119E220

1 – 20

ANNAMALAI UNIVERSITY
DIRECTORATE OF DISTANCE EDUCATION

M.Com. (Co-operative Management)

SECOND YEAR

FUNCTIONAL MANAGEMENT IN CO-OPERATIVES

LESSONS: 1 – 20
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(For Private Circulation Only)
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M.Com. (Co-operative Management)

SECOND YEAR
FUNCTIONAL MANAGEMENT IN CO-OPERATIVES
Editorial Board
MEMBERS
Chairman
Dr. R. Rajendran
Dean
Faculty of Arts
Annamalai University
Annamalainagar
Dr. G. Vasanthi Dr. K. Vijayarani
Professor and Head Wing Head
Department of Commerce Department of Commerce -DDE
Annamalai University Annamalai University
Annamalainagar Annamalainagar
Internal

Dr. R. Dharmalingam
Dr. R. Kumar
Assistant Professor
Assistant Professor
Commerce Wing - DDE
Commerce Wing - DDE
Annamalai University
Annamalainagar Annamalai University
Annamalainagar
External
Dr. S. Vanitha
Dr. S. Mohan
Assistant Professor
Principal
Dept. of Commerce & Financial
S.K.S.S Arts College
Study
Thirupanadal
Bharathidasan University, Trichy
Lesson Writers
Lessons 6- 10
Lessons 1- 5
Prof. SM. Chockalingam
Dr. N. Balusamy
Professor of Commerce
Reader in Co-Operation
Annamalai University
SRMV College
Annamalainagar
Coimbatore
Lessons 11- 15 Lessons 16- 20
Prof. K. Sivaloganathan Dr. G. Vasanthi
Department of Commerce Senior Lecturer in Commerce
KMMPG Centre Annamalai University
Pondicherry Annamalainagar
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M.Com. (Co-operative Management)

SECOND YEAR
FUNCTIONAL MANAGEMENT IN CO-OPERATIVES
SYLLABUS
OBJECTIVE
 To impart the basic conceptual knowledge on Functional Management so as
to develop business acumen.
Unit – I: Management Concepts
Management – Functions – Contributions of management experts : Henry
Fayol – F.W.Taylor – Elton Mayo. Planning : Process – types – Planning premises –
Need and Importance – Organising : Principles – Process – Delegation –
Centralization and decentralization – Directing : Principles – Motivation – Nature,
Importance and Steps in motivation process, theories of motivation –
Communication process – types – barriers; Co-ordination: Principles and
Techniques; Controlling : Process and Techniques.
Unit – II: Production and Materials Management
Meaning – Functions – Need for production planning and control – Types of
production – Techniques of inventory control – Plant location : types, factors
influencing location – Layout : objectives, types, factors influencing layout – Quality
control : types and functions – Productivity ; factory influencing productivity, ways
to increase productivity.
Unit – III: Human Resource Management
Meaning – scope and functions – Sources of recruitment – Selection procedure
– Training: importance, principles, methods – Wage and Salary Administration :
principles – methods of wage payment – factors influencing wages and salary – Job
Evaluation: principles – methods – Performance Appraisal : methods and benefits –
Labour Attrition – causes and consequences – Nature, scope and significance of
Industrial relations.
Unit – IV: Financial Management
Nature and scope of Financial Management – Sources of long-term and short-
term finance – Fixed Asset Management Decision – Working Capital Decision –
Capital Structure Decision – Financial planning and control.
Unit – V: Environment Management
Ecology – Eco system – Energy conservation – dimensions of environment
problems – steps taken to counter environment pollution – regulatory mechanism
for environmental pollution – Support system for effective implementation of the
environment policy.
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M.Com. (Co-operative Management)

SECOND YEAR
FUNCTIONAL MANAGEMENT IN CO-OPERATIVES
CONTENTS

S. No. Title Page No.

1. Management Concepts and Planning 1

2. Organising, Delegation and Decentralisation 27
3. Directing, Motivation and Communication 39
4. Co-ordination and Controlling 62
5. Production and Materials Management and Production 84
Planning and Control
6. Plant Location and Layout 96
7. Quality Control and Productivity 111
8. Inventory Control 119
9. Human Resources Management, Recruitment, Selection and 125
Training
10. Wage and Salary Administration 141
11. Job Evaluation and Performance Appraisal 149
12. Labour Attrition and Industrial Relations 162
13. Financial Management, Nature and Scope 179
14. Sources of Long-Term and Short-Term Finance and Fixed 192
Assets Management
15. Management of Working Capital, Cash and Receivables 204
16. Capital Structure and Financial Planning and Control 225
17. Ecology and Ecosystem 240
18. Energy Conservation 250
19. Dimensions of Environment Problems 260
20. Regulatory Mechanisam for Environmental Pollution and 266
Support system for implementation of Environment Policy
 LESSON - 1

MANAGEMENT CONCEPTS AND PLANNING

STRUCTURE
1.0 Objectives
1.1 Introduction to Management
1.1.1 Definition of management
1.1.2 Nature/characteristics of management
1.1.3 Scope of management
1.1.4 Functions of management
1.1.5 Contributions of management experts
 Henry Fayol‘s Administrative Theory of Management
 Taylor‘s Theory of Scientific Management
 Elton Mayo‘s theory of Hawthorne experiment
1.2. Planning
1.2.1 Introduction
1.2.2 Definition of planning
1.2.3 Nature of planning (characteristics/features of planning)
1.2.4 Importance of planning
1.2.5 Steps in planning/planning process
1.2.6 Types of plans
1.0 OBJECTIVES
After reading this lesson you will be able to
 Define the concept of management
 Narrate the scope and characteristic of management
 Explain to function of management
 Review the contributions of management scientists
 To define planning & explain the nature of planning
 Explain the steps in planning
 Enumerate the types of plans.
1.1 INTRODUCTION TO MANAGEMENT
The managers achieve organizational objectives by getting work from others
and not performing in the tasks themselves.
Management is an art and science of getting work done through people. It is
the process of giving direction and controlling the various activities of the people to
achieve the objectives of an organization.
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1.1.1 DEFINITION OF MANAGEMENT

There are numerous definitions of management. Different experts have defined
different points of view.
According to Mary Parker Follett, “Management is the art of getting things done
through people”
Harold Koontz defined as, “Management is the art of getting things done through
and with people in formally organized groups. It is the art of creating an
environment in which people can perform and individuals could cooperate
towards attaining of group goals”.
In view of Joseph Massie, “Management is defined as the process by which a
cooperative group directs actions towards common goals”.
George.R.Terry‟s point of view, “Management is a distinct process, consisting of
planning, organizing, actuating and controlling, performed to determine and
accomplish stated goals by the use of human beings and other resources”.
According to this definition, management is a process a systematic way of
doing things. The four management functions included in this process are
planning, organizing, directing and controlling.
 Planning refers manager‘s think of their actions in advance. Their actions are
usually based on some method, plan or logic, rather than on a hunch.
 Organizing refers manager‘s coordinate the human and material resources of
the organization.
 Actuating refers managers motivate and direct subordinates
 Controlling refers attempts to ensure that there is no deviation from the plan
or norms.
This definition also indicates that managers use people and other resources such as
finance, equipment’s etc… in attaining their goals.
Finally, the definition states that the management involves the act of achieving
the organization‘s objectives. These objectives will, of course, vary with each
organization.
The following chart clearly presents this definition of management.
Basic Resources (6M) Fundamental Functions Desired Objectives

Men Planning Organizing

Material
Machine
Stated
Methods
Goals
Money
Market
Directing Controlling

Input Process of Management Output (End Result)

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1.1.2 NATURE/CHARACTERISTICS OF MANAGEMENT

Following are the nature and characteristics of Management
1. Management is an activity
It is a process of organized activity concerned with efficient utilization of
resources of production like men, material, machine, money etc…
2. Management is a purposeful activity
It is concerned with the achievement of an objective through its functions.
Objectives may be explicit or implicit.
3. Management concerned with the efforts of a group
Management is concerned with management of people and not the direction of
things. It motivates the workers to contribute their best.
4. Management is getting things done
A manager does not do any operating work himself but gets it done through
others.
5. Management applies economic principles
Management is the art of applying the economic principles that underline a
control of men & materials in the enterprise under consideration.
6. Management involves decision-making
It is a decision-making process and the decisions are involved in all the
functions of management.
7. Management coordinates all activities and resources
It is concerned with coordination of all activities and resources to attain the
specific objectives.
8. Management is a universal activity
The techniques and tools of management are universally applicable.
9. Management is an integrating process
It integrates the men, materials and machines for achieving stated objectives.
10. Management is concerned with Direction and Control
It is concerned with direction and control of human efforts to attain the
specific objectives.
11. Management is Intangible
It is abstract and cannot be seen. It is evidenced by the quality of organization
and through its results.
12. Management is both science and an Art
Management has certain universally applicable principles, laws etc…. Hence, it
is a science. It is also an art, because it is concerned with application of knowledge
for the solution of organizational problems.
13. Management is a profession
It is becoming a profession because there is established principles of
management which being applied in practice.
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14. Management is an inter- disciplinary approach

Management as a body of discipline takes the help or other social science like
psychology, sociology, engineering, economics, Mathematics etc…
15. Management is dynamic and not static
Management adopts itself to the social changes and also introduces innovation
in methodology.
1.1.3 SCOPE OF MANAGEMENT
The scope of management is very wide. The functional areas of management
may be classified into the following categories.
 Production Management
 Marketing Management
 Financial Management
 Personnel Management
i) Production Management
Production functions so as to produces the right goods in right quantity at the
right time and at the right cost. It consists of the following activities.
 Designing the product
 Location & Layout of plant and building
 Operations of purchase & storage of materials
 Planning & control of factory operations
 Repairs & maintenance
 Inventory control and quality control
 Research and development etc…
ii) Marketing Management
It refers to the identification of consumer‘s needs and supplying them the
goods and services, which can satisfy those, wants. The activities are as follows:
 Marketing Research to determine the needs and expectations of consumers
 Planning and developing suitable products
 Setting appropriate prices
 Selecting the right channels of distribution
 Promotional activities like advertising and salesmanship to communicate
with the customers.
iii) Financial Management
Financial management seeks to ensure the right amount and type of funds to
business at the right time and at reasonable cost. The activities are as follows:
 Estimate the volume of funds requires for long term and short term needs of
business
 Selecting the appropriate sources of funds
 Raising the required funds at the right time
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 Ensuring proper utilization and allocation of raised funds

