only the key result areas (KRAs) that affect the entire organisation.motivation level among employees. units to be produced or time to be spent on a particular action. Thus. For example. the next step is to measure the actual performance of the activities. Once the deviations are recognised. etc. This may be done through various techniques such as personal observation. Ӣ Management by Exception: This technique of management is based on the belief that 'an attempt to control everything results in controlling nothing'. On the other hand a 2 percent rise in the cost can be ignored. Thereby. Quantitative benchmarks can be in the form of sales targets. Such a comparison helps in assessing the deviations in the work. It is said that deviations in key areas should be attended first. this should be immediately brought into the notice of the management. standard can be set in terms of number of initiatives taken. it is necessary to acknowledge the cause for it. This would ensure the continuous monitoring of the small parts as well as the final machine. if there is a 6 per cent rise in labour cost whereas the permissible limit is just 3 per cent. The checking should be done in an exact and reliable manner so that correct measurement is taken for comparison. (ii) Measuring Actual Performance Once the standards are set. (iv) Analysing Deviation Every organisation faces deviations when comparing the actual performance with the predeveloped standards. Thus. changes in business environment. it guides the managers in taking the necessary steps so as to improve the performances. The standards that are set should be such that they facilitate easy comparison. deficiencies in process. rise in input cost would be more important than rise in stationary cost. then. checking the sample. For example. According to this. Ӣ Critical Point Control: An organisation cannot keep a check on all the activities of the management. For analysing the deviations the managers generally use 'Critical Point Control' and 'Management by Exception'. efficiency in work in terms of cost incurred can be measured against the standard cost. For example. only the essential and significant deviations that are beyond the acceptable limit should be controlled. Measurement can be done after the completion of an activity as well as while it is in progress. performance reports. the parts can be checked before assembling. . Thus. There can be a number of elements causing deviations in work such as infeasible standards. while assembling small parts of a bigger machine. For example. etc. it .

etc. both these statements are only partially true. Similarly. Hence. Planning is a psychological process of 'thinking and deciding in advance' about 'what is to be done' and 'how it is to be done'. However. there arises a need for the management to take corrective actions. In this sense. if the production target was not met duly. Answer : The techniques used for managerial control can be divided into two broad categories namely. Answer needs Correction? Click Here Q4 : Explain the techniques of managerial control. Comment. For example. controlling is said to be a backward looking function. Answer needs Correction? Click Here Q3 : 'Planning is looking ahead and controlling is looking back'. Traditional Techniques . Though planning is a futuristic concept but it is based on past actions and experiences. involves an assessment of the past performance and evaluating them against the set standards. Traditional Techniques and Modern Techniques. it is said that planning is looking ahead as it involves predicting the future. Answer : Planning is looking ahead and controlling is looking back. though controlling involves assessment of past performance. we can say that planning and controlling are backward looking as well as forward looking functions. Planning for future cannot take place without peeping into the past. it also aims at improving the future performance by taking the required corrective actions. Thus. appropriate corrective actions such as training the workers or updating the machinery for working.becomes important for the management to take into regard the causes for the concerned deviations. Controlling on the other hand. (v) Corrective Measures When deviations go beyond the admissible limits. This statement is partially true. can be taken. It is a mental activity that includes deciding the goals and also the actions through which they are to be accomplished. This is the last step of controlling which aims at correcting the deficiencies of the organisation so that the errors do not occur again.

Managers can opt for this technique when comparing the performances of different departments or divisions or when comparing the present actions in relation to the previous year performance. Statistical Reports: Information in the form various statistical analysis such as averages. It also presents the time-bounded policies to be used for the attainment of the objectives. it is a time consuming process and cannot be used where there are a variety of functions to be overseen. Modern Techniques Modern techniques as the name suggests are modern and recent in origin. It is determined at the point where total cost incurred is equals the total revenue earned. (a) Liquidity Ratio. the manager can estimate the costs and profits to the organisation at various levels of quantity and thereby. can be easily presented in the form of graphs. Break-Even point refers to that quantity of sales where there is neither profit nor loss. Return on Investment: Return on investment refers to the gains or benefits earned in relation to the investments done. iii. ii.Techniques which are being used by the managers since long back. . However. 'budget' refers to a quantitative or qualitative statement which presents the objectives to be achieved in a specified period of time. However. for determining the short-term solvency of business. ratios. The following are traditional techniques of managerial control. i. to ensure effectiveness of the technique. Ratio Analysis: This technique involves calculating various ratios in order to analyse the financial statements. It also facilitates management by exception by focussing on the activities which deviate significantly from the set budgets. It is a useful technique in measuring whether the invested capital is being used effectively and if a reasonable amount of returns are being generated from these investments. Through this technique. estimates about the future should be as accurate as possible. Here. percentages. i. These budgets are then used as standards for measuring the actual performance. They are based on the new thinking of the managers and provide refreshing ideas for a better managerial control. ii. Break-Even Analysis: It involves a study of relation between costs. iv. Such presentation facilitates easy comparison of the performance with the standards. Following are the most commonly used ratios for controlling. These ratios are then used as a tool for effective managerial control. In addition. Following are the highlighted modern techniques of controlling. Personal Observation: This technique includes personal observation by the managers to oversee the work being done. are known as traditional techniques. volume and profits. the budgets should be flexible so as to adapt to the changes in business environment. It enables the manager to gather the right information and also creates a pressure on the workers to perform well as they are being continuously observed by their supervisor. etc. Budgetary Control: Budgetary control is a technique of planning the future operations in the form of budgets. charts and tables. find the level where profit can be maximised.

It involves dividing the entire project into various activities and then deciding a time line and cost estimate for each activity and for the entire project. Answer needs Correction? Click Here Q5 : 'An effort to control everything may end up in controlling nothing'. The head of each centre is responsible for the targets and duties regarding his centre. It processes the massive data of the organisation and generates useful information to the managers. construction projects. responsible for the revenue generated from the sales or marketing activities. vi. v. (d) Investment Centre. MIS also ensures cost effectiveness in managing information as it facilitates collection and dissemination of information at different levels. iv. PERT and CPM: Programme Evaluation and Review Technique (PERT) and Critical Path Method (CPM) are techniques that are based on network analysis. different divisions of an organisation are established as responsibility centres. It aims at reviewing the efficiency and effectiveness of the management in order to identify the deficiencies in the overall performance. (c) Profit Centre. for determining the profitability positions of a business. The aforementioned traditional and modern techniques can be used by the managers for effective and efficient controlling of the organisation.(b) Solvency Ratio. (c) Profitability Ratios. Such techniques are generally used in ship-building. Management Information System: MIS is a computer based controlling technique that provides timely data and information to the managers while aiming at effective decision making. It acts as an important control system by continuously monitoring the working activities of the managers. (b) Revenue Centre. it takes into account the investment made in the form of assets. (a) Cost Centre. iii. Explain. (d) Turnover Ratios. . etc. is responsible for the costs incurred by the organisation. The following are some of the responsibility centres that can be formed. Management Audit: It refers to a systematic approach for analysing and appraising the overall efficiency of the management of a company. Responsibility Accounting: Under this system. responsible for the profits generated considering the costs and revenues. they enable effective execution of the projects. for determining the long-term solvency of a business. for determining the efficiency of activities based on the utilisation of resources. As these techniques deal with time scheduling and resource allocation.

What are the problems faced by the organisation in implementing an effective control system? Answer : Controlling is an important and an indispensable function of management. According to this principle. (ii) Evaluating the Standards: Controlling helps in judging the accuracy of the standards adopted by the management. a less than 3% increase (say 1%) should be neglected. The following are the factors that highlight the importance of controlling. For instance.Answer : The statement. In other words. (i) Achieving Organisational Goals: Controlling aims at accomplishment of the organisational goals by indicating the deficiencies and the corrective actions which are to be taken. 'an effort to control everything may end up in controlling nothing' is in regard with the principle of 'Management by Exception'. It stresses on the fact that everything cannot be effectively controlled. there is less wastage and spoilage of resources. It helps in moving in the right direction for attaining the set organisational objectives. A good controlling system enables the manager to check whether the set standards are accurate and feasible. only the major deviations which are beyond permissible limit should be acknowledged. In this case. an effort should be there to control only the major things instead of trying to control everything. Hence. an acceptable limit of deviations in various activities should be set and only those deviations that go beyond the acceptable range should be brought to the notice of the managers for control. rather than controlling each and every deviation in performance. employees get to know well in advance about what is expected from them and the standards against which their performance will be assessed. suppose the acceptable range of increase in the input cost is set at 3 percent. Answer needs Correction? Click Here Q6 : Explain the importance of controlling in an organisation. (iii) Optimum Utilisation of Resources: A continuous control and monitoring helps in the efficient and optimum utilisation of resources. On the other hand. It aims at managing the managerial actions by setting the standards and identifying the deviations of actual performance as against the set standards. It also ensures optimum utilisation of resources while taking corrective measures for the deviations. As each work is done according to the set standard. This motivates them to achieve the assigned targets in a better way. . It also helps the organisation to review and revise the standards according to the changing business environment. only a more than 3% increase in the input cost (say 7%) should be brought to the notice of the managers. (iv) Employee Motivation: By exercising effective control.

(iii) Resistance from Employees: Controlling can be resisted by the employees if it goes against their comfort zone and freedom. Controlling is an important function that is performed by all the managers. it might pose a problem in the process of controlling. Hence. For example. Answer needs Correction? Click Here Q7 : Write a short note on budgetary control as a technique of managerial control. Such factors can be in the form of change in government policies. As the departments are made aware of their duties and tasks. Qualitative standards make the evaluation of the performance and the comparison of actual work with the standards.(v) Order and Discipline: Efficient controlling helps in creating an atmosphere of order and discipline in the organisation. The actual performance is then compared with the budgetary standards. As the employees are aware of the fact that they are being continuously observed. Thus. it may not be possible for a small organisation to set up such system. However. money and effort. a complicated task. (vi) Promoting Coordination: Pre-determined standards provide a basis for better coordination within various activities. environmental changes. etc. (iv) Expensive Process: Effective controlling is a costly affair in terms of time. However. if the managers set a defined quantity for production as a standard and if the workers take it as unrealistic. controlling becomes less effective when the standards are defined in qualitative terms. Budget refers to a financial or a quantitative statement that defines the targets to be achieved and the policies to be followed in a specific period of time. controlling has some limitations. controlling promotes coordination among them. then they can go on strike. competition. setting up of CCTVs involves a lot of costs. This comparison helps in identifying the . Answer : Budgetary control is a technique of controlling that involves preparing plans in the form of budgets. For instance. The following points highlight the problems faced by the organisation when implementing an effective controlling system. (i) Complication While Setting Standards: It is important to set the standards in quantitative terms as well as qualitative terms for better controlling. Controlling provides unity of direction while ensuring that the organisational objectives are met. Thereby. the managers should ensure that the costs incurred in operating such controlling systems do not exceed the benefits derived from it. Thus. dishonesty and inefficiency in behaviour is minimised. (ii) External Factors: Business environment keeps on changing and the organisation have very little control over such external factors. These factors might create hurdles in effective controlling.

In addition.deviations and thereby. proper budgeting ensures that resources are allocated to different divisions as per their requirements. controlling refers to the process of managing and evaluating the work done in accordance with the standards and taking corrective measures. guides in taking appropriate corrective measures. Thereby. Both the concepts of planning and controlling are interlinked in a way as they are forward looking as well as backward looking. etc. however. it encourages them to achieve the set objectives. if the managers do not know what the final objective is. Thus. On the other hand. On one hand. if there are any deficiencies in the work and if there is a need for taking corrective actions in order to achieve the planned goals. Controlling without planning is meaningless. the statement is only partially true. for the budgeting to be effective. future estimates must be made carefully. there is nothing to control. they do not have any standard against which they can judge the current performance and deficiencies. planning without controlling holds no meaning. it is also used to facilitate coordination among different divisions/departments of the organisation. planning decides the objectives to be achieved and the course of action to be followed. it becomes necessary to monitor and evaluate whether the performance is as per the desired plans. If there are no standards and no objectives. planning besides being forward looking. although controlling is based on the past actions and deals with comparing the current actions with the . Though it is often said that planning is looking forward and controlling is looking backward. Budgeting also acts as a source of motivation for the employees by setting the standards against which their performance will be assessed. it is also based on past experiences and actions initiated in the controlling function. planning cannot be accomplished. If there is no controlling. Answer needs Correction? Click Here Q8 : Discuss the relationship between planning and controlling. Thus. it helps in optimum utilisation of the resources. The various objectives and policies as formulated under planning serve as standards against which the actual performance is evaluated. Moreover. Answer : Planning and controlling are closely interrelated functions of management. purchase budget. Controlling is a requisite for measuring whether the plan is being properly implemented. Though planning is a futuristic concept dealing with preparing plans and setting standards in advance. Once the plans are formulated. it can be said that both planning and controlling complement each other. That is. planning without controlling is of no use. Budget can be prepared for different divisions of the organisation such as sales budget. Thereby. That is. However. is backward looking as well. production budget. planning refers to the psychological process of thinking and deciding about what is to be done and how it is to be done. Thus. Similarly. These standards that form the basis of controlling are provided by planning. if there are any deficiencies. Similarly.

various activities of the management can be continuously monitored. Answer needs Correction? Click Here Q9 : Explain how management audit serves as an effective technique of controlling. planning is a prerequisite for controlling. controlling is incomplete without planning. it helps in taking the necessary corrective measures. Enhances Coordination: It improves the coordination between employees as well as within the different functions of the organisation as it continuously oversees the work. on the other hand. Improves Efficiency: Through management audit. Answer : Management audit refers to the extensive and constructive appraisal of the overall performance of the management of an organisation.pre-defined standards. ii. iv. Thus. It aims at improving the overall effectiveness and efficiency of the management. This is done by ensuring that the managerial policies and strategies are up-to-date. Both are inseparable functions that support each other towards the achievement of the goals of the organisation. controlling besides looking back. Chapter 9 Q1 : What is meant by capital structure? Answer : . also looks forward. Thereby. Thereby. i. while on one hand. It evaluates all the functions performed by the managers and helps in identifying the deficiencies in the work performance. it helps in improving the overall efficiency of the management. it also focuses on taking the corrective actions to improve the future performance of the management. Identification of Deficiencies: Management audit helps in recognising the current as well as probable deficiencies in the performances. Hence. The effectiveness of management audit for controlling can be judged from the following points. iii. Adapting to Environmental Changes: It helps the organisation to adapt to the environmental changes appropriately.