 Administration of earnings.
iv) Personnel Management
It involves planning, organizing, directing & controlling the procurement,
development, compensation, maintenance etc… of the human resources in an
enterprise. It consists of the following activities:
 Manpower planning
 Recruitment
 Selection
 Training & Development
 Performance Appraisal
 Compensation & promotion
 Employee services & benefits
 Maintaining personnel records etc…
1.1.4 FUNCTIONS OF MANAGEMENT
i) Planning
Planning is the function that determines in advance what should be done. It is
looking ahead and preparing for the future. It is a process of deciding the business
objectives and charting out the methods of attaining those objectives. In other
words, it is the determination of what is to be done, how and where it is to be done,
who is to do it and how results are to be evaluated. This is done not only for the
organization as a whole but for every division or department or sub-unit of the
organization. It is a function, which is performed by managers at all levels, like top,
middle and supervisory levels of management. Plans made by top management of
the organizations whole may cover periods as long as five or ten years. Also, plans
made by middle or first line managers, cover such shorter periods. Such plans may
be for the next days or weeks, or months, etc… for example, for a two-hour meeting
to take place in a week.
Following are the sub functions of planning: forecasting, Decision - making,
strategic formulation, policy-making, and programming, scheduling, budgeting,
problem solving, innovation and research activities.
ii) Organizing
It refers to coordinate human resources with other resources such as material,
machine, money etc… Once managers have established objectives and developed
plans to achieve them, they must design and develop a human organization that
will be able to carry out those plans successfully. According to Allen, this
organization refers to the ―structure which results from identifying and grouping
work, defining and delegating responsibility and authority, and establishing
relationships.‖ According to Amitai Etzioni ―An organization is a social unit or
human grouping, deliberately structured for the purpose of attaining specific goals‖.
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The process of organizing involves the followings:
 Identifying the activities necessary to achieve the objectives.
 Grouping activities into various departments
 Assigning duties or tasks to appropriate individuals
 Delegating necessary authority to individuals and fixing responsibilities for
results.
 Defining authority and responsibility relationship among individuals.
Sub-functions of organizing functions are as follows: Functionalisation,
divisionalisation, departmentation, delegation, decentralization, activity analysis,
task allocation.
iii) Staffing
Staffing may also be considered an important function involved in building the
human organization. In staffing, the manager attempts to find the right person for
each job. Staffing fixes a manager‘s responsibility to recruit and to make certain
that there is enough manpower available to fill the various positions needed in the
organization. Staffing involves the selection and training of future managers and a
suitable system of compensation. Staffing obviously cannot be done once and for
all, since people are continually leaving, getting fired, retiring and dying. Often too,
the changes in the organization create new positions, and these must be filled.
According to Koontz and O‘Donnell, ―The managerial function of staffing
involves manning the organizational structure through proper and effective
selection, appraisal and development of personnel to fill the roles designed into the
structure‖.
Staffing function has the following sub functions. They are manpower
planning, recruitment, selection, training & development, placement,
compensation, promotion, appraisal etc…
iv) Directing
After plans have been made and the organization has been established and
staffed, the next step is to move towards its defined objectives. This function can be
called by various names: ‗Leading‘, ‗Directing‘, ‗Motivating‘, ‗Actuating‘, and so on.
But whatever the name used to identify it, in carrying out this function the
manager explains to his people what they have to do and helps them do it to the
best of their ability.
Directing thus involves three sub-functions. They are as follows
 Communication,
 Leadership and
 Motivation.
 Communication is the process of passing information and
understanding from one person to another.
 Leadership is the process by which a manager guides and influences
the work of his subordinates.
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 Motivation means arousing desire in the minds of workers to give

their best to the enterprise. It is the act of stimulating or inspiring
workers. If the workers of an enterprise are properly motivated they
will pull their weight effectively, give their loyalty to the enterprise,
and carry out their task effectively.
Two broad categories of motivation are financial and non-financial. Financial
motivation takes the form of salary, bonus, profit sharing, etc., while non-financial
motivation takes the form of job security, opportunity of advancement, recognition,
praise, etc.
v) Controlling
The manager must ensure that everything occurs in conformity with the plans
adopted, the instructions issued and the principles established. Three elements are
involved in the controlling function.
 Establishing standards of performance.
 Measuring current performance and comparing it against the established
standards.
 Taking action to correct any performance that does not meet those
standards. In the absence of sound control, there is no guarantee that the
objectives, which have been set, will be realized. The management may go on
committing mistakes without knowing them. Control compels events to
conform to plans.
Controlling function has the following sub functions. They are
 Fixation of standards,
 Recording,
 Measurement,
 Reporting,
 Corrective action.
1.1.5 CONTRIBUTIONS OF MANAGEMENT EXPERTS
To get proper and balanced perspective of theory and practice of management
all developments taking place since the beginning of the 20th century may be placed
under three main categories. They are as follows:
 Classical or traditional Management approach
 Behavioral or neo-classical approach
 Modern approach to management
1) Classical or traditional Management approach
The classical approach to management is one of the oldest and most popular,
known as the traditional or universal process. It is based on the assumption that
the objective of an organization may vary from one to another but the management
of all organizations requires similar management process. It has its roots in the
basic concepts of division of labour and specialization. This approach consists
mainly of scientific management developed by F.W.Taylor, administrative theory of
management by Henry Fayol and bureaucratic organization by Max Weber.
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2) Administrative Theory of Management
Though administrative theory of management is based on the contributions of
many scholars and practitioners like Henri Fayol, Max Weber, Sheldon, Mooney,
Allen and urwick, etc. But major part of it relates to Foyal‘s work.
3) Henry Fayol’s Administrative Theory of Management
Henri Fayol (1841-1925) is considered the „Father of administrative
management theory‟ with focus on the development of broad administrative
principles applicable to general and higher managerial levels. Foyal started his
career as a junior engineer in a coal mining company in France in 1860 and
became its general manager in 1880. He wrote a monograph in French in 1916,
entitled ―General and Industrial Administration‖ which was translated into English
in 1929.
It is in four parts of which the first part deals with classification of business
activities as technical activities (manufacturing or production), commercial
activities (buying, selling and exchange), financial activities (raising and optimum
use of capital), accounting activities (recording, costing and statistics), security
activities (protection of persons and property), and administrative or managerial
activities.
Second part contained basic functions of management performed by the
managers in all types of organizations. In this way he identified five elements or
functions of management process: Planning, organizing, commanding, coordinating
and controlling.
Third part consists of 14 principles of management as general guides to the
management process and management practice. These are as under.
i) Division of Work
Division of work in the management process produces more and better work
with the same effort. Various functions of management like planning, organizing,
directing and controlling cannot be performed efficiently by a single proprietor or by
a group of directors. They must be entrusted to specialists in related fields.
ii) Authority and Responsibility
As the management consists of getting the work done through others, it
implies that the manager should have the right to give orders and power to exact
obedience. A manager may exercise formal authority and also personal power.
Formal authority is derived from his official position, while personal power is the
result of intelligence, experience, moral worth, ability to lead, past service, etc.
Responsibility is closely related to authority and it arises wherever authority is
exercised. An individual, who is willing to exercise authority, must also be prepared
to bear responsibility to perform the work in the manner desired. However,
responsibility is feared as much as authority is sought after.
iii) Discipline
Discipline is absolutely essential for the smooth running of business. By
discipline we mean, the obedience to authority, observance of the rules of service
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and norms of performance, respect for agreements, sincere efforts for completing
the given job, respect for superiors, etc.
iv) Unit of Command
This principle requires that each employee should receive instructions about a
particular work from one superior only. Foyal believed that if an employee was to
report to more than one superior, he would be confused due to conflict in
instructions and also it would be difficult to pinpoint responsibility to him.
v) Unity of Direction
It means that there should be complete identity between individual and
organizational goals on the one hand and between departmental goals inter se on
the other. They should not pull in different directions.
vi) Subordination of Individual Interest to General Interest
In a business concern, an individual is always interested in maximizing his
own satisfaction through more money, recognition, status, etc. This is very often
against the general interest, which lies in maximizing production. Hence the need
to subordinate the individual interest to general interest.
vii) Remuneration
The remuneration paid to the personnel of the firm should be fair. It should be
based on general business conditions, cost of living, and productivity of the
concerned employees and the capacity of the firm to pay. Fair remuneration
increases workers‘ efficiency and morale and fosters good relations between them
and the management.
viii) Centralization
If subordinates are given more role and importance in the management and
organization of the firm, it is decentralization but if they are given less role and
importance, it is centralization. The management must decide the degree of
centralization or decentralization of authority on the basis of the nature of the
circumstances, size of the undertaking, and the type of activities and the nature of
organizational structure. The objective to pursue should be the optimum utilization
of all faculties of the personnel.
ix) Scalar Chain
Scalar chain means the hierarchy of authority from the highest executive to
the lowest one for the purpose of communication. It states superior subordinate
relationship and the authority of superiors in relation to subordinate at various
levels. As per this principle, the orders or communications should pass through the
proper channels of authority along the scalar chain. But in case there is need for
swift action, the proper channels of authority may be short-circuited by making
direct contact (called gang plank) with the concerned authority.
x) Order
To put things in an order needs effort. Disorder does not need any effort. It
evolves by itself. Management should obtain orderliness in work through suitable
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organization of men and materials. The management should observe the principles
of ―right place for everything and for every man‖.
xi) Equity
Equity means equality of fair treatment. Equity results from a combination of
kindness and justice. Employees expect management to be equally just to
everybody. It requires managers to be free from all prejudices, personal likes or
dislikes. Equity ensures healthy industrial relations between management and
labour which is essential for the successful working of the enterprise.
xii) Stability of Tenure of Personnel
In order to motivate workers to do more and better work, it is necessary that
they should be assured security of job by the management. If they have fear of
insecurity of job, their morale will be low and they cannot give more and better
work. Further, they will not have any sense of attachment to the firm and they will
always be on the lookout for a job elsewhere.
xiii) Initiative
Initiative means freedom to think out and execute a plan. The zeal and energy
of employees are augmented by initiative. Innovation, which is the hallmark of
technological progress, is possible only where the employees are encouraged to take
initiative. According to Fayol, initiative is one of the keenest satisfactions for an
intelligent man to experience, and hence, he advises managers to give their
employees sufficient scope to show their initiative. Employees should be
encouraged to make all kinds of suggestions to conceive and carry out their plans,
even when some mistakes result.
xiv) Esprit De-Corps
This means team spirit. Since ―Union is strength‖, the management should
create team spirit among the employees. Only when all the personnel pull together
as a team, there is scope for realizing the objectives of the concern. Harmony and
unity among the staff are a great source of strength to the undertaking. To achieve
this, Fayol suggested two things. One, the motto of divide and rule should be
avoided, and two, verbal communication should be used for removing
misunderstandings.
Fourth part of monograph deals with managerial qualities and skills, which
should be possessed by the managers. These are as: Physical qualities (health,
vigour, personality), Mental ability (abilities to understand and learn, to make
decisions and creativity, etc.), Moral education (Loyalty, dignity, ethical values,
etc…), General education, Special knowledge and experience (knowledge arising out
of practice).
4) Theory of Scientific Management
Though scientific management theory is based on the contributions of many
scholars and practitioners like Fredrick Winslow Taylor, Henry Gantt, Frank
Gilbrith, Emerson and Carl Berth, etc. But F.W.Taylor has given a concrete shape
to the theory of scientific management.
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5) Taylor‟s Theory of Scientific Management
F.W.Taylor (1856 – 1915) is known as the “father of Scientific Management”.
He joined as a mechanic at Midvale steel company in U.S.A at 1878. He became
chief engineer in the year 1884 in the same company. During his career spanning a
period of 26 years, he conducted a series of experiments in three companies:
Midvale Steel, Simonds Rolling Machine and Bethlehem steel companies. While
serving as a Chief Engineer of Midvale Steel Company, Taylor made several
important contributions, which are classified under scientific management.
Taylor‘s approach aims at increasing the operational efficiency of workers by
solving their work related problems, reducing in efficiency and wastage, improving
their relation with management, and developing a best way of doing things. Taylor
expressed the basic philosophy of scientific management in the following terms:
 Science, not rule of thumb: For solving problems and making decisions, the
manager should adopt scientific attitude and use scientific thinking and
methods. The ‗rule of thumb‘ or ‗Hit or miss‘ approach should be replaced.
 Harmony, not discord: All the departments and workers are a part of an
organization. There should be complete harmony or coordination in their
functioning and any kind of clash or conflict should not be allowed to crop in
and, if it arises, should be reduced to a minimum.
 Cooperation, not individualism: Instead of fostering individualism, importance
of cooperative group efforts should be recognised. Because, organizational
objectives depends upon the group efforts not for individuals.
 Maximum, not restricted output: Production should be carried out up to the
maximum capacity available in a unit.
6) Elton Mayo‟s theory of Hawthorne experiment
George Elton Mayo (1880 – 1949) was regarded as the ―Founder and father of
Modern sociological and psychological Industrial research‖.
Elton mayo was born in 1880 in Adelaide in Australia. He got a basic degree
from Adelaide University. He worked as a teacher initially. Then, he was advised to
study psychology. He had become a lecturer at the university of Queensland after
completion of Master degree in psychology. Elton Mayo went to the United States of
America in 1922, and joined as a researcher at the Wharton Business School of
Pennsylvania University. Later on he was selected in the Graduate school of
Business at Harvard University in 1926. He was a professor of Industrial Research
at Harvard University. He retired in 1947 and died in 1949. During his career he
has published many books and papers.
Hawthorne experiments were conducted at the Hawthorne plant of the
Western Electric Company in Chicago from 1924 – 1932. Hawthorne plant was
manufacturing telephone systems and its parts. Nearly 30,000 employees worked
during this experiment period. The company provides all facilities to employees
upto their satisfaction level. But the productivity of the employees was not to the
expectations of management. So, in 1924, the management requested National
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Academy of Sciences to investigate the reasons for dissatisfaction of employees and

decrease in productivity. On this basis, Prof.Elton Mayo and his team conducted
research. The objective of the experiment was to find out the behaviour and attitude
of employees under better working conditions. The results of these experiments
have been published into six volumes. They are the Human problems of Industrial
civilization, The social problem of an industrial civilization, The industrial worker,
Leadership in a free society, Management and worker and Management and morale.
Based on the problems, Prof. Elton Mayo and his team conducted researches
in four phases. They are:
 Illumination experiments (1924 – 1927)
 Relay Assembly Test room experiment (1927 – 1928)
 Mass interviewing programme (1928 – 1930)
 Bank wiring observation room experiments (1931 – 1932).
1. Illumination experiments
This research was conducted to determine the effects of changes in lighting on
productivity. The basic assumption of this research was that high lighting leads to
productivity. This experiment was conducted for two and a half years. Under this
experiment, two groups were formed namely, experimental group and control
group. In the case of experimental group, variations in lighting were made
periodically and the results were observed and recorded. In the case of control
group, there is no change in the lighting and the researchers were requested to
work under constant lighting system upto the end of the experiment. It was
observed that the output of both groups increased steadily. The production
decreased in two groups whenever the lighting falls below the normal level. This
experiment revealed that there is no relationship between lighting and productivity.
It means that the improved working conditions do not result in the increased
productivity. As per this experiment, it is known that informal social relations
among the group members are the reason for increased productivity.
2. Relay assembly test room experiments
Relay assembly test room experiments were conducted to determine the effect
of changes in working conditions, length of working days, rest pauses, frequency of
rest and duration and physical conditions on productivity. A group of six women
workers, who were friendly to each other selected for this experiment. These women
workers were told about the experiment and were made to work in a very informal
atmosphere with a supervisor – researcher in a separate room. The supervisor –
researcher acted as their friend, philosopher and guide. During the study several
variations were made in the working conditions to find which combinations was
most ideal for production. Surprisingly, the researchers found that the production
of the group had no relation with working conditions. It went on increasing and
stabilized at a high level even when all the improvements were taken away and the
poor pre – test conditions were reintroduced. How this phenomenon came about
nobody knew. The workers were also not able to explain this phenomenon. They
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were neither closely supervised, nor motivated by extra reward. Obviously,

something else was happening in the test room, which was responsible for this.
Researchers then attributed this phenomenon to the following factors:
 Feeling of importance among the women as a result of their participation in
the research and the attention they got.
 Warm informality in the small group and tension – free interpersonal and
social relations as a result of the relative freedom from strict supervision and
rules.
 High group cohesion among the women.
Elton mayo concluded that the work satisfaction depends to a large extent on
the informal social pattern of the work group.
3. Mass Interviewing Programme
The knowledge about the informal group processes, which was accidentally
acquired in the second phase made researchers design the third phase. This
interview programme was conducted to determine employees attitudes towards
company, supervision, insurance plans, promotion and wages. For this purpose
they interviewed more than 20,000 workers. At first, direct questions were asked
relating to the type of supervision, working conditions living conditions and so on.
But since the replies were guarded, the technique was changed to non –directive
type of interviewing, in which workers were free to talk about their favourite topics
related to their work environment. This study revealed that the worker‘s social
relations inside the organization had an unmistakable influence on their attitudes
and behaviours. The study brought to light the all – pervasive nature of informal
groups which had their own culture and production norms which their members
were forced to obey.
Mayo concluded that the workers were activated by logic of sentiment but the
management is concerned with logic of cost and efficiency. Thus, a conflict between
the workers and the management becomes inevitable.
4. Bank wiring Observation room Experiment
This experiment was conducted between 1931 and 1932. A group has been
formed to conduct this experiment. This group consisted of fourteen male workers.
Out of these fourteen workers, nine were wiremen, three were soldier men and two
were inspectors.
The main aim of this experiment was to analyze how a group could influence a
worker to restrict his output even in the face of attractive incentive schemes for
larger output. Hourly rate of wages was fixed on the basis of average output of each
worker and a group bonus scheme was announced. Group bonus was to be
determined on the basis of average group output. It was assumed that workers
would produce more and more in order to get maximum group bonus. Besides, the
workers could help each other to produce more. The company had not improved the
working conditions for this experiment and the company was not ready to analyse
cause – effect relationships. But, a general observation was made to know about an
 14

individual behaviour and the impact of group behaviour on the individual

behaviour.
Under this experiment, workers have decided their target by themselves. The
company target was more than the target fixed by the workers. However, the
workers have failed to achieve the target due to the following reasons.
 Unemployment problem
 Unduly high standard
 Protection of slow workers
 Satisfaction of management
This experiments helped to arrive at the following conclusion:
 An informal relationship is responsible for deciding the human behaviour.
 The counseling was helpful in resolving management – employee conflicts.
 The existence of informal organization is quite common in all organization.
The group had fixed standard output of their own only because of social
pressure.
1.2. PLANNING
1.2.1 INTRODUCTION
Planning is the fundamental/primary function of management. Planning is the
function that determines in advance what should be done. It is looking ahead and
preparing for the future. It is a process of deciding the business objectives and
charting out the methods of attaining those objectives. In other words, it is the
determination of what is to be done, how and where it is to be done, who is to do it
and how results are to be evaluated. Plans made by top management of the
organizations whole may cover periods as long as five or ten years. Also, plans
made by middle or first line managers, cover such shorter periods. Such plans may
be for the next days or weeks, or months, etc… for example, for a two-hour meeting
to take place in a week.
1.2.2 DEFINITION OF PLANNING
There are numerous definitions of planning. Different experts have defined
different points of view.
“Planning is an intellectual process, the conscious determination of course of
action, the basing of decision on purpose, acts and considered estimates” .
- Koontz & O’Donnell
“Planning is deciding in advance what is to be done. When a manager plans, he
projects a course of action, for the future, attempting to achieve a consistent,
coordinated structure of operations aimed at the desired results”.
Theo Haimann
“Planning is the thinking process, the organized foresight, the vision based on
fact and experience that is required for intelligent action”.
Alford & Beatty
 15
1.2.3 NATURE OF PLANNING (CHARACTERISTICS/ FEATURES OF PLANNING)
1. Planning is goal – oriented
Planning involves setting the objectives of an organization for achieving the
business targets well in time. Objectives can easily be achieved by a sound
planning process.
2. Planning is a primacy
Planning precedes other functions in the management process. It is the
primary requisite before other managerial functions step in. The other managerial
functions, viz., organizing, staffing, directing & controlling can be performed only
after the necessary planning has been done. So it gets primary everywhere.
3. Planning is all - pervasive
Planning is a pervasive activity covering the entire enterprise with all its
segments and every levels of management. It is equally important for large and
small firms.
4. Planning is an intellectual/rational process
Planning is a mental exercise involving imagination, foresight and sound
judgement. It is not guesswork or wishful thinking. Managers take the necessary
steps to fight against future events. So it is a process of looking ahead.
5. Planning is a continuous process
Planning is a never – ending activity. It is a dynamic exercise. One plan makes
another plan to be followed by a series of other plans. Again constant changes
make planning a continuous activity.
6. Planning is a precision
The meaning, scope and nature of planning must be precise. It must pinpoint
the expected results exactly. Any error in planning may lead to serious mistakes in
the other functions.
7. Planning involves Choice
Planning is essentially decision – making or choosing among alternative
courses of action. Planning presupposes the existence of alternatives. Plans are
decisions made after evaluation of alternative courses of action. A planning problem
arises only when an alternative course of action is discovered.
8. Planning is directed towards efficiency
In general, all management functions including planning is directed towards
increase the efficiency of the firm. Corollary of planning is (a) Planning is an
intellectual activity that aims the best way of doing things, and (b) planning
provides with goals and objectives. Thus planning is directed towards efficiency.
9. Flexibility of planning
Planning is flexible as commitment, which is based on future course of action.
These are always dynamic. Therefore, an adjustment is needed between the various
factors and planning.
 16
1.2.4 IMPORTANCE OF PLANNING
a) Minimizes Risk and Uncertainty
In today's increasingly complex organizations, intuition alone can no longer be
relied upon as a means for making decisions. This is one reason why planning has
become so important. By providing a more rational, fact-based procedure for
making decisions, planning allows managers and organisations to minimise risk
and uncertainty. In a dynamic society such as ours, in which social and economic
conditions alter rapidly, planning helps the manager to cope with and prepare for
the changing environment. Planning does not deal with future decisions, but with
the futurity of present decisions. The manager has a feeling of being in control if he
has anticipated some of the possible changes and has planned for them. It is like
going out with an umbrella in cloudy weather. It is through planning that the
manager relates the uncertainties and possibilities of tomorrow to the facts of today
and yesterday.
b) Leads to Success
Planning does not guarantee success, but studies have shown that, often
things being equal, companies which plan not only outperform the non planners
but also outperform their own past results. This may be because when a
businessman's actions are not random or ad hoc, arising as mere reaction to the
market place, i.e., when his actions are planned, be definitely does better. Military
historians attribute much of the success of the world's greatest generals to effective
battle plans.
Planning leads to success by going beyond mere adaptation to market
fluctuations. It proacts. It involves an attempt to shape the environment on the
belief that business is not just the creation of environment but its creator as well.
c) Focuses Attention on the Organization’s Goals
Planning helps the manager to focus attention on the organisation's goals and
activities. This makes it easier to apply and coordinate the resources of the
organisation more efficiently. The whole organisation is forced to embrace identical
goals and collaborate in achieving them. It also enables the manager to chalk-out in
advance an orderly sequence of steps for the realisation of an organisation's goals
and to avoid a needless overlapping of activities.
d) Facilitates Control
In planning, the manager sets goals and develops plans to accomplish these
goals. These goals and plans then become standards or benchmarks against which
performance can be measured. The function of control is to ensure the activities
conform to the plans. Thus, controls can be exercised only if there are plans.
1.2.5 STEPS IN PLANNING/PLANNING PROCESS
The steps generally involved in planning are as follows:
 Establishing Verifiable Goals or Set of Goals to be achieved
 Establishing Planning Premises
 Deciding the planning period
 17