Answer : Every business needs to take the decision regarding the investment in current assets i. Gross working capital and Net working capital. the working capital. The proportion of the debt and equity used by the firm affects its financial risk and profitability. NWC = Current Assets . Thus.e. simply working capital) refers to the investment done in the current assets.e. debentures. Capital structure is said to be optimal when the proportion of debt and equity used is such that the earnings per share increases. outstanding expenses. refers to the amount of current assets that is in excess of current liabilities. higher use of debt. creditors. debt is a cheaper source of finance than equity and lowers the overall cost of capital but on the other hand. Net Working Capital is calculated as the difference of current assets over current liabilities. Herein. Algebraically. current liabilities are those obligatory payments which are due for payment such as bills payable. and owners' fund comprise of preference share capital. Answer needs Correction? Click Here Q2 : What is working capital? How is it calculated? Discuss five important determinants of working capital requirement. equity share capital. While on one hand.Capital structure refers to the combination of borrowed funds and owners' fund that a firm uses for financing its fund requirements. public deposits. on the other hand. . There are two broad concepts of working capital namely. Generally. It is calculated as the ratio of debt and equity or the proportion of debt in the total capital used by the firm. borrowed funds comprise of loans. Herein. etc. the decision regarding the capital structure should be taken with utmost care.Current Liabilities The following are five determinants of working capital requirement. etc. retained earning etc. i. Net working capital. increases the financial risk for the firm. capital structure is simply referred as the combination of debt and equity that a firm uses for financing its funds. Gross working capital (or. Current assets refer to the assets that are converted into cash or cash equivalents in a short period of time (less than or equal to one year).

The span of production cycle is different for different firms depending on which the requirement of working capital is determined. i. in a period of depression there is low demand. there is higher sale. ii) Scale of Operations: Another factor determining the working capital requirement is the scale of operations in which the firm deals. then there will be a high requirement of working capital due to inventories and related expenses. during this period the need for working capital increases. v) Growth Prospects: Higher growth and expansion is related to higher production. Thus. if there is a long time gap between the receipt of raw materials and their conversion into final finished goods. Thus. more sales. If a firm operates on a big scale. In contrast to this. the requirement of the working capital will be less. higher stock and debtors. lesser production and sale. Thereby. Herein. if the production cycle is short then requirement of working capital will be low. This is because such firms would need to maintain high stock of inventory and debtors. more inputs. iv) Production Cycle: The time period between the conversion of raw materials into finished goods is referred as production cycle. On the other hand. the market flourishes and thereby. As against this.i) Type of Business: Working capital requirement of a firm depends on its nature of business. higher production. etc. the raw materials are the same as the outputs and the sales transaction takes place immediately. An organisation that deals in services or trading will not require much of working capital. iii) Fluctuations in Business Cycle: Different phases of business cycle alter the working capital requirements by a firm.e. Answer : . a manufacturing firm involves large operating cycle and the raw materials need to be converted into finished goods before the final sale transaction takes place. In contrast to this. If a firm has a longer span of production cycle. Thus. if the scale of operation is small. This is because such organisations involve small operating cycle and there is no processing done. the requirement of the working capital increases. During boom period. etc. such firms require large working capital. Answer needs Correction? Click Here Q3 : Discuss the two objective of Financial Planning. the working capital requirement reduces. companies with higher growth prospects require higher amount of working capital and vice versa.

capital structure refers to the combination of debt and equity to be used by the company. Thus. The following are the two highlighted objectives of financial planning. excess funds add to the cost of business and encourage unnecessary wasteful expenditure. It involves estimating the right amount of funds that are required for various business operations in the long term as well for day to day operations. financial planning ensures that right amount of funds are available at the right time. Thus. equity share capital. For simplicity. etc. It ensures that just the right amount of funds are available for the organisational operations at the right time. In addition. Inadequate funds hinders the smooth operations and the firm is unable to carry its commitments. capital structure refers to the combination of borrowed funds and owners' fund. It ensures that both inadequate funds as well as excess funds are avoided. owners' funds are in the form of reserves. it ensures smooth functioning. debentures. all borrowed funds are referred as debt and all owners' funds are referred as equity. retained earnings. Answer needs Correction? Click Here Q4 : ''Capital structure decision is essentially optimisation of risk-return relationship''. The sources of raising funds can be classified on the basis of ownership into two categories as borrowed funds and owners' fund. Thus. The capital . financial planning ensures that the funds are properly and optimally utilised. it also involves estimating the time at which the funds would be required. Thereby. On the other hand. Thus. Answer : Capital Structure refers to the combination of different financial sources used by a company for raising funds. i) Ensure Availability of Funds Ensuring that the right amount of funds are available at the right time is one of the main objectives of financial planning. Comment. firms tend to forecast what amount of fund would be required at what time. Financial planning also points out the probable sources of funds. ii) Proper Utilisation of Funds Financial Planning aims at full utilisation of funds. preference share capital. borrowings from banks. On the other hand. public deposits.Financial Planning involves designing the blueprint of the financial operations of a firm. Taking into consideration the growth and performance. etc. Borrowed funds are in the form of loans. through financial planning.

Thereby. raising funds through equity is expensive as it involves certain floatation cost as well. Another factor that affects the choice of capital structure is the return offered by various sources. While on one hand. high debt is related to high risk. although equity is comparatively expensive. The cost of debt is less because it involves low risk for lenders as they earn an assured amount of return. In contrast. A high use of debt increases the earning per share of a company (this situation is called Trading on Equity). they are relatively safe. higher debt raises the financial risk. there is no such compulsion in case of dividend payment to shareholders. the decision regarding the capital structure should be taken very carefully. Thus. However. Therefore. Also. interest that is to be paid to the debt security holders is deducted from the total income before paying the tax). Thus. higher return can be achieved through debt at a lower cost.structure used by the company depends on the risks and returns of the various alternative sources. Any default in payment of the interest can lead to the liquidation of the firm. the interest on debt is deductible from the taxable income (i. Thus. This is because as debt increases the difference between Return on Investment and the cost of debt increases and so does the EPS. the dividends are paid to the share holders out of after tax profits. debt is a cheaper source of finance but involves greater risk. This is due to the fact that debt involves obligatory payments to the lenders.e. taking into consideration the return and risk involved. Though debt is cheaper. even though higher debt leads to higher returns but it also increases the risk to the company. preference dividend and . there is a high return on debt. In addition to this. on the other hand. As against this. Both debt and equity involve their respective risk and profitability considerations. Answer needs Correction? Click Here Q5 : What is financial risk? Why does it arise? Answer : Financial risk refers to a situation when a company is not able to meet its fixed financial charges such as interest payment. The return offered by each source determines the value of earning per share. they require a low rate of return which lowers the costs to the firm.

Capital budgeting decision refers to the decisions regarding the allocation of fixed capital to different projects. In other words. etc. Thereby. iii) High Risk: Fixed assets involve huge amount of money and thereby. they affect the future prospects of a company. It has the capability of changing the financial fortunes of a business. Such decisions are risky as they have an impact on . They have long term implications on the business and are irrevocable except at a huge cost. capital budgeting decision is a very essential decision which needs to be taken carefully. profitability and risk. higher use of debt leads to higher financial risk for the company. Thus. furniture. The following are the factors that highlight the importance of capital budgeting decisions. higher will be its payment obligations and thereby higher would be the chances of default on payment. and also expenditure as on launch of a new product. Do you agree? Why or why not? Answer : Yes. expansion. Thus. etc. capital budgeting decisions need to be taken carefully after a detailed study of the total requirement of funds and the sources from which they are to be raised. It arises when the proportion of debt in the capital structure increases. modernisation and advertising. Such decisions involve investment decisions regarding attainment of new assets. ii) Huge Amount of Funds: Investing in fixed capital involves a large amount of funds. Answer needs Correction? Click Here Q6 : ''A capital budgeting decision is capable of changing the financial fortunes of a business''. Hence.repayment obligations. land. They affect a business' long term growth. it refers to the probability that the company would not be able to meet its fixed financial obligations. building. This is because it is obligatory for the company to pay the interest charges on debt along with the principle amount. This makes the capital budgeting decisions all the more important as huge amount of funds remain blocked for a longer period of time. Such long term investments include purchasing plant and machinery. These decisions once made are difficult to change. i) Long Term Implications: Investment on capital assets (long term assets) yield return in the future. involve huge risk as well. modernisation and replacement. higher the debt. A company's long term growth prospects depend on the capital budgeting decisions taken by it.

Reversing a capital budgeting decision involves huge cost. For example. Give four examples of such assets. i) Amount of Earning: A firm pays dividends out of its current and the past earnings. iv) Irreversible Decisions: These decisions once made are irrevocable. debtors. However. decision about the purchase of new machinery involves a risk in terms of whether the return from the machinery would be greater than the cost incurred on it. Answer needs Correction? Click Here Q8 : Explain the factors affecting the dividend decision. As they can be easily converted into cash or cash equivalents. A company having higher earnings will be in a position to pay a higher amount . This is because once huge investment is made on a project. Answer : Current asset of a firm refers to those assets which can be converted into cash or cash equivalents in a short period of time. Such assets are used to facilitate the day to day business operations. Current assets can be financed through short-term as well as long term sources. Answer : Dividend decision of a company deals with what portion of the profits is to be distributed as dividends between the shareholders and what portion is to be kept as retained earnings. such assets provide very little return and are thereby.the long term existence of the company. withdrawing it would mean huge losses. The following are the factors that affect the dividend decision. Some of the examples of current assets are short term investment.e. less than one year. Firms acquire such assets to meet its various payment obligations. Answer needs Correction? Click Here Q7 : Define a 'current asset'. less profitable. stocks and cash equivalents. i. This implies that earnings play a key role in the dividend decision. these assets provide liquidity to the company.

On the other hand. ii) Stable Earnings: When a company has a stable and a smooth earning. Even if a company has higher profits. In such cases. if the share holders prefer at least a certain amount of dividend.of dividend to its shareholders. If the taxation policy is such that a high rate of tax is levied on dividend distribution. iv) Growth Prospects: Companies aiming for a higher growth level or expansion of operations retain a higher portion of the earnings with itself for re-investment. the company has to keep such agreements in mind when distributing the dividends. . a fall in the dividends adversely affects the stock prices. Thus. while giving out loans to a company. then the companies are likely to distribute lower dividends. In other words. then the company is likely to declare the same. they are in a position to distribute higher dividend as compared to the companies who have an unstable earning. Thus. For instance. a company having consistent and stable earnings can distribute higher amount of dividends. a company must consider the probable stock market reactions. vi) Preference of the Shareholders: A company must keep in mind the preferences of the share holders while distributing the dividends. These restrictions may be related to the dividend paid in the future. v) Cash Flow Position: Dividend payments require cash outflow. while taking the dividend decision. In contrast to this. If a company is low on cash then the dividend will be lower as compared to the company which has more liquidity. a company having low or limited earnings would distribute low dividends. it might prefer to distribute higher dividends if the tax rate is low. ix) Contractual Constraints: Sometimes. viii) Stock Market Reactions: The amount of dividend that a company distributes affects its stock market prices. They try to avoid frequent fluctuations in dividend per share and opt for increasing (or decreasing) the value only when there is a consistent rise (or fall) in the earnings of the company. On the other. iii) Stable Dividends: Companies generally follow the practice of stabilising their dividends. it will not be able to distribute high dividends if it does not have enough cash. dividend of such a company is smaller as compared to the companies with lower growth opportunities. the lender may impose some restrictions in the form of agreement. vii) Taxation Policy: Taxation policy plays an important role in deciding the dividends. An increase in dividend by a company is viewed as a good sign by the investors and the stock price of the company goes up.

etc. For example. The smaller companies who have lower access to capital markets tend to pay lower dividends. The main sources for raising funds are shareholders' funds (referred as equity) and borrowed funds (referred as debt). Short term investment decisions also known as working capital decisions affect a business' day to day working operations. Long term investment decisions also known as Capital Budgeting decisions affect a business' long term earning capacity and profitability. decisions regarding cash or bill receivables are short term investment decisions. xi) Legal Constraints: Companies have to adhere to the rules and policies laid out by the Companies Act. Financial Decisions Such decisions involve identifying various sources of funds and deciding the best combination for raising the funds. are long term investment decisions. Based on the cost involved. risk and profitability a company must judiciously decide the combination of debt and equity to be used. investment in a new machine. For example. Investment decisions can be taken for both long term as well as short term. Thus. Financial decisions and Dividend decisions. Investment Decisions Investment decisions refer to the decisions regarding where to invest so as to earn the highest possible returns on investment. For example. allocation and usage of funds of the company. . purchase of a new building. It deals in three main dimensions of financial decisions namely. any company needs to take care of such restrictions and policies before declaring the dividends.x) Access to Capital Market: The companies that have a greater access to the capital market tend to pay higher dividends. What are these? Answer : Financial management refers to the efficient acquisition. while debt is considered to be the cheapest source of finance. Answer needs Correction? Click Here Q9 : Financial management is based on three broad financial decisions. This is because they can rely less on retained earnings and more on other sources due to the market access. Investment decisions.