 Finding Alternative Courses of Action

 Evaluating and Selecting a Course of Action
 Developing Derivative Plans
 Measuring and controlling the Progress
1. Establishing Verifiable Goals or Set of Goals to be achieved
The first step in planning is to determine the enterprise objectives. Upper level
or top-level managers most often set these, usually after a number of possible
objectives have been carefully considered. There are many types of objectives
managers may select such as a desired sales volume or growth rate, the
development of a new product or service, or even a more abstract goal such as
becoming more active in the community. The type of goal selected will depend on a
number of factors like the basic mission of the organization, the values its
managers hold, and the actual and potential abilities of the organization.
2. Establishing Planning Premises
The second step in planning is to establish planning premises. Plans are
prepared for future. But future is uncertain. Therefore, management makes certain
assumptions about the future. These assumptions are known as planning
premises. Planning premises are vital to the success of planning as they supply
pertinent facts and information relating to the future such as population trends,
the general economic conditions, production costs and prices, probable competitive
behaviour, capital and material availability, governmental control and so on.
Planning premises can be variously classified as under:
 Internal and external premises.
 Tangible and intangible premises.
 Controllable and non-controllable premises.
(a) Internal and external premises
Internal Premises refer to the factors within the enterprise. These includes sales
forecasts, policies and programs of the organization, capital investment in plant
and equipment, skill of the labour force, other resources and abilities of the
organization in the form of machines, money and methods, and beliefs, behaviour
and values of the owners and employees of the organization.
External premises are those, which lie outside of the firm. It may be classified
in three group‘s viz.,
i. General business environment including economic, political and social
conditions,
ii. The product market consisting of the demand & supply forces for the product
or services, and
iii. Factors, which affect the resources available to the enterprise.
(b) Tangible and intangible premises
Some of the planning premises may be tangible while some others may be
intangible. Tangible premises are those, which can be quantitatively measured. For
example, Population growth, industry demand, capital and resources invested in
 18

the organization are all tangible premises whose quantitative measurement is

possible.
Intangible premises are which being qualitative in character cannot be so
measured. For example, political stability, sociological factors, business and
economic environment, attitudes, philosophies and behaviour of the owners of the
organization are all intangible premises whose quantitative measurement is not
possible.
(c) Controllable and non-controllable premises
Those while some of the planning premises may be controllable, some others
are non-controllable. Those premises, which are entirely within the control and
realm of management, are known as Controllable premises. Some of the examples
of controllable factors are the company's advertising policy, competence of
management members, skill of the labour force, availability of resources in terms of
capital and labour, attitude and behaviour of the owners of the organization etc.
Premises over which an enterprise has absolutely no control are uncontrollable
premises. Some of the examples of uncontrollable factors are strikes, wars, natural
calamities, emergency, legislation, etc
3. Deciding the planning period
Once upper-level managers have selected the basic long term goals and the
planning premises, the next task is to decide the period of the plan. Businesses
vary considerably in their planning periods. In some instances plans are made for a
year only while in others they span decades. In each case, however, there is always
some logic in selecting a particular time range for planning. Companies generally
base their period on a future that can reasonably be anticipated. Other factors,
which influence the choice of a period are as follows: (a) lead time in development
and commercialization of a new product, (b) time required to recover capital
investments or the pay-back period; and (c) length of commitments already made.
(a) Lead time in development and commercialization of a new product
For example, a heavy engineering company planning to start a new project
should have a planning period of, say, five years with one or two years for
conception, engineering and development and as many more years for production
and sales. On the contrary, a small manufacturer of spare parts who can
commercialize his idea in a year or so need make annual plans only.
(b) Time required to recovering capital investments or the pay-back period
These are the number of years over which the investment outlay will be
recovered or paid back from the cash inflow if the estimates turn out to be correct.
If a machine costs Rs.10 lakhs and generates cash inflow of Rs. 2 lakhs a year, it
has a pay-back period of five years. Therefore, the plan should also be for at least
five years.
(c) Length of commitments already made
The plan period should, as far as possible, be long enough to enable the
fulfillment of commitments already made. For example, if a company has agreed to
 19

supply goods to the buyers for five years or has agreed to work out mines for ten
years it need also plan for the same period to fulfil its commitments. However, if the
length of commitment can somehow be reduced, the plan period can also be
reduced. Thus, if the company can grant sub-lease of its mines to other parties,
then it can reduce its plan period also.
4. Finding Alternative Courses of Action
The fourth step in planning is to search for and examining alternative courses
of action. Generally, there are alternative ways of achieving the same goals. For
example, in order to increase sales, an enterprise may launch advertising campaign
or reduce prices or increase the quality of products. Therefore, alternative course of
action should be determined. This requires imagination, foresight and ingenuity. In
determining alternatives the critical or limiting factors must be kept in view.
5. Evaluating and Selecting a Course of Action
Having sought alternative courses, the fifth step is to evaluate them in the
light of the premises and goals and to select the best course or courses of action.
Alternative courses of action can be evaluated against the criteria of cost, risks,
benefit and organizational facilities. The strong and weak points of every alternative
should be analyzed carefully. This is done with the help of quantitative techniques
and operations research.
6. Developing Derivative Plans
Once the plan has been formulated, its broad goals must be translated into
day-to-day operations of the organization. Middle and lower-level managers must
draw up the appropriate plans, programmes and budgets for their sub-units. These
are known as derivative plans. In developing these derivative plans, lower-level
managers take steps similar to those taken by upper-level managers-selecting
realistic goals, assessing their sub-units‘ particular strengths and weaknesses and
analyzing those parts of the environment that can affect them.
7. Measuring and controlling the Progress
 Obviously, it is foolish to let a plan run its course without monitoring its
progress. Hence the process of controlling is a critical part of any plan.
Managers need to check the progress of their plans so that they can (a) take
whatever remedial action is necessary to make the plan work, or (b) change
the original plan if it is unrealistic.
 It should provide for proper analysis and classification of actions.
1.2.6 TYPES OF PLANS
In a business enterprise, we find or hear of a number of plans; which might
seem to be different in their contents and application. However, a careful analysis
of various plans would reveal them to be closely connected and forming a sort of
structure. Depending on their use, management plans may be classified into two
broad categories.
 20

Types of Plans

Standing Plan (or) Single Use Plan (or)

Multi – use plan Ad hoc Plan
Missions/purposes Programme
Objectives/Goals Budgets
Strategies Schedules
Policies Projects
Rules Methods
Procedures
I. Standing Plan
a) Mission or Purposes
Mission is a statement that defines the role that an organization plays in the
society.
It represents the overall philosophy of an organization. It indicates the end
which is to be achieved over the whole life of an organization or at least over a long
period. The term mission is generally used in non – business organizations like a
college, university, a religious trust, a club, a government etc… For example, the
mission of the Government of India might be eradication of poverty; the mission of a
university might be imparting higher level education to the largest possible number
of people of society and encouraging research maximally; and the mission of a
manufacturing enterprise might be producing high quality goods for the common
men of society of the most affordable prices and so on.
b) Objectives or Goals
Objectives are the results which management wants to achieve through the
making and implementation of a plan. These, in fact, are the goals towards which a
plan is directed. Objectives provide a sense of direction to the thinking process of
the planner, and to the action process of the operators of the plan. Organization
objectives may be classified into two categories. They are Internal objectives and
External objectives. An internal objective relates to maximize the company‘s profit,
high liquidity, best services to employees, high return to shareholders etc… While
external objectives relate to the services to the customers and their satisfaction. It
is rightly pointed out that the management process begins with setting the
organizational objectives. While establishing the organizational objectives, the
following eight areas should be taken into account without fail
 Market standing
 Productivity
 Physical and financial resources
 21

 Profitability
 Innovation
 Manager performance and development
 Work performance and attitude
 Public and social responsibility.
In addition to that the following two things also very essential for formulating
objectives.
 The mission of the enterprise, and
 The resources and limitations of the enterprise.
In any case, objectives must be rational and must contribute to the mission of
the enterprise.
c) Strategies
It is a special type of plan prepared for meeting the challenges posed by the
activities of competitors and other environmental forces. It is an action to meet the
specific demands of the situation. The concept of strategy is borrowed from military
organizations. In the military plans are changed and modified very often for the
purpose of meeting the movement of enemy. Similarly, the business enterprises,
managers bring the changes in corporate plans and policies in accordance with the
tactics adopted by competitors. The nature and form of strategy is not static, but it
is a dynamic one.
d) Policies
Since all managers in the organisation - do planning from the highest to the
lowest. It is imperative that planning by managers at lower levels must be within
the limits of planning done at upper levels of management. For achieving this
purpose precisely; policies are formulated by the top management.
A policy might be defined as ―a statement of guidance and instruction; which
defines and confines the area of discretion of subordinates, in matters of
decision-making‖.
For example, A policy of the marketing manager to extend credit to customers
for a maximum period of 30 days; authorized salespersons to extend credit to their
customers for any period say, a week, a fortnight, or 20 or 25 days; but in no case
for a period beyond 30 days; which amounts to the boundary line of policy of credit
to customers.
e) Rules
A rule is a specific and detailed guide to action. It is also a standing plan, as
they prescribe in advance what is to be done or not to be done in a specific
situation. The top management derives rules. Rules must be strictly followed. Rules
are definite and they do not leave any scope for discretion on the part of the
subordinates. Rules for dealing with unauthorized absence from duty, ―No smoking
in the factory‖, and ―stop when the red light is on‖ are some examples of rules.
 22
f) Procedures
A procedure, as a type of management plan, specifies the manner of handling
an organizational activity - in terms of various steps to be undertaken. I.e., a
procedure is a chronological sequence of steps to be undertaken to enforce a policy
and to achieve an organizational objectives. The essence of a procedure is the
chronological (i.e. in order of time) sequence of actions. For example, there might be
specified procedures for handling inward mail; procedures for executing orders of
customers; procedure for employees to proceed on to leave and so on, for various
other organizational activities
II) Single Use plan
a) Programmes
A programme is a plan of action - indicating what work is to be done to carry out
a particular objective. For example to popularize the products there-is a need for an
advertising programme. Again, to improve the skills of personnel in performing their
jobs; there is required a 'training and development' programme. For undertaking the
manufacturing activities, there is a production programme, and so on.
b) Budgets
A budget is a plan, which states expected results of a given future period in
numerical terms. It is a plan of action or blueprint designed to achieve a specific
goal. It may be expressed in time, money, or other measurable units. It is a
projection defining the anticipated costs and results and the allocation of resources.
It may reflect capital outlay, cash flow, production and sales targets. It expresses
organizational objectives in financial and physical units. For example, man-hours,
machine hours, sales-targets, expense estimates in money terms or revenue
estimates in money terms etc.
There are various types budgets according to their nature. These are
 Variable Budgets or Flexible Budget
These budgets vary according to the organization output.
 Programme Budget
In this budget, the agency identifies goals, develops detailed programmes to
meet the goals, and estimates the cost of each programme.
 Zero – base budget
It is a combination of programme and variable budget.
c) Schedules
A schedule is a time – table of work. It specifies the date when a task is to
begin and the time needed to complete each task. The starting and completion date
for each part of the programme are specified in the time schedule. Three main
elements are involved in planning a schedule.
 Identify activities or tasks,
 Determine their sequence, and
 Specify starting and finishing date for each activity as well as for the
sequence as a whole.
 23
d) Projects
A project is a complex scheme for the investment of resources, which can be
analyzed and evaluated as an independent unit. The main features of a project are
as follows.
 It is a non – recurring plan
 It has a specific mission or objective
 It involves time bound plan with a long time.
 It has a clear termination point.
e) Methods
Methods specify the detailed and best manner of perform a particular step,
comprised in a procedure. Methods are formalized and standardized ways of
accomplishing repetitive and routine jobs. They are designed to keep operations
running on planned and desired lines, to prevent confusion and adhocism and to
ensure economy and efficiency. Methods provide detailed and specific guidance for
day – to – day operations. Methods are helpful in the simplification, standardization
and systematization of work. They serve as uniform norms to guide and control
operations and performance. Standard methods represent the best way of
performing jobs.

Summary of Various Plans

Name of Plan Definition Nature Example
Objective Goal or target to be Basis of all plans Increase sales by 10
achieved per cent
Policy General statement Boundary within Employees are to be
or understanding to which decisions are promoted on the
guide thinking to be made basis of seniority
Strategy Action plan to face Relates the Combative
environmental organisation to its advertising to face
uncertainties environment price cuts by
competitors
Procedure Manner in which Sequence of steps Purchase procedure
activities are to be
performed
Rule States what should Rigid plan, no scope No smoking in the
or should not be for discretion factory
done in a given
situation
Programme Combination plan States activities and Installation of a
for goal resources to be computer
achievement, non- undertaken
repetitive
 24

Schedule Time-table for Specifies priority of Complete installation

activities work and time for of computer within 3
each activity months w.e.f. Jan,
1989.
Budget Statement of Quantitative and Produce 10,000
expected results and time bound plan of tonnes of sugar next
resources to be used action year
Project Cluster of Scheme for Construction of a
interrelated deployment of flyover
activities-a separate resources
unit
(a) Differences between policies and strategies
Sl. Policies Strategies
No
1 Guides to thinking and actions of Provide direction in which human
those who make decisions and physical resources will be
deployed
2 Guidelines for making decisions in Contingent decisions
repetitive situations
3 Taken for problems about which Taken for problems where
facts are known. Only time of alternatives cannot be analysed in
occurrence is not specific advance.
4 Implementation of policy can be Implementation of strategy cannot
delegated be delegated as it requires last-
minute executive decision
5 Standing plan or long lasting Non-repetitive plans, may need
frequent revision
6 Not based specially on the moves of Formulated in the light of
competitors competitors‘ moves
(b) Differences between policy and procedure.
Sl. Policies Procedures
No
1 General guides to thinking and Operational guides to action
decision-making
2 Expressions of management‘s Systematic ways of handling routine
attitude towards certain issues events
3 Leave room for executive discretion Leave little room for reflection and
and judgement deviation
4 Lay down broad area Provide route through the area
 25
5 Provide bridge between purpose and
performance
6 Provide norms for thinking and
discretion. Broad, general and
flexible
7 Form part of strategies
8 Formulated mainly by top
management
9 Derived from objectives of the
organization
(c) Difference between Policies and Rules
Sl. Policies
No
1 A general statement
2 Guide to decision-making
3 Lays down management attitude
4 Flexible, may have some exceptions
5 Provides discretion during
implementation
(d) Distinction between Objectives and Policies
Sl. Objectives
No
1 Ends towards which all activities of
an organisation are directed
2 Determine what is to be done
3 End-points of planning
4 Determined by top management
5 One objective may require more than
one policy
6 Derived from philosophy of business
7 Indicate the destination
8 Basic to the very existence of an
organization
Provide bridge between activities and
outcomes
Detailed and rigid. More specific.
Provide manner of doing something
Serve as tactical tools
Laid down at middle and lower levels
Specifies chronological sequence of
steps. Derived from policies
Rules
A most specific statement
Guide to behaviour
Indicates what should or should
not be done
Rigid, no exceptations or deviations
Provide no scope for discretion
Policies
Guidelines which facilitate the
accomplishment of predetermined
objectives
Determine how the work is to be
done
Means by which objectives are to
be achieved
Formulated at top and middle
levels
Every policy related to one
particular objective
Derived from objectives
Provide the route
Not basic to existence
 26
SUMMARY
In the above section, the concept of management is defined. The scope of
management and characteristics of management is explained. The functions of
management and the contributions of management experts, Henry Fayol,
F.W.Taylor and Elton Maryo are enumerated.
In the second part, planning is defined, nature and importance of planning is
listed, the steps in the planning process is explained along with the different types
of plans.
KEY WORDS
 Actuating
 Discipline
 Espirit-De-Corps
 Hawthorne Experiments
 Primises
 Adhol plan
 Strategies
REVIEW QUESTIONS
1. Define the concept of management. What are its characteristics?
2. Explain the scope and functions of management?
3. Enumerate the contribution of Henry Foyol‘s Administrative Theory of
Management?
4. Briefly explain F.W.Taylor‘s Theory of scientific management?
5. Narrate Elton Mayor‘s Theory of Hawthorne experiments
6. Explain the nature of planning
7. State the importance of planning
8. List out the steps in the process of planning
9. What are the different types of plans?
REFERENCES
1. Dr.T.Ramasamy, Principles of Management, Himalaya Publishing House, New
Delhi – 1999.
2. R.Kesavan, C.Elanchezhian and B.Vijaya Ramanth, Principles of Management,
Easwar Press, Chennai, 2004.
3. L.M.Prasad, Organisational Behaviour, Sultan Chand & Sons, New Delhi, 2004.
4. Dinkar Pagare, Principles of Management, Sultan & Sons, New Delhi, 2008.

 27
LESSON - 2

ORGANISING, DELEGATION AND DECENTRALISATION

Structure
2.0 Objectives
2.1 Introduction
2.2 Organisation
2.2.1 Meaning of organization
2.2.2 Definition
2.2.3 Nature of organization/characteristics of organization
2.2.4 Principles of organizing
2.2.5. Organization process
2.3 Delegation
2.3.1 Meaning
2.3.2 Definition
2.3.3 Process of delegation
2.3.4 Guidelines for effective delegation
2.3.5 Barriers to effective delegation
2.3.6 Centralization and decentralization
2.3.7 Difference between delegation and decentralization
2.3.8 Degree of decentralisation
2.3.9 Process of decentralisation
2.3.10 Merits of decentralisation
2.3.11 Demerits of decentralisation
2.0 OBJECTIVES
After reading through this lesson you will be able to:
 Define the concept of organizing
 Explain the nature and characteristics of organization
 List out the principles of organization
 Explain the organization process
 Define delegation
 Explain the process of delegation and its barriers
 Differentiate between centralization and decentralisation.
 Distinguish between delegation and decentralisation.
 List out the benefits of decentralization.
 State the guidelines for effective delegation.
2.1 INTRODUCTION
Management is the art of getting things done through and with other people.
Hence, while making an attempt to organize things in an organisation it is
inevitably happen to delegate and de-centralize powers for ensuring an efficient an
 28

defective management. This lesson deal with the delegation of authority an

decentralisation.
2.2 ORGANISATION
2.2.1 MEANING OF ORGANIZATION
It refers to coordinate human resources with other resources such as material,
machine, money etc… Once managers have established objectives and developed
plans to achieve them, they must design and develop a human organization that
will be able to carry out those plans successfully.
Sub functions of organizing functions are as follows: Functionalisation,
divisionalisation, departmentation, delegation, decentralization, activity analysis,
task allocation
2.2.2 DEFINITION
Organization refers to the structure, which results from identifying and grouping
work, defining and delegating responsibility and authority, and establishing
relationships.”
Louis Allen
“An organization is a social unit or human grouping, deliberately structured for
the purpose of attaining specific goals”.
Amitai Etzioni
For example, corporation, Armies, Schools, Hospitals, etc… are the
organizations. But tribes, Ethnic, and friendship group and families are not
organization because they do not involve any significant amount of conscious
planning or deliberate structuring.
2.2.3 NATURE OF ORGANIZATION/CHARACTERISTICS OF ORGANIZATION
The main characteristics of organization are as follows:
1. Common purpose
Every organization exits to accomplish some common goals. The structure
must reflect these objectives as enterprise activities are derived from them. It is
bound by common purpose.
2. Division of labour
The total work of an organisation is divided into function and sub-functions.
This is necessary to avoid the waste of time, energy and resources, which arises
when people have to constantly change from one work to another. It also provides
benefits of specialisation.
3. Authority structure
There is an arrangement of positions into a graded series. The authority of
every position is defined. It is subordinate to the position above it and superior to
the one below it. This chain of superior-sub-ordinate relationships is known as
chain of command.
 29
4. People
An organisation is basically a group of persons. Therefore, activity groupings
and authority provision must take into account the limitations and customs of
people. People constitute the dynamic human element of an organisation.
5. Communication
Every organisation has its own channels of communication. Such channels are
necessary for mutual understanding and co-operation among the members of an
organisation.
6. Co-Ordination
There is a mechanism for coordinating different activities and parts of an
organisation so that it functions as an integrated whole. Co-operative effort is a
basic feature of organisation.
7. Environment
As organisation functions in an environment comprising economic, social,
political and legal factors. Therefore, the structure must be designed to work
efficiently in a changing environment. It cannot be static or mechanistic.
8. Rules and Regulations
Every organisation has some rules and regulations for orderly functioning of
people. These rules and regulations may be in writing or implied from customary
behaviour.
2.2.4 PRINCIPLES OF ORGANIZING
In order to develop a sound and efficient organisation structure, there is need
to follow certain principles. In the words of E.F.L. Brech, if there is to be a
systematic approach to the formulation of organisation structure, there ought to be
a body of accepted principles. These principles are as follows.
1. Objectives
The objectives of the enterprise influence the organisation structure and hence
the objectives of the enterprise should first be clearly defined. Then every part of the
organisation should be geared to the achievement of these objectives.
2. Specialisation
Effective organisation must promote specialisation. The activities of the
enterprise should be divided according to functions and assigned to persons
according to their specialisation.
3. Span of control
As there is a limit to the number of persons that can be supervised effectively
by one boss, the span of control should be as far as possible, the minimum. That
means, an executive should be asked to supervise a reasonable number of
subordinates only say six.
4. Exception
As the executives at the higher levels have limited time, only exceptionally
complex problems should be referred to them and the subordinates at lower levels
should deal with routine matters. This will enable the executives at higher levels to
devote time to more important and crucial issues.
 30
5. Scalar principle
This principle is sometimes known as the chain of command. The line of
authority from the chief executive at the top to the first-line supervisor at the
bottom must be clearly defined.
6. Unit of command
Each subordinate should have only one superior whose command he has to
obey. Dual subordination must be avoided, for it causes uneasiness, disorder,
indiscipline and undermining of authority.
7. Delegation
Proper authority should be delegated at the lower levels of organization also.
The authority delegated should be equal to responsibility, i.e. each manager should
have enough authority to accomplish the task assigned to him.
8. Responsibility
The superior should be held responsible for the acts of his subordinates. No
superior should be allowed to avoid responsibility by delegating authority to his
subordinates.
9. Authority
The authority is the tool by which a manger is able to accomplish the desired
objective. Hence, the authority of each manger must be clearly defined. Further, the
authority should be equal to responsibility.
10. Efficiency
The organization structure should enable the enterprise to function efficiently
and accomplish its objectives with the lowest possible cost.
11. Simplicity
The organization structure should be as simple as possible the organization
levels should, as far as possible, be minimum. A large number of levels of
organization mean difficulty of effective communication and coordination.
12. Flexibility
The organization should be flexible, should be adaptable to changing
circumstances and permit expansion and replacement without dislocation and
disruption of the basic design.
13. Balance
There should be a reasonable balance in the size of various departments,
between centralization and decentralization, between the principle of span of
control and the short chain of command, and among all types of factors as human,
technical and financial.
14. Unity of Direction
There should be one objective and one plan for a group of activities having the
same objective. Unity of direction facilitates unification and coordination of
activities at various levels.
 31
15. Personal ability
As people constitute an organization, there is need for proper selection,
placement and training of staff. Further, the organization structure must ensure
optimum use of human resources and encourage management development
programmes.
2.2.5. ORGANIZATION PROCESS
The term organization is used in two different senses. In the first sense it is
used to denote the process of organizing.
In the second sense it is used to denote the result of that process, namely, the
organization structure (departmentation).
Using it in the first sense, organization is the process of defining and grouping
the activities of the enterprise and establishing the authority relationships among
them. In performing the organizing function, the manager differentiates and
integrates the activities of his organization. By differentiation is meant the process
of departmentalization or segmentation of activities on the basis of some
homogeneity. Integration is the process of achieving unity of effort among the
various departments (segments or subsystems).
Organization procedure consists of six steps.
1) Consideration of objectives
The first step in organizing is to know the objectives of the enterprise.
Objectives determine the various activities, which need to be performed, and the
type of organization, which needs to be built for this purpose. Management writers,
such as Alfred D. Chandler refer to this phenomenon as one in which ―structure
follows strategy.‖ For example, the structure required for an army is different from
the structure required for a business enterprise. In view of this, consideration of
objectives is the first step in the process of organization.
2) Grouping of activities into departments
After the consideration of objectives, the next step is to identify the activities
necessary to achieve them and to group the closely related and similar activities
into divisions and departments. For example, the activities of a manufacturing
concern may be grouped into such departments as production, marketing,
financing and personnel. In addition, the activities of each department may be
further classified and placed under the charge of different sections of that
department. For example, in the production department, separate sections may be
created for research, industrial engineering, etc. The topic of departmentalization
has been dealt with in a separate section in this chapter.
3) Deciding which departments will be key departments
Key departments are those, which are rendering key activities, i.e. activities
essential for the fulfillment of goals. Such key departments demand key attention.
Other departments exist merely to serve them. Experience suggests that where key
departments are not formally identified, the attention of top management is focused
on the minor issues raised by vocal mangers. This is known as the “decibel system”
 32