Dividend Decisions The decision involves the decision regarding the distribution of profit or surplus of the company. a company decides what proportion of the surplus to distribute as dividends and what proportion to keep as retained earnings.higher debt increases the financial risk. maintenance of liquidity etc.) over current liabilities. financial decisions should be taken such that some value addition takes place and ultimately the price of the equity share increases. stock. The market value of shares increase when the benefits from a financial decision exceed the cost involved in taking them. Working capital . a financial decision raises the market value of share if it results in some value addition. etc. Financial decisions taken by a company affects its overall cost of capital and the financial risk. debtors. Under dividend decision. the basic objective of financial management for a company is to opt for those financial decisions that prove gainful from the point of view of the shareholders. It is aimed at maximising the shareholders' wealth while keeping in view the requirement of retained earnings that are needed for re-investment. Answer needs Correction? Click Here Q11 : How does working capital affect both the liquidity as well as profitability of a business? Answer : Working capital of a business refers to the excess of current assets (such as cash in hand. In other words. are automatically fulfilled. Answer needs Correction? Click Here Q10 : What are the main objectives of financial management? Briefly explain Answer : The paramount objective of the financial management is maximising the shareholders' wealth. other objectives such as proper utilisation of funds. Thus. A company can distribute its profit to the equity share holders in the form of dividends or retain it with itself. The share holders are said to gain when the market value of their shares rise. When a financial decision is able to fulfil the primary objective of wealth maximisation. That is.

stable earnings as stable earnings means that the company is confident of its future earning potentials. hinders the day to day operations of the business. the working capital should be such that a balance is maintained between the profitability and liquidity. unstable earnings and higher growth opportunities (b) high earnings. since current assets offer low return. high cash flows. the liquidity of the business increases. low cash flows. high cash flows. For example. an increase in the inventory of the business increases its liquidity but since the stock is kept idle. low working capital. Answer needs Correction? Click Here Q12 : Higher dividend per share is associated with (a) high earnings. stable earnings and lower growth opportunities Answer : If a company gives higher dividend per share then it gets associated with high amount of earnings as only if they will earn higher. Answer needs Correction? Click Here Q13 : A fixed asset should be financed through (a) a long term liability (b) a short term liability (c) a mix of long and short term liabilities . with the increase in working capital the profitability of the business falls. As the amount of working capital increases. high cash flows. However. stable earnings and high growth opportunities (c) high earnings. Thus. stable earnings and lower growth opportunities (d) high earnings.affects both the liquidity as well as profitability of a business. higher cash flow as the payment of dividend involves cash outflow. and lower growth opportunities because it requires less requirement of retained earnings and their retained earnings while lowering the amount of dividends paid. the profitability falls. On the other hand. they will be able to give higher dividends.

As the difference between the return on investment and the rate of interest on debt increases. the earnings per share increase. Answer needs Correction? Click Here Q14 : Current assets of a business firm should be financed through (a) current liability only (b) long-term liability only (c) both types (i. Why. preference shares. As these assets have long term implication on the business in terms of growth and profitability. generally more than one year.e. The use of Trading on Equity is explained in detail with the help of the following example. For financing the current assets of a business. A company resorts to Trading on Equity when the rate of return on investment is greater than the rate of interest on the borrowed fund. . retained earnings. both types of liabilities (short and long) can be used. That is. Answer needs Correction? Click Here Long answers : Solutions of Questions on Page Number : 266 Q1 : Explain the term ''Trading on Equity''. the company resorts to Trading on Equity in situation of favourable financial leverage. etc. Long and short liabilities) Answer : Current assets are those assets which get converted in cash or cash equivalents within a short span of time and provide liquidity to a business. when and how it can be used by a company? Answer : Trading on equity refers to a practice of raising the proportion of debt in the capital structure such that the earnings per share increases. they should be financed through long term liabilities such as long term loans.Answer : Fixed assets are those assets which are invested in a company for a longer time period.

Also suppose the tax rate is 30% and the interest on borrowings is 10%.000 Earnings After Tax (EAT) 70.00.000 40. Here.00.000 . In such a case the EPS are calculated as follows.000 10. Situation I Situation II 1.Rs 2. In the second situation the company takes advantage of the Trading on Equity and raises the EPS.00. Thus. Suppose instead of Rs 1.000 Tax 30.000 3.000 through equity capital and the remaining Rs3. in the second situation the EPS is greater than in the first situation.000 1. In case the return on investment is less than the rate of interest to be paid. the Trading on Equity is profitable.Suppose there are two situations for a company.000 7. it raises the same amount through two sources. Situation I Situation II Earnings before interest and tax (EBIT) Interest Earnings Before Tax (EBT) 40.000 1.000 25.000 79.000 No.000 through equity capital and in situation II.000 Earnings After Tax (EAT) 70.000 10.000 70. the return on investment calculated as is 20% while the interest on the borrowings is 10%.00.000.00.000 the company earns just Rs 25. the Trading on Equity should be avoided.000 30.00. Of equity shares 50.00.000 20. it should be noted that Trading on Equity is profitable and should be used only when the return on investment is greater than the interest on borrowed funds. In situation I it raises a fund of Rs 5.000 Earnings before interest and tax (EBIT) Interest Earnings Before Tax (EBT) Clearly.000 through borrowings.000 Tax 30. However.000 21. The earnings per share (EPS) in the two situations is calculated as follows.

it can be said that a firm can use Trading on Equity if it is earning high profits and can increase the EPS by raising more funds through borrowings. It provides a platform for the transfer of savings from the households to the investors. Thus. Hence. Chapter 10 Q1 : What are the functions of a financial market? Answer : A financial market refers to the market where the creation and exchange of financial assets such as shares and debentures takes place. Financial market provides a platform for the interaction of the demand of the funds (represented by the business firms) and the supply of funds (represented by the households). Of equity shares 50. the EPS in Situation II falls. directs the funds to the most productive investment. ii) Establishes the Price Similar to a commodity. Here the return on investment is only 8% while the interest on the borrowings is 10%. it helps in determining the price of the asset being traded. The following are the functions of a financial market. in this situation the Trading on Equity is not favourable and should be discouraged.000 Clearly in this case. . the price of a financial asset is established through the forces of demand and supply for funds. Thereby. It also provides savers with various alternatives for investment and thereby. i) Transfer of Savings and Alternatives for Investment A financial market acts a link between the savers and the investors.No.000 20.

Moreover. The difference between the value at which they are issued and the redemption value is the interest received on them. a financial market helps in reducing the cost of transaction in terms of effort. they are issued at a price lower than their face value and at the time of redemption. This renders liquidity to the assets.iii) Facilitates Liquidity An asset or a security can be easily purchased and sold in a financial market. through trading in the financial market assets can be easily converted into cash or cash equivalents. Answer needs Correction? Click Here Q2 : Explain the various Money Market Instruments.50. Answer : Money Market refers to the market where short term funds are traded. money and time. the difference of Rs 6. Herein. That is. (ii) Call Money Call money is an instrument used for interbank transactions. their price. Through call money.000. as they are issued by the RBI.000) is the interest receivable on the bill. T-bills are available for a minimum of Rs 25. they have negligible risk and offer assured return. The following are some of the common money market instruments. At the time of maturity. availability. T-bills are highly liquid bonds.. That is. short term funds are in the form of monetary assets having a maturity period of maximum one year.000 and in multiples thereof. Generally.000 for Rs 50. etc. if an investor purchases a 182-days treasury bill with a face value of Rs 56. T-Bills are issued at a discount and redeemed at par. They are the most commonly used money market instrument. three types of treasury bills are issued 91-days. the investor will receive Rs 56.000 . the investor gets the amount equal to the face value. For example. Thus. T-Bills are also called Zero-Coupon Bonds. They are auctioned and issued by the Reserve Bank of India on behalf of the Central Government. 182-days and 364-days. the banks borrow from each other to meet any shortage of funds .000.000 (56. iv) Reduced Cost of Transaction By rendering information regarding the securities being traded. (i) Treasury Bil (T-Bills) Treasury Bill refers to a promissory note used for short term borrowing by the government.

They are issued to meet the demand for credit in times of tight liquidity position. (iv) Certificate of Deposit (CDs) Certificate of Deposits are time deposits which are negotiable and unsecured in nature. For example. when a person buys a CD by depositing a specific amount. That is. Call money have a very short maturity period ranging from one day to fifteen days. (iii) Commercial Paper (CPs) Commercial paper is an unsecured short term money market instrument. if a company wishes to raise finance from the capital market to purchase land. the interest rate applicable and the date of maturity is written. To finance such floatation costs the company can issue Commercial Paper. Large companies view Commercial Papers as an alternative to bank borrowings and borrowings through capital market. other instruments of money market become cheaper and their demand increases. There exists a negative relationship between call rate and other money market instruments such as Commercial Papers and Certificate of Deposits. commission. any bank in shortage of funds borrows from other bank having surplus funds. he receives a certificate wherein the term of deposit. That is. It is a negotiable and transferable promissory note with a maturity period ranging from a minimum of 15-days to a maximum of one year. They are bearer instruments for a short and specified time period ranging from one month to more than five years. to raise the funds required to meet the floatation cost incurred on long term borrowings in the capital market. They were introduced in India in 1990. Call rate is highly volatile and varies from day to day. etc. CPs are mainly issued by large and creditworthy companies to raise short-term funds. it will have to incur floatation cost such as cost related to brokerage. That is. (v) Commercial Bill Commercial bill also known as bank bill or bill of exchange refers to the instrument used to finance the working capital requirements of a firm. higher interests are offered for higher deposits. For this. On the date of maturity. CDs are a secured form of investment. which are issued to individuals. The rate of interest payable on Commercial Papers is lower than the market rates. Companies use Commercial Bills to finance . the individual gets entitled to receive the principle amount and the earned interest on it. Generally. corporations and companies by the commercial banks and development financial institutions.required to maintain CRR. Interest paid on such loans is known as call rate. companies use Commercial Papers for bridge financing. Herein. For example. as the call rate rise. It is a short term negotiable instrument. advertising.

Common instruments traded in the money market are treasury bills.their credit sales. For example. A prospectus is published as advertisements in newspapers. Money market instruments act as an important source of finance for working capital requirements. For instance. It involves inviting the subscriptions from public by issue of prospectus. certificate of deposit. In addition. Due to their short maturity period they are also known as 'Near Money instruments'. the buyer becomes liable to make the payment on a specified future date. Once the bill is accepted by the buyer it becomes a marketable instrument which can be discounted with a bank. Answer needs Correction? Click Here Q4 : What are the methods of floatation in Primary Market? Answer : The following are the various methods through which floating of new issues can be done. Answer : Money market refers to the market for trading of short term securities and funds. when an individual makes credit sales. (i) Offer through Prospectus The most commonly used method for raising funds in primary market is offer through prospectus. DFHI discounts money market securities and offers a ready market for them. Discuss. Such assets act as a close substitute for cash or money. the seller draws a bill of exchange and gives it to the buyer mentioning a specific maturity period. if the seller requires funds before the maturity period. commercial paper. securities traded in the money market are safe and secure as the transactions are made in those instruments that are issued by financial institutions and those companies that are financially strong. Answer needs Correction? Click Here Q3 : ''Money Market is essentially a Market for short term funds''. he can discount the bill with a commercial bank. Securities traded in the money market have a very short maturity period ranging from one day to one year. They enjoy a high degree of liquidity. . call money. Herein. etc.

under the offer through sale method. Answer needs Correction? Click Here . company's background and future prospects. issuing houses. the lead manager looks upon the various activities and coordinates them. Herein. (ii) Offer through Sale As against offer through prospectus. the companies which cannot afford the huge expenses related to public issue often go for private placement. etc. A company can apply to get listed in any stock market except from the one through which it has already offered securities. under offer through sale. Thus. The existing share holders are offered subscription of new shares of the company in proportion to the number of shares possessed by them. first the company sells its securities to the intermediaries at the face value and later the intermediaries resell the securities to the investing public at a higher price than the face value to earn profit. the company does not issue securities directly to the public rather they are issued through intermediaries such as brokers. etc. its past financial performance. the securities are sold only to some selected individuals and big institutional investors rather than to the public. Company appoints brokers for accepting applications and placing orders. it is the right of the existing share holders of a company to subscribe to the new shares issued by it. Such information helps the public and the investors to know about the company as well as the potential risk and the earnings involved. The companies either allot the securities themselves or they sell the securities to intermediaries who in turn sell them to selected clients. (iii) Private Placement Under this method. (iv) Rights Issue Under the Companies Act 1956. That is. Such issues need to be listed on one of the stock exchanges and should be in accordance with the guidelines and rules listed under the Companies Act and SEBI disclosure. (v) e-IPOs It is system of issuing securities through online system. It provides such information as the purpose for which the fund is being raised. This is called Initial Public Offer (IPO). If a company decides to offer its securities through an online system it is required to gets into an agreement with the stock exchange. underwriter fees. This method saves the company from various mandatory or non-mandatory expenses such as cost of manager fees. commission. etc. securities are issued in two steps. etc.magazines.

non-baking financial companies. these bills are brought by commercial banks. Treasury Bills are issued at a discount i. Primary Market and Secondary Market. Answer : A capital market refers to the market that deals in the trading of medium and long-term securities. etc. Maturity period of Treasury Bills ranges from 14 days to 364 days. They are available for a minimum amount of Rs 25. They are also called Zero-Coupon Bonds.e.000 and in multiples thereof. bonds. LIC. That is. public deposits. debentures. That is. Herein. the discount (the difference between the price of issue and the redemption value) is the interest received at the time of redemption. on the other hand.Q5 : What is a Treasury Bill? Answer : Treasury Bill is a short term promissory note issued by the Reserve Bank of India on behalf of the Central Government of India. Issue of new securities in the primary market directs funds towards those entrepreneurs who either want to start a new enterprise or wish to expand the existing one. mutual funds. Secondary market. they are issued at a price which is lower than the face value and are redeemed at par. UTI. Moreover. they are also considered to be the safest instrument as they are issued by the RBI. . Primary market deals with issue of new securities. They are issued to fulfil the short-term fund requirements of the Government of India. Answer needs Correction? Click Here Q6 : Explain the recent Capital Market reforms in India. Treasury bills are highly liquid instruments because of the fact that the RBI is always ready to purchase these bills. Generally. deals in the sale and purchase of the existing securities. Capital market comprises of instruments such as equity and preference shares. A capital market can be divided in two parts namely. The Government of India introduced the Companies Act in 1850 with the aim of generating investor interest in corporate securities. etc. it deals in the trading of those securities that were initially issued in the primary market. The history of capital market in the form of stock exchange dates back to the eighteenth century. it deals in those securities that have a maturity period of greater than or equal to one year.