of management. The key departments should be placed directly under higher

management.
Which department needs to be emphasized how much will depend, of course,
on the company's objectives and the way it seeks to be distinctive. For example, a
company, which believes that advertising is a primary key to success, will set up a
separate advertising department, that reports directly to the president. But another
company, which considers it much less important, may only create separate section
for it under its sales department. Similarly, product development, which is treated
as a key department in all chemical and pharmaceutical companies, with those in
charge reporting directly to the president, may be treated only as a section of the
production department in textile companies. The importance of an activity may also
grow with times. Thus, personnel management, which was hitherto considered less
important, is now treated as important activity and has risen in organizational
status.
4) Determining levels of which various types of decision are to be made
After deciding the relative importance of various departments, the levels at
which various major and minor decisions are to be made must be determined. Each
firm must decide for it as to how much decentralization of authority and
responsibility it wants to have. Extreme decentralization may lead to loss of control
and effective coordination as a result of which the firm as a whole may fail to
achieve its overall objectives. Extreme centralization, on the other hand, may lead
to wrong decision sat wrong times and complete breakdown of the morale of
employees
5) Determining the span of management
The next step to be taken in designing a structure is to determine the number
of subordinates who should report directly to each executive. The narrower the
span, the taller would be the structure with several levels of management. This will
complicate communication and increase the payroll. For these reasons, a flat
structure is generally desirable
6) Setting up a coordination mechanism
Emphasizing the importance of coordination in an organization, Peter Drucker
says that an organization is like a tune. It is not constituted of individual sounds
but of the relation between them. As individuals and departments carry out their
specialized activities, the overall goals of the organization may become submerged
or conflicts among organization members may develop. For example, production
mangers in a manufacturing company may press for a standardized product line to
hold down costs, when the larger interests of the company may be best served by a
diversified product line. In a university, various schools or departments may begin
to compete for limited funds
 33
2.3 DELEGATION
2.3.1 MEANING
Delegation means assigning work to others and giving them authority to do it.
It involves granting the right to decision making in certain defined areas and
charging the subordinates with responsibility for carrying out the assigned job.
2.3.2 DEFINITION
“Delegation of authority is the process of manager follows in dividing the work
assigned to him so that he performs that part which only he, because of his
unique organizational placement, can perform effectively and so that he can get
others to help with what remains” –
Louis A. Allen
2.3.3 PROCESS OF DELEGATION
The process of delegation consists of the following aspects
 Assignment of duties
 Granting of authority
 Creation of accountability
1) Assignment of duties
The process of delegation starts with dividing the work into suitable parts. The
manager has to decide what part of the work he will be transferred to his
subordinates. Then he assigns the duties to subordinates indicating what he wants
the subordinates to do.
2) Granting authority
Duties cannot be performed without granting of the necessary authority. So
the subordinates are given the requisite authority such as the use of resources,
take necessary actions etc… to perform the given job.
3) Creation of accountability
Accountability is the obligation to carry out the responsibility with the help of
authority in relation to the job entrusted. The subordinate to whom authority is
delegated is also made accountable for the proper performance of the job entrusted
to him.
2.3.4 GUIDELINES FOR EFFECTIVE DELEGATION
 Before delegating authority, make the nature and scope of the task clear
 Assign authority proportionate to the task.
 Make the subordinate clearly understand the limits of his authority.
 Give the subordinate some positive incentives who are accepting
responsibility.
 Train the subordinate properly. First be in front of him for checkup and
guidance and the be at his back to follow his performance
 Create climate of mutual trust and good will. The subordinate will work
much better if he has the freedom to commit honest mistakes.
 Do not make the subordinate accountable to more than one superior.
 Let there be more overlaps or splits in delegation
 34
Advantages of delegation
 It enables the mangers to distribute their workload to others. By reducing the
workload for routine matters, they can concentrate one or more important
policy matters
 Delegation facilitates quick decisions because the authority to make
decisions lies near the point of action. Subordinate need not approach the
boss every time for a decision arises.
 Delegation helps to improve the job satisfaction, motivation and morale of
subordinates. It helps to satisfy their needs for recognition, responsibility and
freedom.
 By clearly defining the authority and responsibility of subordinates manger
can maintain healthy relationship with them. Delegation increases
interaction and understanding among managers and subordinates.
 Delegation binds the formal organization together. It establishes superior–
subordinate relationship and provides a basis for efficient functioning of the
organization.
 Delegation enables a manger to obtain the specialized knowledge and
expertise of subordinates.
 It helps to ensure continuity in business because managers of lower levels
are enabled to acquire to valuable experienced in decision-making. They get
an opportunity to develop their abilities and can fill higher positions in case
of need.
2.3.5 BARRIERS TO EFFECTIVE DELEGATION
Many managers are found unwilling to delegate authority and many
subordinates are found unwilling to accept it. The reasons for this unwillingness on
both sides are as under:
A) Manager’s side
 Fear of loss of power: Some managers are little Napoleans who want to keep
all th4e authority to make decisions in their own hand. They feel
uncomfortable when they see their subordinates making decisions, which
they themselves once made.
 I can do it better myself fallacy: Some managers have an inflated sense of their
own worth. They, therefore, want to perform themselves all jobs, which come
their way.
 Lack of confidence in subordinates: Some managers hesitate to delegate
authority to their subordinates because they doubt their ability. Such
managers continue to keep themselves involved in jobs, which they have
delegated to their subordinates.
 Fear of being exposed: Some inefficient managers are always afraid of their
subordinates outshining them and providing more efficient. They are
therefore, very cautious about delegating, lest their inefficiency be exposed.
 Difficulty in briefing: Many times managers are reluctant to delegate because
they think that it is easier to do a task themselves than to brief the
subordinates.
 35
B) Subordinate’s side
 They may refuse to accept authority because of their fear of criticism
by their superior incase of commit mistakes in decision-making.
 They avoid accepting any authority if they feel that they lack
adequate information and resources to help them discharge their
duties properly.
 They may lack self – confidence and initiative and this may also be
the cause for their unwillingness to accept any authority.
 They may avoid accepting any authority because there are no positive
personal gains to them for assuming extra responsibility.
2.3.6 CENTRALIZATION AND DECENTRALIZATION
Centralization
―Centralization is the systematic and consistent reservation of authority at
central points with an organization. Decentralization applies to the systematic
delegation of authority in an organization-wide context”
Decentralization
Centralization and decentralization refer to the location of decision-making
authority in an organization. Centralization means that the authority for most
decisions is concentrated at the top of the managerial hierarchy whereas
decentralization requires such authority to be dispersed by extension and
delegation through all levels of management. Actually these terms denote different
degree of delegation of authority.
Louis A. Allen has defined both terms as ―centralization is the systematic and
consistent reservation of authority at central points within an organization.
Decentralization applies to the systematic delegation of authority in an organization
– wide context.‖
Centralization and decentralization are opposite but relative terms because
every organization contains both the features. There cannot be absolute
centralization and absolute decentralization in practice. In case of having absolute
centralization, each and every decision is to be taken by top-level management. But
practically it is not possible; some decentralization exists in all organizations. In
case of having absolute decentralization, there is no control over the activities of the
subordinates, which is also not practicable. Therefore, effective decentralization of
authority requires a proper balance between dispersal of authority among lower
levels and adequate control over them.
2.3.7 DIFFERENCE BETWEEN DELEGATION AND DECENTRALIZATION
Sl. No Delegation Decentralizations
1 It is process of devolution of It is the end result achieved by the
authority delegation.
2 It implies the relationship It implies the relationship between
between a superior and a top management and various
subordinate. departments and sections.
 36

3 In delegation control rests Here the top management exercises

entirely with the superior. only overall control and delegates
the authority for control to the
departmental heads.
4 It is must for management It is optional
5 It is a technique of It is both technique and philosophy
management to get things of management.
done.
6 It can take place without There cannot be decentralization
decentralization. without delegation.

2.3.8 DEGREE OF DECENTRALISATION

A number of factors needs to be analysed before deciding the degree of
decentralisation. The various factors relating to the external environment of the
business people, work and organisations influence the degree of decentralisation.
Th--- following are the selected important factors:
(i) Size of Organisation
The speed and adequacy of decision making, flexibility and efficiency ar;
enhanced through decentralisation in case of very large-multi-product, multi-
location organisation.
(ii) Philosophy and Age of the Organisation
A high degree of centralisation is needed at the start when new values and
culture is to be induced and when organisations grows and adopts the values and
culture desired, decentralisations can be induced.
(iii) Philosophy of Management
Owner manager firms tend to be more centralised in contrast to professionally
managed companies.
(iv) Strategy and Organisational Environment
The company strategy with regards to products technology markets an:
competition influence the degree of decentralisation.
(v) Ability of Lower Level Managers
The competence and ability of the lower level managers is a factor to
considered in deciding degree of decentralisation.
(vi) Nature of Management Function
In some companies, the prime functions like finance and marketing arm
centralised where as purchasing and other are decentralised.
2.3.9 PROCESS OF DECENTRALISATION
Decentralisation includes the following steps as pointed out by Allen:
(i) Establishment of appropriate centralisation.
(ii) Development of managers.
(iii) The system of communication and coordination of decentralised units.
 37

(iv) Development of control for the decentralised operations and

(v) The mechanics of appropriate dispersion.
(i) Appropriate Centralisation
Centralisation may be stated as the first step in the process of decentralisation
Certain functions cannot be carried without decentralization in the large interest of
achieving the objectives of the concern. The administrative structure should be
designed like the federal government in which some of the importance
2.3.10 MERITS OF DECENTRALISATION
i. Promotes establishment and use of broad controls which may increase
motivation.
ii. Gives managers more freedom and independence in decision making.
iii. Facilitates product diversification.
iv. Facilitates setting up of profit centres.
2.3.11 DEMERITS OF DECENTRALISATION
i. Can be limited by availability of qualified managers.
ii. May be constrained by inadequate planning and control systems.
iii. May be limited by inadequate control techniques.
iv. May result in some control by upper-level managers.
v. May be limited by external forces like national labour unions, governmental
controls, tax policies.
SUMMARY
Organisation is the structure and process by which group of human beings
allocate tasks among their members, identify relationships and integrate activities
towards common objectives. Principles of organisation, steps in the process of
organization are explained in this section.
Delegation is defined A.Allen, delegation is dynamics of management, process
of delegation, guidelines for effective delegation and barriers to delegation are
explained in detail in this lesson.
The process of centralization, decentralization, benefits of decentralization, and
distribution between delegation and decentralisation are discussed in this section.
KEY WORDS
 Span of control authority
 Scalar principle
 Centralisation
 Decentralisation
REVIEW QUESTIONS
1. Define organization? State the importance of organization?
2. What are the characteristics of organization?
3. State the principles of organization
4. What are the barriers to effective delegation?
5. Define delegation and explain the process of delegation.
 38

6. What are the guidelines for effective delegation?

7. Define centralization
8. State the need for decentralisation.
9. What are the merits and demerits of decentralisation?
10. Distinguish between delegation and decentralization.
REFERENCES
1. Dr.T.Ramasamy, Principles of Management, Himalaya Publishing House, New
Delhi – 1999.
2. R. Kesavan, C.Elanchezhian and B. Vijaya Ramanth, Principles of
Management, Easwar Press, Chennai, 2004.
3. L. M. Prasad, Organisational Behaviour, Sultan Chand & Sons, New Delhi,
2004.
4. Dinkar Pagare, Principles of Management, Sultan & Sons, New Delhi, 2008.

 39
LESSON – 3

DIRECTING, MOTIVATION AND COMMUNICATION

Structure
3.0 Objectives
3.1 Introduction
3.2 Directing
3.2.1 Definition
3.2.2 Process of directing
3.2.3 Principles of direction
3.2.4 Harmony of objective
3.2.5 Maximum individual contribution
3.2.6 Unity of command
3.2.7 Appropriate techniques
3.2.8 Direct supervision
3.2.9 Strategic use of informal organization
3.2.10 Managerial communication
3.2.11 Comprehension
3.2.12 Effective leadership
3.2.13 Principles of follow though
3.2.14 Span of management
3.3 Motivation
3.3.1 Meaning
3.3.2 Definition
3.3.3 Nature/characteristics of motivation
3.3.3.1 Motivation is a personal and internal feeling
3.3.3.2 Motivation produces goals directed behavior
3.3.3.3 Motivation is a continuous process
3.3.3.4 Motivation is complex
3.3.3.5 Motivation is system oriented
3.3.3.6 Motivation can be either positive or negative
3.3.3.7 Motivation is different from job satisfaction
3.3.4 Importance of motivation
3.3.5 Motivational techniques or tools
3.3.6 Theories of motivation
1) Maslow‘s Need Hierarchy Theory
2) Hertzberg‘s Motivation Hygiene Theory
3) McClelland‘s Need Theory
4) Vroom‘s Expectancy Theory
 40

5) Porter and Lawler‘s Expectancy Theory

6) McGregor‘s Theory (X & Y Theory)
3.4 Communication
3.4.1 Nature of communication
3.4.2 Purpose of communication
3.4.3 Process of communication
3.4.4 Types of communication
3.4.5 Communication networks
3.4.6 Barriers to communication
3.4.7 Suggestions for making communication effective
3.4.8 Electronic media in communication
3.0 OBJECTIVES
After studying this section you will be able to:
 Define directing and explain the process of directing.
 Enumerate the principles of direction.
 Define motivation and list out the characteristics of motivation
 Explain the theories of motivation.
 Write the nature and purpose of communication.
 Briefly explain the types of communication.
 Explain the barriers to communication.
 Suggest measures to make communication effective.
3.1 INTRODUCTION
After plans have been made and the organization has been established and
staffed, the next step is to move towards its defined objectives. This function can be
called by various names: „Leading‟, „Directing‟, „Motivating‟, „Actuating‟, and so on.
But whatever the name used to identify it, in carrying out this function the manager
explains to his people what they have to do and helps them do it to the best of their
ability.
3. 2 DIRECTING
Directing is a managerial function of guiding, inspiring, instructing, and
harnessing people towards the accomplishments of desired results. It is that part of
the management process, which actuates the members of an organization to work
effectively and efficiently for the achievements of the goals. The process of direction
is concerned with the way an executive issues order and instructions and otherwise
indicates how the work is to be done. But directing does not simply mean issuing
orders and instructions. It also includes guiding and inspiring people. It is a
comprehensive function.
Directing thus involves three sub-functions. They are as follows
i. Motivation.
ii. Communication,
iii. Leadership
 41
3.2.1 DEFINITION
“Directing concerns the total manner in which a manager influences the actions
of subordinates. It is the final action of a manger in getting others to act after
all preparations have been completed”. -
J.L. Massie
Direction is the interpersonal aspect of managing by which subordinates are led
to understand and contribute effectively to the attainment of enterprise
objectives.
- Koontz & O’Donnel
3.2.2 PROCESS OF DIRECTING
Following steps are involved in directing process
1. Issuing orders and instructions that are clear, complete and within the
capabilities of subordinates;
2. Continuing guidance and supervision to ensure that the assigned tasks are
carried out effectively and efficiently.
3. Maintaining discipline and rewarding those who perform well.
4. Inspiring the subordinates to work hard for the achievements of pre-
determined targets.
3.2.3 PRINCIPLES OF DIRECTION
Direction is a complex function as it deals with people whose behavior is
unpredictable. An effective direction is an art, which a manger can learn and
perfect through practice.
However, managers can follow the following principles while directing their
subordinates
3.2.4 HARMONY OF OBJECTIVE
Individuals join the organization to satisfy their physiological and
psychological needs. They are expected to work of the achievements of
organizational objectives. They will perform their tasks better if they feel that it will
satisfy their personal goals. Therefore management should reconcile the personal
goals of employees with the organizational goals.
3.2.5 MAXIMUM INDIVIDUAL CONTRIBUTION
Organizational objectives are achieved at the optimum level when every
individual in the organization makes maximum contribution towards them.
Managers should, therefore try to elicit maximum possible contribution form each
subordinate.
3.2.6 UNITY OF COMMAND
A subordinate should get orders and instructions from one superior only. If he
is made accountable to two bosses simultaneously, there will be confusion, conflict,
disorder, and indiscipline in the organization. Therefore, every subordinate should
be asked to report to only one manager.
3.2.7 APPROPRIATE TECHNIQUES
The mangers should use correct directions techniques to ensure efficiency of
direction. The techniques used should be suitable to the superior, the subordinates
and the situation. Only efficient direction can lead to accomplishment of goals.
 42
3.2.8 DIRECT SUPERVISION
Direct becomes more effective when there is a direct personal contact between
a superior and his subordinates. Such direct contact improves the more and
commitment of employees. Therefore wherever possible direct supervision should be
used.
3.2.9 STRATEGIC USE OF INFORMAL ORGANIZATION
Management should try to understand and make use of informal groups to
strengthen formal or official relationships. This will improve the effectiveness of
directions.
3.2.10 MANAGERIAL COMMUNICATION
A good system of communication between the superior and his subordinates
helps to improve mutual understanding. Upward communication enables a manger
to understand the subordinates and gives and opportunity to the subordinates to
express their feelings.
3.2.11 COMPREHENSION
Communication of orders and instructions is not sufficient. Managers should
ensure that subordinates correctly understand shat they are to do and how and
when they are to do. This will avoid unnecessary queries and explanation.
3.2.12 EFFECTIVE LEADERSHIP
Managers should act as leaders so that they can influence the activities of
their subordinates without dissatisfying them. As leaders, they should guide and
counsel subordinates in their personal problems too. In this way, they can win the
confidence and trust of their subordinates.
3.2.13 PRINCIPLES OF FOLLOW THOUGH
Directing is a continuous process. Therefore, after issuing orders and
instructions, a manger should find out whether the subordinates are working
properly and what properly and what problems they are facing. He should modify, if
necessary, his orders in the light of these findings.
3.2.14 SPAN OF MANAGEMENT
The term span of management is also known as span of control, and span of
supervision. It refers to the number of subordinates that report directly to a single
manager or superior.
It is, however, difficult to decide the appropriate span of management. In
actual practice spans vary widely and there is no best or ideal number that can be
applied in all situations. According to Hamilton stated that span of control is
related to the degree of responsibility exercised by the group members. The smaller
the responsibility of a subordinate, the greater could be the span of control. Thus,
at the bottom of the organization (e.g. soldiers) six subordinates is the right number
but at the top (e.g., generals) three is the most appropriate number.
3.3 MOTIVATION
3.3.1 MEANING
The term motivation has been derived from the word motive. Motive is
anything that initiates or sustains activity. It is an inner state that energizes
 43