NSE was set up in order to establish a nationwide platform for trading in all types of securities. This consisted of Regional Stock Exchanges. Later it was renamed as 'Bombay Stock Exchange' (BSE). Herein. It aims at providing the small companies an easy access to the capital market. it also expanded its trading operations in capital market segment.The first stock exchange was set up in India in the year 1875 as 'The Native Share and Stock Brokers Association' in Bombay. 1956. that acts as a place where buyers meet the sellers and negotiate for an acceptable terms of trade. Delhi. Madras. dealers can trade both in new issue of securities as well as secondary market. first being the BSE. there are 22 regional stock exchanges in India. NSE has transformed the Indian capital market and has been able to take the stock market to the investor's door step. Within the span of its existence. the Indian Stock Market acquired a three-tier system. Subsequently in the later years other regional stock exchanges were established in Calcutta. after the reforms of 1991. OTCEI provides a screen based nationwide trading system.1956 but later was recognised as a stock exchange under the Securities Contracts Regulation Act. It has provided a wide screen-based automated trading system across the nation ensuring equal access to all the investors. It started its operations in 1994 with trading in money market securities. However. regional stock exchanges were developed in Coimbatore as Coimbatore Stock Exchange and in Meerut as Meerut Stock Exchange. Currently. transparent and efficient avenue for capital market investment. the Indian secondary market only consisted of regional stock exchanges wherein. Over the Counter Exchange of India (OTCEI) OTCEI is a company which was set up in 1990 under the Companies Act. National Stock Exchange and Over the Counter Exchange of India (OTCEI). Similarly. Recently. the OTC exchange in USA. Regional Stock Exchange The first Regional Stock Exchange was developed in Ahemdabad as Ahmedabad Stock Exchange (ASE) in 1894. Calcutta Stock Exchange (CSE) was established. It ensured development of fair and efficient securities market. It commenced its operations in trading in 1992 and is modelled along the lines of NASDAQ. . Hyderabad and Indore. Calcutta and Madras. In the subsequent years stock exchanges were developed in Ahemdabad. In 1990s. It is a single window exchange which provides a convenient. Later. National Stock Exchange The NSE is the latest technology driven stock exchange which was recognised in 1993. Ahemdabad. in 1908.

Answer needs Correction? Click Here
Q7 :
Distinguish between Capital Market and Money Market.
Answer :
The following points highlight the difference between Capital Market and
Money Market.

Basis of Difference

Capital Market

Money Market

Time Span of Securities

Capital Market mainly deals in the
trading of medium and long-term
securities wherein, the maturity period
is more than one year.

Money Market deals in the trading
short-term securities wherein, the
maturity period can vary from one
to a maximum of one year.

Liquidity

Capital market securities are liquid in
nature as they are tradable on stock
exchanges, but are less liquid in
comparison to the money market
securities.
Expected returns are higher due to the
possibility of capital gains in long-term
and regular dividends or bonus.

The securities traded are highly liq
in nature. DFHI discounts money
market securities and offers a read
market for them.

Instruments

Instruments traded in capital market
comprise of equity shares, preference
shares, debentures, bonds and other
long term securities.

Instruments traded in money mark
comprise of treasury bills, commer
bills, certificate of deposits and oth
short-term securities.

Risk

Money market securities are less r
Capital market securities involve
greater risk in terms of repayment of the due to short time period and sound
financial position of the issuers.
principal amount.

Returns Expected

Expected returns are lower due to
shorter duration.

Answer needs Correction? Click Here
Q8 :
Explain the objectives and functions of the SEBI.
Answer :
The Securities and Exchange Board of India was established in 1988 in order
to encourage an orderly and healthy growth of the securities market. SEBI

was set with an overall objective of investor protection and to promote the
development and regulation of the functions of the securities market. The
following are the listed objectives.
(i) Regulation: The main objective of SEBI was to regulate the functioning of
the stock exchange and the securities market. It aims at providing a place
where the issuers of securities (i.e. companies) can raise funds in an easy
and confident manner.
(ii) Protection: SEBI educates the investors by providing them valuable
information regarding various securities and companies. It provides them
with the guidelines related to efficient investment. It provides them adequate
and reliable information about the companies and thereby, helps them in
taking wise and informed investment decisions.
(iii) Prevention: To combat the malpractice in trading of securities was the
basic reason for the establishment of SEBI. Malpractice such as insider
trading, violation of rules and regulations, non-adherence to Companies Act,
etc. erodes the confidence of investors. SEBI aims at checking these
malpractice by creating a balance between the self regulation of a business
and the legal statutory regulations.
(iv) Code of Conduct: Through efficient regulation, SEBI aims at developing
a code of conduct for fair trade practices by intermediaries such as brokers,
merchant bankers, underwriters, etc. This helps in making them competitive
and professional.
To attain the aforementioned objectives, SEBI perform 3 main functions
namely, Regulatory, Development and Protective functions. The following are
the functions performed by SEBI.
(i) Regulatory Functions
Ӣ Registration: One of the regulatory functions performed by SEBI is the
registration of the brokers, sub-brokers, agents and other players in the
market. Registration of collective mutual schemes and Mutual Funds is also
done by SEBI.
Ӣ Regulating the Work: SEBI regulates the working of the stock brokers,
underwriters, merchant bankers and other market intermediaries. It frames
rules and regulations for the working of the intermediaries. SEBI also
regulates the takeover bids by the companies. It conducts regular enquires
and audits of stock exchange and intermediaries.
Ӣ Regulation by Legislation: SEBI performs and exercise various other
powers which are delegated by the Government of India under the Securities

Contracts (Regulation) Act, 1956. Besides, it levies fee or other charges for
carrying out the purposes of the Act.
(ii) Development Functions
Ӣ Training: SEBI promotes the training and development of the
intermediaries of the securities market in order to promote healthy growth of
the securities market.
Ӣ Research: By conducting research in the required and important areas of
the securities market, SEBI publishes useful information. This helps the
investors and other market players to make wise investment decisions.
Ӣ Flexible Approach: SEBI has adopted a flexible and adaptive approach
such permitting internet trading, IPOs, etc. Such measures promote the
development of capital market.
(iii) Protective Functions
Ӣ Prohibition: SEBI prohibits fraudulent and unfair trade practices. It
prevents the spreading of misleading and manipulative statements which are
likely to affect the working of the securities market. SEBI educates the
investors by providing them valuable information regarding various securities
and companies so as to enable them to make wise investment decisions.
Ӣ Checks on Insider Trading: Insider trading refers to a situation where an
individual connected with the company leaks out crucial information
regarding the company. Such information may adversely affect its share
prices. SEBI keeps a strict check on such insider trading.
Ӣ Promotion and Protection: SEBI encourage fair trade practices and
promotes a code of conduct for the intermediaries. It undertakes step for
investor protection and education. It also checks the manipulation of price of
securities.
Answer needs Correction? Click Here
Q9 :
What are the functions of a Stock Exchange?
Answer :
Stock Exchange refers to a market where buying and selling of the existing
securities take place. The following are the main functions of a stock
exchange.

NSE provides trading in two main . It promotes and encourages the people to invest in ownership securities. enhances capital formation and economic growth. Through stock exchange. it ensures safety and fairness in transactions. a stock exchange indicates the changes in economic conditions. a stock exchange helps in educating the people about investment. a boom (or recession) is reflected in the rise (or fall) in the share prices. It provides a platform for interaction for buyers and sellers of securities and thereby. Thereby. long-term securities can be converted to medium-term and shortterm through stock exchange. In other words. It was recognised as a stock exchange in 1993 and started operations in the year 1994. helps in the determination of prices of the securities through the forces of demand and supply. Stock exchange provides a reasonable and controlled scope of speculation within the provisions of law. it provides a continuous market for the sale and purchase of securities. Answer needs Correction? Click Here Q10 : Explain the various segments of the NSE. (v) Spreading Equity Cult: Through regulation of the issues and better trading practices. In addition. securities can be easily converted into cash whenever required. (iv) Facilitates Economic Growth: In a Stock Exchange the securities are continuously brought and sold. (iii) Fair and Safe Market: As stock exchange is a legal and well regulated market. (ii) Determination of Prices: A stock exchange helps in establishing the price of the monetary assets that are traded in that market. It trades within the defined and the existing legal framework. (vi) Acts as an Economic Barometer: Through changes in the share prices. This. This continuous process of disinvestment and reinvestment helps in channelising the savings and the investments to the most productive use. (vii) Scope for Speculation: It is generally believed that certain degree of speculation is necessary for better liquidity and to maintain demand and supply of securities.(i) Provides Liquidity and Marketability: Stock exchange provides a ready platform for trading of existing securities. Answer : The National Stock Exchange is the technology driven stock exchange which was incorporated in 1992. For instance.

segments namely, Whole Sale Debt Market Segment and Capital Market
Segment.
(i) Whole Sale Debt Market Segment
This segment provides a platform for trading in fixed income securities such
as state development loans, bonds issued by public sector undertaking,
corporate debentures, commercial paper, mutual funds, central government
securities, zero coupon bonds, treasury bills, etc. NSE started operations in
Whole Sale Debt Market in June 1994. It is the first fully screen based system
for trading in debt market. That is, it is the first computer based trading
system. Trading in the debt market involves two parties- trading members
(which are the recognised brokers of NSE) and the participants (i.e. the
buyers and sellers of securities). The transactions among the participants are
settled through members. For instance, the members place an order for the
seller of a security which is then suitably matched by another member for
buyer of a security wishing to purchase that security. An order remains in the
system until it is suitably matched. This segment of NSE is also known as
NEAT (National Exchange for Automated trading).
(ii) Capital Market Segment
Under this segment, NSE deals with trading in equity shares, preference
shares, debentures, exchange traded funds as well as retail Government
securities. It provides an efficient and transparent platform for a fair trading
system. The capital market segment commenced its working in November
1995. The trading system of NSE Capital Market segment is also known as
the National Exchange for Automated Trading - Capital Market (NEAT- CM).
The trading operations of the Capital Market segment remain the same as in
the Whole Sale Debt market system.
Answer needs Correction? Click Here
Q11 :
What are the objectives of the SEBI?
Answer :
Securities and Exchange Board of India (SEBI) was established for promoting
an orderly and healthy growth of the securities market in India. The following
points highlight the overall objectives of SEBI.
(i) Regulation: The basic objective of SEBI is to regulate the functioning of
stock exchange and the securities market. It aims at providing a place where

the issuers of securities (i.e. companies) can raise funds in an easy and
confident manner.
(ii) Protection: SEBI works on educating the investors and provide guidelines
related to investment. It provides them adequate and reliable information
about the companies and thereby, helps them in taking wise and informed
investment decisions.
(iii) Prevention: To combat the malpractice in trading of securities was the
basic reason for the establishment of SEBI. Malpractice such as insider
trading, violation of rules and regulations, non-adherence to Companies Act,
etc. erodes the confidence of investors. SEBI aims at checking these
malpractice by creating a balance between the self regulation of a business
and the legal statutory regulations.
(iv) Code of Conduct: Through regulation, SEBI develops a code of conduct
for the fair trade practices by the intermediaries such as brokers, merchant
bankers, underwriters, etc. SEBI controls the activities of these intermediaries
and provides them a professional and competitive environment.
Answer needs Correction? Click Here
Q12 :
State the objectives of the NSE.
Answer :
National Stock Exchange of India was incorporated in the year1992. It was
recognised as Stock Exchange in 1993 and started operations in 1994. It was
established by leading banks, financial institutions, insurance companies and
financial intermediaries. NSE was established with the following objectives.
(i) NSE aimed at setting up a single nationwide trading system for providing
the trading facility in all types of securities. Such a system increases the
confidence of the investors.
(ii) It ensured that all the investors over the country get an easy and equal
access through an appropriate communication network. It increases the
liquidity of the securities. Under the system of regional stock exchange the
number of people involved in the transaction was limited. As against this,
NSE incorporates transactions from investors from the entire country and
thereby, increases the liquidity of the securities.
(iii) By using an electronic trading system, NSE aims at providing a fair,
efficient and transparent securities market. Any person can get information

regarding the trading of various securities from the local terminals of NSE.
Thereby, it helps in reducing fraud in trading.
(iv) One of the objectives of NSE includes enabling shorter settlement cycles
and book entry settlements.
(v) NSE aimed at meeting the international standards and benchmarks of
stock exchange.
Answer needs Correction? Click Here
Q13 :
OTCEI was started on the lines of
(a) NASDAQ
(b) NYSE
(c) NASAQ
(d) NSE
Answer :
OTCEI (Over the Counter Exchange of India) was incorporated in the year
1990 on the lines of NASDAQ which is the OTC in USA. OTCEI is a fully
computerised and transparent stock exchange. It was established with the
objective of addressing the needs of small companies and helps in
maintaining the liquidity of their securities.
Answer needs Correction? Click Here
Q14 :
What is the OTCEI?
Answer :
Over the Counter Exchange of India (OTCEI) was incorporated in 1990 under
the Companies Act, 1956 and was recognised as a stock exchange under the
Securities Contracts Regulation Act, 1956. It commenced operations in the
year 1992. It aims at providing the small and medium companies an easy
access to the capital market. OTCEI is a fully computerised and single window
exchange system. OTCEI is modelled along the lines of NASDAQ, the OTC
exchange in USA. OTC was promoted by UTI, ICICI, IDBI, LIC, IFCI, GIC and SBI
financial services. It does not involve a geographical area rather, trading
takes place through its counters or offices through telephones and other

It incorporates an exclusive list of companies as only those companies which have an issued capital of 30 lakh or more can be listed on OTCEI. marketing had different approaches with respect to its definition. Answer needs Correction? Click Here << Previous Chapter 1 : Financial ManagementNext Chapter 3 : Marketing >> Chapter 11 Q1 : What is marketing? What functions does it play with process of exchange of goods and services? Explain. transparent and efficient avenue for capital market investment. It acts as a place where buyers meet the sellers and negotiate for an acceptable terms of trade. marketing is a much . 6 crores (d) Rs. 3 crores (c) Rs. the minimum capital requirement for a company is (a) Rs.modes of communication. Answer needs Correction? Click Here Q15 : To be listed on OTCEI. It provides liquidity to the securities along with practicing a fair trade system. In reality. Answer : Marketing refers to the process wherein the buyers and sellers interact with each other for purchase and sale of goods and services. as a pre-production process that involves merchandising (designing) of the product. It provides a convenient. It also aims at providing cheaper and easy means of trade to public as well as small companies. the minimum capital requirement for a company is Rs 3 crores and the maximum is Rs 50 crores. It was sometimes described as a post-production process that involves purchasing of the final products and sometimes. 1 crore Answer : To be listed on OTCEI. 5 crores (b) Rs. Earlier.

attract customers. branding. Answer : Branding implies giving a unique name. Answer needs Correction? Click Here Q3 : Distinguish between the product concept and production concept of marketing. designing the product. It also includes activities that are performed even after the sale of product such as. The following are the advantages of branding to the marketers. This is because if a new product is launched under a good and established brand. standardising. i) Branding enables a firm to distinguish its product from the product of other firms. Only when a product is given a brand. warehousing. Thereby. iv) It helps in establishing the base if a new product is to be launched. It involves planning. iii) Through good branding manufacturers can create loyalty and habituality for their product. maintaining customer relations and collecting feedback.wider concept than this. it can be advertised and thereby. ii) It facilitates advertising of the product. transportation. it is expected to get a good boost and benefit from reputation of the brand. sign. Thus. Answer : . advertising. the firm can benefit from this and charge a different price for its product. symbol or term for the identification of a product. packaging and labelling of the product. A product with a generic name cannot be advertised. pricing and distribution. Answer needs Correction? Click Here Q2 : Explain the advantages of branding to marketers of goods and services. These activities are basically the functions performed under marketing. It consists of all those activities that are involved in the process of exchange of the goods and services between producers and consumers. marketing plays an important role in the process of exchange of goods and services.

ii) A brand should suggest the benefits or qualities of the product and also suit its functions. Answer needs Correction? Click Here Q4 : List the characteristics of a good brand name. iii) The name should be unique as well as adaptable to packaging and labelling requirements. Ponds. Methodology Production Concept It was believed that consumers fav readily available and affordable pr thereby profits can be maximised increasing the volume of productio Focus was on enhancing the quant production and reducing the avera production. For example. For example. pronounce and remember. Boost. Focus of the business Focus was on improving the quality of the product.Basis of Difference Product Concept Belief It was believed that consumers favoured. superior quality products and thereby. Answer : . Rin. Answer : A good brand name consists of the following characteristics. etc. adding new features. Fair & Lovely. Answer needs Correction? Click Here Q5 : Product is a bundle of utilities? Do you agree? Comment. i) The name should be short and easy to spell. It should also be adaptable to different mediums of advertising and languages. profits can be maximised by increasing the quality of the product. iv) A brand name should be versatile and should be able to adapt to the new products if introduced under the brand. v) It must be distinctive and capable of being legally protected. efficiency of the business. Emphasis on improving the features and Emphasis on improving the produ quality of product.

scarcity of resources. a product is said to be a bundle of utilities and a buyer while buying a product values all such kinds of utilities. besides customer satisfaction. Answer : Convenience products refer to those products that are purchased frequently. i) Such products are easily available at convenient places with minimum time and effort wastage. Answer needs Correction? Click Here Q6 : What is the societal concept of marketing? Answer : According to the societal concept of marketing the organisations must identify the needs of the market and the target consumers and deliver the desired results in an efficient manner. Thus. Benefits derived from a product can be of three types. immediately and with minimum time and effort. A customer seeks different types of satisfaction from the product. organisations should also aim at ecological. he also receives a psychological benefit in the form of pride and self-esteem that he has bought a car. For instance.When a customer decides to buy a product. The following are the characteristics of a convenience product. Answer needs Correction? Click Here Q7 : List the characteristics of convenience products. his/her main focus lies on the utility which he/she receives while consuming it. . Thus. Besides. ethical and social aspects such pollution.functional benefits. etc. ii) Convenience products are consumed frequently and have a continuous demand. The organisation should identify not just the immediate needs of the market rather should also aim at long-term well being of the consumers. psychological benefits and social benefits. it provides him functional utility as a means of transport. when a consumer purchases a car. Along with it comes the social benefit in the form of acceptance by the peers. Generally the essential commodities come under the category of convenience products.

iii) Appropriate packaging contributes to the convenience in handling the product. symbols in packaging helps in attracting the customers. etc. i) It enables differentiation and identification of a product from other products.iii) They are available in small units and low and standardised prices. Use of colours. A good packaging has the following advantages. ii) It acts as a promotional tool. ii) Evaluation regarding the effectiveness of the advertisement is very difficult to conduct. It helps in avoiding any kind of spoilage. Thereby. iv) The competition in the market for such products is high. Answer needs Correction? Click Here Q9 : What are the limitations of advertising as a promotional tool? Enlist. Answer needs Correction? Click Here Q8 : Enlist the advantages of packaging of a customer product. iv) It helps in protecting the quality of the product from any kind of damage. heavy advertising is required for these products. pictures. particularly at the time of storage and transportation. Answer : Packaging refers to the process of developing and designing the container for a product. iv) Effectiveness of advertising is low as there can be numerous advertisement. iii) Advertisements come in standardised form and cannot be moulded as per the requirements of different consumer groups. breakage. i) It lacks personal form of communication and thereby is less forceful. Answer : The following are the limitations of advertising as a promotional tool. .

Selling Selling is a narrower term and is confined just to the promotion activi and the transfer of ownership of the product from the seller to the purcha . packaging and labelling of the product. i) Clothes ii) Jewellery iii) Television iv) Shoes v) Home furniture Answer needs Correction? Click Here << Previous Chapter 2 : Financial MarketsNext Chapter 4 : Consumer Protection >> Q1 : Define marketing. pricing and distribution and also after sale services such as maintaining customer relations and collecting feedback. Selling. Through the process of selling the product is converted into cash. Answer : Shopping products purchased are the following. refers to the promotion activities undertaken for the sale of goods and services. How is it different from selling? Discuss Answer : Marketing refers to the process wherein the buyers and sellers interact with each other for purchase and sale of goods and services. It comprises of a range of activities such as planning.Answer needs Correction? Click Here Q10 : List five shopping products purchased by you or your family during the last few months. etc. In this sense. Such promotion activities can be in the form of advertising. Basis of Difference Scope of the Term Marketing Marketing is a wider time and involves a number of activities such as planning. on the other hand. selling can be regarded as a part of marketing. designing the product. etc. publicity. after sale services. The following points highlight the difference between marketing and selling. designing.

It involves strategies related just to t promotion and sale of the product. feedback services. Selling lays emphasis on maximising the sales for maximising profits. etc. . In the long run. it must take all decisions based on needs and requirements of the customers.Selling is just a part of marketing. It believes that customer satisfaction plays a vital role in the success of any organisation. Answer needs Correction? Click Here Q2 : What is marketing concept? How does it help in the effective marketing of goods and services? Answer : Marketing concept of marketing management lays emphasis on customer satisfaction. Means of profit Maximisation Marketing lays emphasis on enhancing customer satisfaction for maximising profits. social need. Emphasis All marketing activities emphasise on customer satisfaction Scope of Activities Marketing activities start before production and continues even after the sale of the product. Strategies and Efforts It involves strategies related to production. That is. The organisations must clearly identify the needs and requirements of the target customer. ii. This concept identifies the fact that people purchase a product for satisfaction of a specific need (such as functional need.). any organisation can survive and maximise profits only if it identifies customer needs and effectively works towards fulfilling them. designing. i. The marketing concept is based on the following points. Selling activities emphasise on sale o goods and the transfer of ownership product from the seller to the purcha Selling activities start only after the production of the product. An organisation works and sells not according to what it has. Any organisation must aim towards identifying such needs and satisfy them in an effective manner. planning. psychological need. etc. The efforts of all marketing activities must be directed towards a particular segment of market or group of customers. but according to what the customer wants.

For example. A firm continuously alters the various controllable factors to achieve the objectives of marketing. Answer needs Correction? Click Here Q3 : What is marketing mix? What are its main elements? Explain. are also based on the requirements of the customers. quality. pricing. If all marketing activities are directed towards customer satisfaction. pricing. It should not just independently work towards customer satisfaction. etc. The crux of all efforts of marketing is profit. It should develop such products and services that satisfy the needs of the customers. the company produces mobile phones with such features. However. Such factors form the pillars of marketing and are known as marketing tools. For example. branding. there are certain non-controllable factors as well that affect the decision making by a firm. selling would not be a problem. Such decisions are affected by a large number of factors. decisions regarding packing. are within the control of the firm. The following are the elements of marketing mix. etc. designing. marketing of goods and services would take place in an effective and smooth manner.iii. etc. That is. Answer : Marketing mix refers to the set of marketing tools that are used to achieve the various objectives of marketing. high pixel camera. Some of them are controllable by the firm. v. location of sale. Marketing concept helps in effective marketing of goods and services. other decisions of the company such as pricing. From the various alternative marketing tools. If decisions of production. . advertising. if customers want dual sim mobile phones. for effective marketing. an organisation must decide the various features of a product such as its size. In the process of marketing. Such a set of marketing tools used by the firm to achieve the desired objectives of marketing is known as marketing mix. credit policies of the banks are beyond the control of the firm. are based on the needs of the customers. etc. Similarly. government policies. For example. GPS. market offering plays an important role. branding. etc. but should also aim at satisfying the customers better than its competitors. a firm chooses the best combination to develop a market offering. iv.

Other important decisions comprise of managing the inventory. 2. its demand falls and vice versa. so as to influence the customers to purchase the product. should be used. Product: A product refers to any good or service that offers value and satisfies needs of a customer. Promotion: Promotion comprises of those activities that communicate customers regarding the availability of a product. An organisation must carefully decide the medium of promotion. sale. consumption of a product benefits a consumer in the form of satisfaction of consumers' functional needs. a product also includes the after sale services such as taking feedbacks. For example. branding and packaging. storage and transportation of the goods 4. etc. soap. a product relates not just to the physical product but it also includes the satisfaction of various needs and utilities of the customer. its features. Important decisions regarding a product relate to its designing. etc. must be consider while deciding a price. a firm must also take decisions regarding the availability of the product to the target customers. free gifts. In marketing. qualities. quality. services of teacher. In addition. features. Such benefits also form a part of product. The marketers must analyse properly the various factors that determine the price and decide a suitable price for the product. redressing consumer complaints. warehousing. personal selling. The price set should be such that the customers find it at par with the value of the product. labelling. pricing policy followed by the competitors. sales techniques. etc. etc. etc. etc. the organisation must decide which of the sales techniques such as discounts. Price: Price refers to the money paid by the customers to obtain a product. 3. Suitable discounts and incentive schemes must also be decided. For example. Answer needs Correction? Click Here Q4 : What are industrial products? How are they different from consumer products? Explain. social needs and psychological needs. For example. objectives of the firm. taking the related actions. Organisations undertake various promotional activities such advertising. thereby.1. the target customers. Place: Besides the product decisions and pricing decisions. a car. As the price of a product increases. toothpaste. are products. For example. . Price of a product affects its demand. A firm must appropriately decide the dealers or intermediaries for the distribution of the goods.

are consumer goods. As against this. Basis of Difference Number of Customers Channel of Distribution Industrial Products The number of customers is limited. technical features does not have much role in decision making while purchasing. Role of Technical Features Technical features play an important in Decision Making role while purchasing these products Consumer Products The number of customers is higher. Such products do not involve any technical complexities in manufacturing. edible oil. consumer products refer to those products that are used by the ultimate customers for their personal consumption purposes. Such goods are not meant for final consumption rather they are used as raw material and inputs by the manufacturers for the production of consumer goods.Answer : Industrial products refer to those products that are used as inputs for the production of other goods. Such products require shorter channels of distribution such as direct selling or one level channel. are industrial products. channel o distribution for perishable consumer products is small. The following points highlight the difference between industrial products and consumer products. For example. Consumer products readily and conveniently available. machines. toothpaste. oil seeds (industrial product) are used mostly by the producers of mustard oil. For instance. etc. Answer needs Correction? Click Here Q5 : Distinguish between convenience product and shopping product. Demand of consumer product is not derived demand rather sets the basis for demand for industrial products. Location Industrial products remain concentrated only in those areas where the industries producing these goods are located. tools etc. For instance. furniture. Demand Demand for industrial product is a derived demand based on the demand for consumer products. Answer : . Thereby. mustard oil (consumer product) is consumed by many peop Such products require comparatively longer channels before they reach th final consumer. However. For example.

stationary items. of the pro Jewellery. for the production of a good. The price charged by a firm for its product affects it revenue and profits as well. medicines. etc. such goods are durab nature These products usually come in units and have high unit prices. etc Unit of Purchase and Price Nature of Purchase Example Ice-creams. pricing plays an important role in the marketing of goods. Such products are not brought impulsively and the consumer d considerable time and effort to c the price. Thus. In addition to this. pricing also acts as a competitive tool. Fixed cost refers to those cost that do not vary with the level of output produced. namely. Answer needs Correction? Click Here Q6 : What are the factors affecting the determination of the price of a product or service? Answer : Price refers to the money paid by the customers to obtain a product and this price affects its demand. a firm incurs cost on the purchase . Thereby. For example. Generally. Shopping products have a relati frequent demand. the profit margin is also high. variable cost and semi variable cost. These products are available in small units and have low unit price. Nature of Products Essential commodities come under the category of convenience goods. the firms must pay due emphasis on proper pricing of their products. distribution and sale of the product. 1. Cost of Product: Cost of the product plays an important role in determining the price. The following are the factors that affect the determination of the price of a product or a service. quality. clothes. such products have low profit margin. The marketers must analyse properly the various factors that determine the price and decide a suitable price for the product. Firms producing similar substitutable products compete with each other on the basis of price. Cost of product can be classified into three broad categories.Basis of Difference Convenience Product Shopping Product Demand Convenience products have a continuous and frequent demand. furniture. Such products are brought impulsively without devoting much time and effort. It comprises of cost involved in production. newspaper. fixed cost. Thereby.

3. the firm has the privilege of charging a higher price. it would lose its customers to the competitors. etc. the government intervenes in the determination of price. In this case. Thus. if a firm attempts to charge a high price. Semi variable cost refers to those costs that vary with the level of output but not in direct proportion. the elasticity of demand plays an important role. they also aim at earning some profit over and above the cost incurred by them. the demand would not fall much. the demand changes by a larger proportion. Objectives of Pricing: Every firm has various pricing objectives which it considers while deciding a price. That is. Degree of Competition in the Market: Generally. For example. Such costs are fixed cost. etc. raw material. For example. This is because in case of high competition. then it may decide to . the cost incurred on labour. the firm cannot charge a higher price as it would lead to a large fall in the demand. demand is said to be inelastic. as the level of output increases. 5. On the other hand. the lower is the price that a firm can charge for its product. For example. Generally. Government Regulations: At times to protect the interest of public at large. are variable cost. the variable cost also increase. higher the competition in the market. Demand for the Product: While determining the price. Thus. the demand is said to be elastic. if a firm faces very little competition for its product then it has the freedom of charging a higher price. variable cost refers to those costs that vary in direct proportion with the volume of production. In this case. If due to small proportionate a change in price. 2. the firms decide the price of a product such that they are able to cover all their cost. On the other hand. in case of essential commodities. Herein. The following are some of the objectives of pricing. Profit Maximisation: Every firm aims at profit maximisation. if the firm aims at maximising profits only in the short run. if a change in price does not affect the demand much. Elasticity of demand refers to the proportionate change in demand due to a given proportionate change in price. fall) in price leads to a relatively large fall (or.of machinery. In addition. price for goods having elastic demand is generally lower than price for goods having inelastic demand. However. a firm must also consider the demand for its product. land. 4. rise) in price. as even at a higher price. i. commission paid to intermediaries for the sale of good is a semi-variable cost. the government can declare a maximum price that can be charged. That is. if a small rise (or. demand is said to be elastic. On the other hand. the firms decide upon the price keeping in consideration the cost as well as the profit factor.

if the firm aims to maximise profit in the long run. a consumer purchases a product not just for its functional utility but for other factors as well such as brand name. For example. features. when a person purchases a laptop. it would charge a lower price so as to attract a greater number of customers towards its product. Answer : Generally. then it would charge a higher price. also affect the determination of prices. etc. brand. a product is referred to as a tangible asset which has physical attributes. This is because if it charges a higher price. social satisfaction. product is a mixture of tangible and intangible attributes. in marketing a product relates not just to physical or tangible attributes but also to certain intangible attributes. Answer needs Correction? Click Here Q8 : What do you mean by channels of distribution? What functions do they play in the distribution of goods and services? Explain. iii. it would lose its customers to the competitors. along with the physical attributes and functional utility regarding the model. In other words. etc. a firm would keep the price for its product lower. For example. branding. advertisement. . Focus on Quality: If the firm emphasis on enhancing the quality of the product. Answer needs Correction? Click Here Q7 : 'Products is a mixture of tangible and intangible attributes'. 6. a consumers' decision to purchase a product is based not just on its tangible attributes but also on certain other intangible attributes. it would charge a lower price so as to acquire a greater share of the market and benefit from larger sales. However. it charges a higher price to cover the additional cost incurred. etc. On the other hand. Acquiring Market Share: If a firm desires to capture a greater market share. if the firm uses intense advertising for the promotion of the product. customer services. we regard a motorbike or a laptop as a product. That is. size. iv. For example. Hence. he also looks for intangible attributes such as guarantee. Method of Marketing: Methods of marketing used by the firm such as distribution. etc.charge a higher price and increase its revenue. reputation. Surviving Competition: In face of high competition. Discuss. ii.

Promotion of Product: They assist in the promotion activities undertaken by the manufacturers. they form a link between the . Collection: A middle men accumulates and maintains large stock of the goods so as to ensure a continuous and smooth flow of supply. the manufacturers use advertising for the promotion of their product. agents and institution that facilitate the exchange or transfer of goods and services from the producer to the consumer. 6. a grocer maintains a wide variety of products for sale. It repacks the goods into convenient packets. at a retail store a customer can get a wide variety of goods. To ease the process. The retailers then finally sell the product to the customers. for a manufacturer of sugar in Punjab. the middle men interact with the producers and on the other hand. 3. the goods received differ in terms of size. They facilitate the transfer of goods from the place of production to the place where they are consumed. 2. Building Variety: An intermediary acquires various goods from different sources and assembles them at a single place.Answer : Channels of distribution refer to the individuals. channels of distribution refer to the set of individuals. Thus. institutions. Thus. As the potential consumers of a product are spread over a larger geographical area. In addition. Mediation: On one hand. 4. Thus. Allocation and Packing: A middle men breaks the whole lot of goods into small. However. 5. channels of distribution also reduce the efforts of the consumers by offering various goods and services at a convenient single location. channels of distribution play an important role. Here. it maintains a variety of goods. The intermediaries can aid this process by putting banners and displays. marketable units. quality and features. Arrangement: An intermediary receives the supply of goods from various sources. agents who facilitate the process of distribution. For example. it would be difficult to contact the customers in other parts of the country. 1. it would sell its product to whole sellers who in turn would sell it to the retailers. The following are the functions of channels of distribution. The intermediary arranges or sorts these goods into homogeneous groups based on their characteristics. it becomes difficult for the producers or the manufacturers to directly contact the customers for the sale of their products. For example. with the customers. For example. For example.

spoilage. For example. However. quality. price. suppose a retailer acquires large quantities of sugar. application. a picture of noodles is there describing its appearance. etc. the price of sugar rises which reduces its demand. Answer needs Correction? Click Here Q9 : Describe the functions of labelling in the marketing of products. wheat. Labelling basically provides the information about the product in the form of a tag (in cases of local unbranded products such as rice. in a potato chip product. the ingredients and procedure of making it is also stated. In the process they bear the risk of fluctuations in demand. batch number. labelling plays an important role in packaging of the product. net weight. on the bottle of a shampoo. ii) Identification and Differentiation A label helps in easy identification of the product. Along with this.producers and the customers. a man eating potato chips is imprinted for identification. the contents are written. Bearing Risk: Intermediaries acquire goods from the producers and keep them in their possession till the final sale. 7. A label also provides other valuable information such as name or address of the manufacturer. content. etc. along with the cautions such as keep away from children below the age of 10. cautions. etc. etc.) or graphics (such as a lady applying cream on face for a face-cream). maximum retail price. iii) Standardising and Grading A label also helps in setting grades for a product. For example. Answer : In the marketing process. on food products such as maggie cuppa mania. Similarly. This helps the marketers to classify the product in different categories based on certain specific quality or . It helps the consumers to differentiate their favourable products from other products. There are various functions performed by labelling which are as follows. and work towards satisfying the needs of both the parties. Thereby. i) Description of Use and Contents The main function performed by labelling is to provide the description about the product regarding its use. after a period of time. They negotiate on matters related to price. For example. etc. the retailer may lose out as the stock remains unsold.

To make the goods physically . It involves the following four major activities. Transportation of Products: Transportation of products refers to the physical movement of goods from the place where they are manufactured to the place where they are consumed. they must be moved from the place where they are produced to the place where they would be consumed. All such processes take time. Answer : Once the good are produced. v) Information Required for Law Label also provides and mentions the information which are required to be mentioned as per the law. transmission of the order by the intermediaries to the manufacturer. for maggie noodles. Physical distribution system should be such that it should ensure speedy and proper order processing. Thus. For example. maintenance of inventory as per the requirement. That is. packaged. This physical movement of products from the place of production to the place of consumption is known as physical distribution of products. a brand of face-cream comes in different categories such as oily skin. Processing of order comprises of a number of a steps such as placement of order. delivery of goods. iv) Promotes the Production An attractive label helps the marketers in promoting the product as well. a proper system of order processing is of vital importance. on a packet of tobacco it is written 'chewing tobacco is injurious to health'. branded and priced they must be made available to the consumers. It helps in attracting more customers towards the product. Herein. Answer needs Correction? Click Here Q10 : Explain the major activities involved in the physical distribution of products. Processing of Order: Processing of order and delivery of goods is the most important component of buyer-seller relationship. For example. Fast and accurate order processing provides a consumer greater satisfaction. the label says ''Taste bhi.features. 1. there exists a direct relationship between speed and accuracy of order processing and customer satisfaction. Health bhi''. 2. promoted. dry skin and normal skin. label plays an important role in highlighting the product and promoting its sale. The potential consumers of a product are spread across a large geographical area. For example. Generally. etc.

This process of storing and assorting the products is known as warehousing. However. Proper warehousing ensures efficiency in delivery and sale of products which in turn results in greater customer satisfaction. The following are the different functions performed by the intermediaries in case of non-durables. For example. Maintenance of higher inventory helps a firm in ensuring timely delivery of goods to the customers and thereby. firms' objectives. Thus. Warehousing: Generally. sale cannot take place. The firms maintain inventory so as to ensure timely supply of products. Inventory shares a direct relation with customer service. Maintenance of Inventory: Inventory implies maintaining a stock of products. maintaining warehouses involves its own cost. Thus. This implies that the goods must be properly stored and assorted before the actual sale takes place. 3. cost involved in holding the inventory. through warehousing a company can maintain stock of products and ensure timely delivery of goods as and when required. Unless the products are physically transported and made available at the place of consumption. etc. Answer : Intermediaries play an important role in the distribution of consumer nondurables. . Answer needs Correction? Click Here Q11 : Discuss the role of intermediaries in the distribution of consumer non-durable products. the firms must strike a balance between customer service and cost.available to them. A firms' decision to maintain inventory is based on several factors such as how well the distribution system responds to the orders and the deliveries. a company must weigh the relative benefits and costs associated with warehousing and maintain a balance between the two as per the requirement. 4. there is a time lag between the act of production and the act of sale or consumption. they must be transported from the place of production to the place of consumption. maintenance of inventory involves a cost as a huge amount of capital remains tied up in the stock unless it is sold. They facilitate the transfer of goods from the place of production to the place where they are consumed. An appropriate inventory must be decided by the firm keeping in consideration the various costs and benefits involved. improve customer service. However.

it maintains a variety of goods. the manufacturers use advertising for the promotion of their product. the electronic goods seller maintains large stock of each type of the electronic item. each electronic item as well as their spare parts are packed separately. Answer needs Correction? Click Here Q12 : Expenditure on advertising is a social waste' Do you agree? Discuss . etc. etc. price. Thus. ii) Collection: An intermediary maintains large stock of the goods so as to ensure easy flow of supply. spoilage. quality. However. an electronic goods retailer puts up banners for various products highlighting their features. For example. The intermediaries can aid this process by putting banners and displays. For example. a television and a video player are preferred together by most of the people. He then sorts these goods into homogeneous groups based on their characteristics such as size. v) Promotion of Product: They assist in the promotion activities undertaken by the manufacturers. vii) Bearing Risk: Intermediaries acquire goods from the producers and keep them in their possession till the final sale. vi) Mediation: Middle men perform the function of setting a deal that can satisfy both the producers and the consumers. the stock remains unsold and retailer would suffer a loss. For instance. He procures the products and then sells them in different combinations as desired by the consumers. etc. suppose a retailer acquires large quantities of air conditioners. iv) Building Variety: An intermediary acquires various goods from different sources and assembles them at a single place. They negotiate the price. quality. for efficient transfer of ownership so as to satisfy the need of both the parties. Thus. Thus. an electronic goods seller receives supply of different electronic goods (T.V. For instance.. For instance. the retail can sell a combination of both. In the process they bear the risk of fluctuations in demand. washing machine etc. quantity.) and then sorts them based on their functions. For example. iii) Allocation and Packing: This function includes breaking the larger stock into smaller units. after a few months winter sets in and the demand for air conditioners falls. For instance.i) Arrangement: An intermediary receives the supply of goods from various sources.

. the manufacturers increase production. weakens social values and aggravates. The companies in turn. Advertisement attracts customers towards new products and induces them to purchase it. In the process. proponents of advertising argue that advertisement through greater sales brings down the cost and aids the process of growth. However. However. . builds up consumer needs and desires for multiple products. The following points help in judging whether advertising can be considered as a waste. Weakens Social Values: One of the major criticisms to advertising is that it weakens social values and instead promotes materialism in the society. On the other hand. With numerous advertisements the consumer gets confused as to the product of which of the brand should be purchased. Thus. In response to the increased demand. the customers feel dissatisfied about what they currently have. it is argued that advertisements just inform the buyers about the availability of various products and the final decision to purchase the product rests with the consumer. often they end up buying what they don't even require. it can be said. the supporters of advertisement argue that advertisement in fact brings down the per unit cost of production. advertisements of different hair oil claim for healthy and long hair by the use of their product. pass this increased cost to the consumers in the form of higher prices. 2. this increase in cost can be compensated through fall in the per unit cost due to increased demand and production. Higher Cost: Advertisement expenses add to the cost of the company. Advertising is criticised on the grounds that it unnecessarily adds to the cost of the company. However. Creates Confusion: It is argued that a large number of advertisements on similar products confuse the customers.Answer : Expenditure on advertising is often considered as a social waste. Advertisement increases the knowledge of the customers and keeps them informed. With increased production the per unit cost of production comes down. For example. With increased knowledge about the availability of new products. such a process of discontentment and purchase of new products is never ending and materialism increases. that even though advertisement expenses add to the cost. 3. This is because through advertisement greater number of customers can be attracted towards the product which in turn implies an increase in the demand for the product. 1.

quality. Answer needs Correction? Click Here Q13 : Explain the factors determining choice of channels of distribution. shaving creams. This is because quality is a relative concept. Answer : One of the important decisions of marketing involves the choice regarding which channel of distribution to opt for.On the contrary. it can be said that expenditure on advertisement though draws criticism. etc. supporters of advertisement do not agree with this criticism and argue that advertisement provided a choice to the consumers. if a good is perishable then short channels should be used rather than the long ones. if a product has a low unit value then longer . images and the content of the advertisement may not appeal to the society at large. it is argued that good or bad taste is a subjective phenomenon and varies from person to person.) are often criticised. For instance. As against this. style. What may be acceptable by one may be offensive for other. The consumers can make a rational choice for themselves after analysing various factors such as price. demand for inferior goods can also be induced. For example. i) Product Type The choice of channel of distribution is based on the type of the product that is produced. such a claim is only partially true. Through advertisement. 5. deodorants. they can be misused and have their own cons but on the other hand one cannot deny the benefits derived from advertisement. Sometimes the language. women in men cantered products (such as. It is important to check whether the product is perishable or nonperishable. 4. etc. whether it is an industrial or a consumer product. Objectionable Advertisements: It is said that often advertisement undermine social values and are in bad taste. The following factors determine the choice of channels. Similarly. the degree of complexity of the product. What is inferior to one consumer can be superior to another. Promotes Inferior Goods: It is argued that products of both superior quality as well as inferior quality are advertised. whether its unit value is high or low and also. Thus. Advertisements promote all kinds of products and the consumer purchases them if it suits their requirements. but the objections are not entirely true. However. While on one hand.

if competitors of a company opt for sale through retail store. shorter channels are used. For example. Depending on its policies a company can adopt a similar channel as adopted by its competitors or opt for a different channel. if the buyers are dispersed in a larger area then longer channels of distribution may be used. In a similar manner. v) Market Factors Various other factors such as size of the market. if potential buyers are concentrated in a small geographical area then. Thus. Answer needs Correction? Click Here Q14 : Distinguish between advertising and personal selling. ii) Characteristics of the Company The two important characteristics of a company that affect the choice of channel are its financial strength and the degree of control that the company wishes to hold on the intermediaries. As against this. etc. requirement of complex legal formalities at each step of distribution induces the companies to opt for shorter channels. For example. For instance. it may also do the same or it can opt a different channel such as direct selling. also affect the choice between the channels.channel are preferred. consumer products are distributed through long channels while industrial products are distributed through short channels. iv) Environmental Factors Environmental factors such as economic constraints and legal policies play an important role in the choice of channel of distribution. companies that are financially strong or wish to command greater control over the channel of distribution opt for shorter channels of distribution. geographical concentration of buyers. iii) Competitive Factors The degree of competition and the channels opted by other competitors affect the choice of distribution channel. Answer : . Shorter channels require greater funds than longer channels and also offer greater control over the members of the channel (intermediaries). quantity demanded.

It is more suitable when marke be done for a few selected cons For example. he get feedback fro customers and judge their reac It personal communication thro sales persons. newspapers. It is inflexible as advertisements are standardised and cannot be adjusted as per the requirements of different customers.Advertising is an impersonal. The following points highlight the difference between advertising and personal selling. Advertising has a broader reach as the advertisement reaches a large number people simultaneously. feedbacks and reactions of the customers cannot be judged. It has a narrower reach as only people can be contacted directl It is flexible as the seller can ad message as per the requiremen different customers. The basic objective of persona is to create awareness about th and induce decision making. it take time and effort to cover the ent market. As the seller directly contacts t customers. It is more suitable where marketing is to be done to large number of consumers. Advertising reaches a large number of people simultaneously. Advertising Basis of Difference Personal v/s Impersonal Reach Flexibility Target Group Cost Involved Time Involved Customer Feedback Medium of Communication Objective It is an impersonal form of communication where the seller communicates with customers through various medium such as television. it can cover the entire market in a short period of time. It involves communication through mass media such as television. The basic objective of advertising is to create interest of the customers towards the product. personal selling involves direct communication of the seller with the potential customers. advertising is suitable if. That is. etc. Through advertising. Personal Selling It is a personal form of commu where the seller directly interac the potential customers. if marketing is to for intermediaries and retailers personal selling is more useful Personal selling is relatively co As through personal selling on people can be contacted. Answer needs Correction? Click Here Q15 : Explain briefly the components of physical distribution. As advertising reaches the masses simultaneously. For example. radio. etc. newspapers. Thus. On the other hand. marketing is to be done for ultimate customers. . it involves direct face to face communication of the sellers with the customers for the purpose of sale of the product. paid form of communication used by the marketers for the promotion of goods and services. the cost per person is low.

As all such processes take time. To make the goods physically available to the consumers they must be transported from the place of production to the place of consumption. What are its main features? Explain. a physical distribution system should be such that it should ensure speedy and proper order processing. maintenance of inventory also shares a positive relation with customer service. etc. transmission of the order by the intermediaries to the manufacturer. Fast and accurate order processing results in greater consumer satisfaction. Answer : . ii) Transportation of Products: Transportation of products refers to the physical movement of goods from the place where they are manufactured to the place where they are consumed. Answer needs Correction? Click Here Q16 : Define advertising. Similar to warehousing. iii) Warehousing: Warehousing refers to the process of storing the produced goods before the final act of sale.Answer : Physical distribution refers to movement of products from the place of production to the place of consumption. it will be able to readily provide the goods on time at different locations. However. The following are the components of physical distribution. delivery of goods. Thus. i) Processing of Order: Processing of order comprises of a number of steps such as placement of order. a company must weigh the relative benefits and costs associated with warehousing and maintain a balance between the two as per the requirement. maintaining warehouses involves its own cost. However. If a company has a larger number of warehouses. Thus. iv) Maintenance of Inventory: The firms maintain inventory so as to ensure timely supply of products. maintenance of inventory as per the requirement. Generally. maintenance of inventory involves a cost as a huge amount of capital remains tied up in the stock unless it is sold. the firms must strike a balance between customer service and cost. there exists a direct relationship between speed and accuracy of order processing and customer satisfaction.

Advertising is a technique used for promotion of a product. television. magazines. gifts. They bring an initial boost to sales. Answer needs Correction? Click Here Q17 : Discuss the role of 'sales promotion' as an element of promotion mix. That is. Free gifts are offered in the form of quantity gifts (such as 20% extra or buy 2. The following are the important features of advertising. It is a paid form of promotion. there is no face-to-face interaction between the customer and the advertiser. Thus. Free samples are provided in the form of small packets when launching a new brand. They increasingly attract the customers and induce them to immediately purchase the product. it lacks a personal touch and creates a monologue. Such incentives are opted by the companies to attract more customers and boost its sales. iii) Specific Sponsor: There are always some identified individuals or sponsors who undertake the responsibility of designing it and bearing the cost involved. For example. Such activities are especially useful at the time of launch of a new product. etc. ii) Impersonal Mode: Advertising is an impersonal mode of communication. etc. Such activities supplement other promotional activities undertaken by the company such as advertising and direct selling. Through advertising the companies attract customers towards their product and induce them to purchase it. Answer : Sales promotion refers to the incentives that are offered to the buyers so as to encourage them to purchase the product. It included activities such as offering discounts. get 1 free). Some of the common modes of advertising are newspapers. The costs involved in advertising are to be borne by the sponsors. i) Cost Involved: Advertising involves a cost. free samples. discounts are given in the form of offering the product at a lower price than the listed price. Chapter 12 .

Consumer protection is important not just for consumers but also for business. it is in long-term benefit of the business to protect consumers' interest.Q1 : Explain the importance of consumer protection from the point of view of a business. Thus. (i) Long-Term Interest: With increasing competition and the drive to survive in the market. Thus. (iii) Ethical Reasoning: Today moral values and ethics play an important role in business. (v) Government Interference: A business organisation that indulges in any form of exploitation of consumers such as unfair trade practices. A satisfied customer not only comes back and results in repeated sales for the firm. Answer needs Correction? Click Here Q2 : . it is in the interest of the business to voluntarily follow such practices that take care of the interest of the consumers. but also pulls new customers by spreading the good word. It is the moral duty of every business to protect the interests of its customers. adulteration. etc. etc. They must follow ethical and moral values and avoid any form of exploitation of the consumers such as unfair trade practices. it is their duty to supply such goods and services that adhere to the overall interest of the society. While taking due care of the interest of the consumers. Through the sale of these goods and services to the society. (ii) Use of Resources: A business uses the resources of society for the production of various goods and services. consumer satisfaction and interest is of prime importance for any business. adulteration. (iv) Responsibility towards Society: As the business earns profits by selling various goods and services to consumers. Answer : Consumer protection refers to the consumer education regarding their rights and responsibilities and the redressal of their grievances and complaints. Thus. it becomes their responsibility to take care of the interests and satisfaction of the consumers. a business earns profits. Such government interference spoils the goodwill and image of the business. draws intervention from the government. The following points highlight the significance of consumer protection from the point of view of business. a business builds goodwill and reputation.

This enables the consumer to make a wise choice. In addition to the rights. The Consumer Protection Act provides for compensation in the form of replacement of product. a consumer has the right to file a complaint. The consumer has the right to be protected against such products. ingredients. the retailer or the supplier should offer a variety of products in terms of quality. . etc. They should not induce the consumers towards the purchase of a particular product or service. In India. Right to Choose: A consumer has the right to choose from a variety of goods and services at competitive prices as per his wishes. repair/removal of defects. 5. the consumer has the right to be informed of the quality. 1. cash compensation. Right to Seek Redressal: A consumer has the right to seek redressal and compensation in case of any exploitation. manufacturing defects in electrical appliances. a consumer has some responsibilities to safeguard himself from exploitation. A consumer can file a legal complaint and seek redressal against any form of exploitation in appropriate forums established by the government. The following are the rights of a consumer. many consumer organisations and associations also work in this direction. of the goods and services. For example. weight. health and property. etc. quantity. it is legally mandatory for the manufactures to provide all such information on the package and the label of the goods. 2.Explain the rights and responsibilities of a consumer. brand. 6. Right to Consumer Education: A consumer has the right to be educated and aware of his rights and the available remedies in case of exploitation. Right to be Heard: In case of any grievance or dissatisfaction. Right to Safety: Every consumer has the right to be safeguarded against those goods and services that are hazardous to life. The following are some of the responsibilities of a consumer. 3. price. Answer : The Consumer Protection Act enlists six rights for a consumer. Nowadays. Right to be Informed: According to this. cooking gas cylinders can be injurious. the consumer has the right to have access to a variety of products at fair and competitive price. price. etc. Many government and non-government organisation work actively in this regard. Thus. 4. That is.

This enables him to make an informed and wise choice. Karnataka Consumer Service Society. (v) Honest Transactions: A consumer must always choose legal dealings and discourage illegal trade practices such as black marketing and hoarding. weight. a complaint must be filed in the appropriate forum. instructions provided on the electrical appliances must be carefully read before using them. (iv) Reading Labels: Labels on goods provide information regarding price. (vii) Filing Complaint: In case the product is found defective or any deficiency is found in the quality of the product. For example. AGMARK in case of agricultural goods. (ix) Environment Protection: The consumers must also work towards environment protection by avoiding wastes. pollution control. (vi) Ensure Safety: A consumer must carefully read the manuals and instructions provided by the manufacturer so as to ensure safe use of the product. The consumer must read these labels carefully before purchasing the goods. Answer needs Correction? Click Here Q3 : Enumerate the various Acts passed by the Government of India which help in the protection of consumers' interests. expiry date of the product. etc. Answer : The following are some of the Acts passed by the Government of India for the protection of consumers' interests.(i) Awareness: A consumer should be well aware of the availability of various goods and services. The bill acts a proof of purchase and can be used for future references in case of a complaint. must be formed to work towards consumer education and awareness. (ii) Looking for Quality Marks: A consumer must always look for the quality certification marks before the purchase of goods such as ISI in case of electrical goods. (iii) Asking for Cash Memo: A consumer should always ask for cash memo or bills for the goods and services purchased. (viii) Consumer Societies: Consumer organisations and societies such as consumer Coordination Council. etc. Common Cause. etc. .

1982: This Act defines the conditions under which the promises in a contract are binding.(i) The Consumer Protection Act. (iv) The Agriculture Produce (Grading and Marking) Act. The Bureau of Indian Standards has been established that formulates the standards for the quality of the goods and based on these standards provides certification of quality through BIS certification scheme. 1954: This Act is formed to check the adulteration in food items and to maintain their purity. 1999: This Act is formed to check the use of false marks on the goods and thereby. State Commissions and the National Commission. unfair trade practices. the remedies available in case of breach of contract are also specified in the Act. 1986: This Act provides for the protection of consumer interests against various forms of exploitation such as defective goods. (ix) The Competition Act. supply and distribution of essential goods. (ii) The Contract Act. a grievance cell has also been set up to redress complaints regarding the quality of the products. 1986: Under the Act. deficiency in services. 1955: This Act provides for control in production. (vi) The Standards of Weights and Measures Act. (viii) The Trade Marks Act. (vii) The Essential Commodities Act. In addition. The quality certification mark provided by the Act is called as ISI. . (v) The Prevention of Food Adulteration Act. 1976: This Act safeguards the interest of the consumers against exploitative practices related to under-weight and under-measure of the goods. protects the consumers against such goods. 2002: This Act is formed to prevent such practices by the business firms that hinder competition in the market. packing and marking of agricultural products. has been set up for the redressal of consumer grievances. It provides the procedure for grading. Under the Act. The quality certification mark provided by the Act is called as AGMARK. It also controls inflationary trends and ensures equality in distribution of these goods. (x) The Bureau of Indian Standards Act. In addition. It also checks anti-social activities such as hoarding and black marketing. (iii) The Sale of Goods Act. 1930: The Act provides protection and relief to the consumers in case the goods purchased by them do not abide by the expressed or implied conditions and warranties. 1937: This Act defines grade standards for agricultural and livestock commodities. a three-tier machinery comprising of District Forum. etc.

pull new customers for the business. Consumer guidance Society of India. nowadays many business firms have set up grievance cells and customer care centres to redress the complaints of their customers. In addition. He must also be aware of the reliefs available to him in case of any form of exploitation under the Act. Answer : Consumer protection refers to the making the consumers aware and educated about their rights and responsibilities and help them in seeking redressal for their grievances and complaints. 2. The following are some of the ways in which the objective of consumer protection can be achieved. adulteration.Answer needs Correction? Click Here Q4 : What are the various ways in which the objective of consumer protection can be achieved? Explain the role of consumer organisations and NGOs in this regard. They must increasingly work towards their satisfaction. etc. They lay down guidelines for their members for the code of conduct for customer dealings. Confederation of Indian Industries (CII) have been established that work towards consumer protection. Formation of Consumer Associations and Organisations: An increasing number of consumer organisations and associations such as the Consumer Unity and Trust Society. 4. A consumer must be well aware and informed of his rights as defined under the Consumer Protection Act. many business and commerce associations such as Federation of Indian Chambers of Commerce and industry (FICCI). Formation of Business Associations: In India. he must also be educated about his responsibilities so as to safeguard himself against cheating and exploitation. 3. In this regard. They must realise that satisfied customers not only lead to repeated sales but also spread the good word about the company and thereby. Consumer Protection Council. 1. must be formed. Consumer protection is of prime importance for both consumers and business. A well educated and informed consumer is able to make wise choices. Consumer Education and Awareness: Consumer education and awareness is one of the important steps towards consumer protection. These organisations work . They must follow ethical values and avoid any form of exploitation of the consumers such as unfair trade practices. Self Administration by Business: The business firms should realise that it is in their long-term interest to protect the interest of their customers. etc.

These journals and other publications provide knowledge about various consumer problems. Some of the important NGOs and consumer organisations include Consumer Coordination Council. legal remedies available and other such matters. they also spread awareness through journals and periodicals. (iii) Legal Assistance: They also provide legal assistance and aid to the consumers and help them in seeking suitable redressal. etc. . Consumer Protection Council. (ii) Publishing Journals: In addition to the training programmes and seminars. Mumbai Grahak Panchayat. Of these. Consumers' Association. consumer organisations and NGOs play an important role in protecting and promoting consumers' interest. (iv) Encouraging Protest against Exploitation: They encourage the consumers to protest strongly against any form of exploitation and unfair trade practices. The Contract Act.actively towards educating the customers and making them aware of their rights and responsibilities. etc. Role of Consumer Organisations and NGOs in Consumer Protection Nowadays. (vi) Taking Initiatives: They not only encourage the consumers to register complaints but also take initiatives themselves in filing cases in the general interest of the public. the most important being the Consumer Protection Act. Role of Government: Government plays an important role in consumer protection by enacting various rules and legislation in this regard. State Commission and National Commission has been set up that work towards the redressal of consumer grievances and complaints. The Government of India has passed various regulations and legislation to provide for consumer protection such as The Consumer Protection Act. (v) Assistance in Filing Complaints: They encourage the consumers to file complaints in appropriate forums and also file complaints on their behalf. The following are some of the functions performed by these organisations in regard of consumer protection. Under the Act a three-tier machinery comprising of District Forum. The Competition Act. 5. (i) Consumer Education: The NGOs and consumer organisations organise various training programmes and workshops to educate the consumer about their rights and responsibilities. Common Cause. The Trade Marks Act. In addition. they encourage consumers to protests against any form of exploitation or cheating and also assists them in taking legal actions and seeking redressal.

(vii) Filing Complaint: In case the product is found defective or any deficiency is found in the quality of the product. (i) Awareness: A consumer should be well aware of the availability of various goods and services so that he can choose carefully and wisely. (ii) Looking for Quality Marks: A consumer must always look for the quality certification marks before the purchase of goods such as ISI in case of electrical goods. Answer needs Correction? Click Here . etc. (v) Honest Transactions: A consumer must always choose legal dealings and discourage illegal trade practices such as black marketing and hoarding. expiry date of the product. etc. pollution. (iii) Asking for Cash Memo: A consumer should always ask for cash memo or bills for the goods and services purchased. a complaint must be filed in the appropriate forum. Such results help the consumers in making informed choices. (iv) Reading Labels: Labels on goods provide information regarding price. The labels must be read carefully. weight. (viii) Consumer Societies: Consumer organisations and societies must be formed to work towards consumer education and awareness. The following are some of the responsibilities of a consumer.(vii) Testing Quality of the Products: They carry out the quality tests for various products in laboratories and publish the results. Answer needs Correction? Click Here Q5 : What are the responsibilities of a consumer? Answer : A consumer is also responsible for safeguarding his own interest and to protect himself from exploitation. (vi) Ensure Safety: A consumer must carefully read the manuals and instructions provided by the manufacturer so as to ensure safe use of the product. (ix) Environment Protection: The consumers must also work towards environment protection by avoiding wastes. AGMARK in case of agricultural goods. The bill acts a proof of purchase and can be used for future references.

State Consumer Dispute Redressal Commission (State Commission) and National Consumer Dispute Redressal Commission (National Commission) respectively.Q6 : Explain the redressal mechanism available to the consumers under the Consumer Protection Act. it refers it to the concerned party against whom the compliant is registered. an appeal can be filed in the State Commission within 30 days of passing the judgment. As the Forum receives the complaint. along with the compensation that is claimed is less than Rs 20 lakh. If necessary. the forum passes a judgement order. The machinery works at the District level. A consumer can to file a complaint in a District forum in case the value of goods in question. National Commission . In State Commission. State level and National level and are known as District Consumer Dispute Redressal Forum (or District Forum). Answer : Under the Consumer Protection Act. 2. Alike District Forum. State Commission also comprises of a President and two or more members one of whom should be a woman. District Forum District Forum is set up in each district by the concerned State Government. a complaint can to be filed by a consumer in case the value of goods /services in question along with the compensation claimed is more than Rs 20 lakh but is less than Rs 1crore. the sample of the good are sent for testing in the laboratory. An appeal can be filed against the order of the Commission before the National commission within 30 days of judgement. in case the party filing the complaint is not satisfied with the order. After considering the tests and reports and on hearing both the concerned parties. 1. the commission passes an order. The following is a brief explanation of the machinery under the Consumer Protection Act. 3. It comprises of a president and two or more members. After receiving the complaint. the commission refers the complaint to the party against whom the compliant is registered. Moreover. After considering the tests of the reports and on hearing the concerned parties. a three-tier machinery has been set for the redressal of consumer grievances and complaints. one of whom should be a woman. State Commission The State Government sets up State Commission for the redressal of consumer grievances.

Payment of an appropriate amount (not less than 5% of the good in question) to be credited to Consumer Welfare Fund. Payment of punitive damages. Repair the defective goods or remove the deficiency in the service. Removal of misleading advertisement and issue of a correct advertisement. consumer courts and consumer forums have been established under the Consumer Protection Act. i. (i) Any consumer (ii) Any registered consumer association or organisation (iii) The Central and State Government . After referring to the sample proofs and on hearing the concerned party. Payment of compensation in cash for the loss or injury suffered. iii. A consumer can file a complaint in the National Commission in case the value of goods in question along with the compensation claimed is more than Rs 1 crore. ii. Replacement of the defective good with a new one. the commission passes an order. Refund the price paid by the consumer for the good or the service. v. vi. an appeal can be filed before the Supreme Court. viii.The National Commission is set up by the Central Government. vii. iv. it can pass one or more of the following directions to the opposite party. The following can file a complaint in a consumer court. Answer needs Correction? Click Here Q7 : Who can file a complaint in a consumer court? Answer : For the redressal of the grievances of consumers. It consists of a President and four or more members one of whom is a woman. Ceasing the manufacturing of hazardous goods. Available Reliefs In case the concerned forum passes an order in favour of the aggrieved party. In case the aggrieved party is not satisfied with the order.

one of whom is a women. It comprises of a president and one or more members. Common Cause. A consumer can file a complaint in the appropriate State Commission in case the value of the goods or the services in question is more than Rs 20 lakhs but is less than Rs 1crore. . In addition.(iv) A consumer or a group of consumers on behalf of a number of consumers having same interest. (i) Consumer Education: The NGOs and consumer organisations educate the consumer about their rights through various training programmes and workshops. an aggrieved consumer not satisfied with the judgement at the lower forum (District Forum) can also appeal at the State Commission. (v) A legal heir or a representative of the deceased consumer. etc. Answer : Consumer organisations and NGOs play an important role in protecting and promoting consumers' interests. Consumers' Association. (iii) Legal Assistance: They also provide legal assistance to the consumers and help them in seeking suitable redressal. Answer needs Correction? Click Here Q9 : Explain the role of consumer organisations and NGOs in protecting and promoting consumers' interests. Answer needs Correction? Click Here Q8 : What kind of cases can be filed in a State Commission? Answer : State Commissions have been established under the Consumer Protection Act for the redressal of various consumer grievances. Mumbai Grahak Panchayat. Consumer Protection Council. legal remedies available and other such matters. Some of the important NGOs and consumer organisations include Consumer Coordination Council. The following are the functions performed by these organisations in regard of safeguarding the interest of the consumers. (ii) Publishing Journals: They publish journals and periodicals to spread knowledge and awareness about various consumer problems.

(iv) Encouraging Protest against Exploitation: They encourage the consumers to protest against any form of exploitation and unfair trade practices. (vi) Taking Initiatives: They not only encourage the consumers to register complaints but also take initiatives themselves in filing cases in the general interest of the public. (v) Assistance in Filing Complaints: They encourage the consumers to file complaints in appropriate forums and also file complaints on their behalf. . (vii) Testing Quality of the Products: They carry out the quality tests for various products in laboratories and publish the results.