activates or moves and that directs or channels behavior towards goals motive is a
psychological force within an individual that sets him in motion.
3.3.2 DEFINITION
“Motivation is a general term applying to the entire class of drives, desires,
needs, wishes and similar forces that induce an individual or a group of people
to work”
Koontz & O’Donnell
“Motivation means a process of stimulating people to action to accomplish
desired goals”
- Scott
3.3.3 NATURE/CHARACTERISTICS OF MOTIVATION
Following are the characteristics of motivations:
3.3.3.1 Motivation is a personal and internal feeling
Motivation is a psychological phenomenon, which generates within an
individual. Motives are the energetic forces within a person that drive him to action.
3.3.3.2 Motivation produces goals directed behavior
Motivation is a behavioral concept that directs human behaviour towards
certain goals.
3.3.3.3 Motivation is a continuous process
Human needs are unlimited. Therefore, motivation is an ongoing process.
3.3.3.4 Motivation is complex
Individuals differ in their motivation. Different people seek different things or
they work for different reasons. Human needs and motives are varies and they
change form time to time. Human motivation is partly logical and partly emotional.
3.3.3.5 Motivation is system oriented
Motivation is the result of interplay among three groups of factors (a)
influences operating with in an individual, (for example, his goals needs and
values). (b) Influences operating within the organization, (e.g. organization
structure, technology, physical facilities and nature of the job, etc., ) and (c)forces
operating in the external environment, (e.g. culture customs, norms etc., of the
society).
3.3.3.6 Motivation can be either positive or negative
Positive motivations implies use of pay incentives, etc., to satisfy human needs
while negative motivation emphasizes penalties, e.g. reprimands, threats of
demotion, fear or loss of job, etc.,
3.3.3.7 Motivation is different from job satisfaction
Motivation is the drive to satisfy a want and its is concerned with goal directed
behaviour. Satisfaction refers to contentment after the satisfaction of want.
Motivation is the process while satisfaction is the outcome or consequence.
 44
3.3.4 IMPORTANCE OF MOTIVATION
A lot of importance has been given to the process of motivation in the area of
organizational behaviour. The process of motivation is applicable to all cadres of
employees, workers, supervisors, managers and employees in all walks of life.
The demotivated worker, demotivate others in the society and they cause
much damage at home and in industries. Motivation is the basic factor and the
cause for any behaviour. Motivation is only overt but also covert in nature. So, the
expert in organization behaviour recognizes the importance of motivation and
accords top priority to the concept.
Nowadays, managers spent more time in their attempts to motivate their
subordinates than in any other managerial function. Yet the word motivation is
often misused and misunderstood by many of us. It is the force or urge that is
within the individuals that force them to act.
3.3.5 MOTIVATIONAL TECHNIQUES OR TOOLS
Motivational tools or techniques are instruments that prompt people to action.
Hence, while using motivational tools, these should be adequate and capable
enough to motivate employees to make their maximum efforts to accomplish the set
goals. Various motivational techniques are used to motivate employees in business
organization are broadly classified into monetary (financial) and non-monetary
(Non-financial) techniques of incentives.
As human needs vary between people and between different points of times in
case the same person, motivational techniques are therefore bound to vary
accordingly, for example, while increase in salary may satisfy one‘s physiological
needs, recognition may satisfy the esteem needs. Better the motivational
techniques, greater would be its effect on the individual behaviour. This would in
turn lead to organizational effectiveness.
I) Financial Incentives
Incentives, which are given in the form of money, are called financial
incentives. This can be classified into two points.
 Individual financial incentives
 Collective financial incentives
a. Individual financial Incentives
This type of incentives includes all such incentive plans, which induce an
individual to achieve higher output to earn higher financial reward. F.W.Taylor‘s
piece rate system, Habey‘s efficiency plan are examples of such incentives. The
basic assumptions behind these incentives are that in individual will be motivated
for higher output to earn money, which satisfies his need.
b. Collective financial incentives
This type of incentives tries to motivate individuals collectively. The basic ideas
of these incentives are the same as the individual incentives. However, these
incentives are collectively given to employees for motivating them. Eg. Bonus, profit
sharing, Pension plan etc.
 45
II) Non-financial Incentives
Individuals have various needs, which want to satisfy while working in the
organization. People at comparatively higher level of managerial hierarchy attach
more importance to socio-phychological needs, which can not be satisfied by money
alone. Thus, management in addition to financial incentives provides non-financial
incentives to motivate people in the organization. The importance of non-financial
incentive is to provide psychological and emotional satisfaction rather than
financial satisfaction. For example, if an individual gets promotion in the
organization, it satisfies him psychologically more i.e. he get better status,
challenging job, authority etc. than financial benefits.
The non-financial incentives can be grouped as under:
 Individual non-financial incentives.
 Collective non-financial incentives.
 Institutional non-financial incentives.
a) Individual non-financial incentives
These incentives motivate people on individual basis. The various forms of
individual non-financial incentives are as follows:
 Status: Status means the ranking of position, rights and duties in the formal
organization structure. It is an instrument of motivation because it is
extremely required for most of the people. The status system should be
closely related to the abilities and aspiration of people in the organization.
 Promotion: It is a movement to a higher position in which the responsibilities
and powers are more. Promotion satisfies the needs of human beings in
organization.
 Responsibility: Most of the people prefer challenging jobs or the jobs which
has got more responsibilities rather than monotonous and routine in nature.
If the job is connected with more responsibilities, it satisfies people‘s natural
and inherent characters and they put more efforts in the respective jobs.
 Making the job pleasant and interesting: The work can be made enjoyable and
pleasant if it‘s so designed that it allows employees to satisfy the natural
instincts. This creates interest in the work and employees take it natural as
play.
 Recognition of work: It means acknowledgement with a show of appreciation.
When such appreciation is given to the work performed by the employees
they feel motivated to perform work at similar (or) higher level.
b) Collective non-financial incentives
Workers may be motivated in groups also. They perform their duties in groups
and the group affects them. Some of the collective non-financial incentives are as
follows:
 Social importance to work
 Team spirit
 Competition
 46

 Social importance to work: People generally prefer a work, which is

socially acceptable, if the society gives the importance and praise the
work, people like to perform.
 Team spirit: Management should encourage Team spirit i.e. work in co-
operation and co-ordination.
 Competition: Sometimes for providing incentives to employees,
competitions are organized between different individuals (or) different
groups.
c) Institutional non-financial incentives
 Human Relations in industries: It is related with the policies to be adopted in
the organization to develop a sense of belongingness with employees, improve
the efficiency and treat them as human beings and not merely a factor of
production.
 Participation: Participation is related to superior-subordinates, both involved
in making decision and discharge their responsibilities towards achieving
organizational objectives.
3.3.6 THEORIES OF MOTIVATION
When the human organizations were established, various thinkers have tried
to find out the answer to what motivates people to work. Different approaches
applied by them have resulted in a number of theories on motivation.
1) Maslow’s Need Hierarchy Theory
Maslow‘s theory is based on the human needs. Drawing chiefly on his clinical
experience, he classified all human needs into a hierarchical manner from the lower
to the higher order. In essence, he believed that once a given level of need is
satisfied, it no longer serves to motivate man.
Maslow identified five levels in his need hierarchy as shown in the above
figure. 5

SELF ACTUALISATION
4

3 ESTEEM NEEDS

2 SOCIAL NEEDS

SAFETY NEEDS
1

PHYSIOLOGICAL NEEDS

1) Maslow’s Need Hierarchy

i. Physiological Needs
These needs are basic to human life and, hence, include food, clothing,
shelter, air, water and other necessities of life. These needs are relate to the survival
and maintenance of human life. They exert tremendous influence on human
 47

behaviour. These needs are to be met first at least partly before higher level needs
emerge. Once physiological needs are satisfied, they no longer motivate the man.
ii. Safety Needs
After satisfying the physiological needs, the next needs felt are called safety
and security needs. These needs find expression such desires as economic security
and protection from physical dangers. Meeting these needs requires more money
and hence, the individual is prompted to work more. Like physiological needs, these
become inactive once they are satisfied.
iii. Social Needs
Man is a social being. He is therefore, interested in social interaction,
companionship, belongingness, etc. It is this socializing and belongingness why
individuals prefer to work in groups and especially older people go to work.
iv. Esteem Needs
These need refer to self-esteem and resolve respect. They include such needs,
which indicate self-confidence, achievement, competence, knowledge and
independence. The fulfillment of esteem needs leads to self-confidence, strength
and capability of being useful in the organization. However, inability to fulfil these
needs results in feelings like inferiority, weakness and helplessness.
v. Self-Actualization Needs
This level represents the culmination of all the lower, intermediate and higher
needs of human beings. In other words, the final step under the need hierarchy
model is the need for self-actualization. This refers to fulfillment.
According to Maslow, the human needs follow a definite sequence of
domination. The second need does not arise until the first is reasonably satisfied;
the third need does not emerge until the first two needs have been reasonably
satisfied and so on.
Criticism made against this theory is as follows:
1. The needs may or may not follow a definite hierarchical order. So to say, there
may overlap in need hierarchy. For example, even if safety need is not
satisfied, the social need may emerge.
2. The need priority model may not apply at all times in all places.
3. Researches show that man‘s behaviour at any time is mostly guided by
multiplicity of behaviour. Hence, Maslow‘s preposition that one need is
satisfied at one time is also of doubtful validity.
4. In case of some people, the level of motivation may be permanently lower. For
example, a person suffering from chronic unemployment may remain satisfied
for the rest of his life if only he/she can get enough food.
Notwithstanding, Maslow‘s need hierarchy theory has received wide
recognition, particularly among practicing managers. This can be attributed to the
theory‘s intuitive logic and easy to understand. One researcher cam to the
conclusion those theories that are intuitively strong die-hard.
 48
2) Hertzberg’s Motivation Hygiene Theory
The psychologist Frederik Herzberg extended the work of Maslow and proposed
a new motivation theory popularly known as Hertzberg‘s Motivation Hygiene (Two-
Factor) Theory. Herzberg conducted a widely reported motivation study of 200
accountants and engineers employed by firms in an around Western Pennsylvania.
He asked these people to describe two important incidents at their jobs:
1. When did you feel particularly good about your job? and
2. When did you feel exceptionally bad about your job?
He asked the critical incident method of obtaining data. The responses when
analyzed were found quite interesting and fairly consistent. The replies respondents
gave when they felt good about their jobs were significantly different from the
replies given when they felt bad. Reported good feelings were generally associated
with job satisfaction whereas bad feelings with job dissatisfaction. Herzberg labeled
the job satisfies motivators and he called job dissatisfies hygiene or maintenance
factors. Taken together, the motivators and hygiene factors have become known as
Herzberg‘s two-factor theory of motivation.
Herzberg‘s motivational and hygiene factors have shown in this table.
Hygiene: Job dissatisfaction Motivators: Job satisfaction
Company Policy and Achievement
Administration Recognition
Supervision Work itself
Interpersonal Relations Responsibility
Working Conditions Advancement
Salary Growth
Status
Security
According to Herzberg, the opposite of satisfaction is not dissatisfaction. The
underlying reason, he says, is that removal of dissatisfying characteristics from a
job does not necessarily make the job satisfying. He believes in the existence of a
dual continuum. The opposite of ‗satisfaction‘ is no satisfaction and the opposite of
‗dissatisfaction‘ is no ‗dissatisfaction‘.
According to Herzberg, today‘s motivators are tomorrow‘s hygiene because the
latter stop influencing the behaviour of persons when they get them. Accordingly
one‘s hygiene may be the motivator of another.
Criticism of Herberg’s model
1. People generally tend to take credit themselves when things go well. They
blame failure on the external environment.
2. The theory basically explains job satisfaction not motivation.
3. Even job satisfaction is not measured on an overall basis. It is not unlikely
that a person may dislike part of his/her job, still thinks the job acceptable.
4. This theory neglects situational variable to motivate an individual.
 49

Regardless of criticisms, Herzberg ―two factor motivation theory‘ has been

widely read and a few managers seem unfamiliar with his recommendations. The
main use of his recommendations lies in planning and controlling of employee‘s
work.
Distinction between Maslow’s and Herzberg’s Theories
Both Maslow and Herzberg theories focus on motivational factors. However,
both differ from each other in their approaches. As discussed earlier, Maslow‘s
motivation theory is based on the hierarchy of needs. According to this theory, only
unsatisfied needs motivate individuals. Once a need is satisfied, it ceases to be a
motivating factor. But Herberg‘s motivation theory is based on motivational and
hygiene of maintenance factors. According to Herzberg, hygiene or maintenance
factors prevent job dissatisfaction but do not provide motivation to workers. In his
view, Maslow‘s lower order needs like physiological, safety and social needs act as
hygiene or maintenance factors.
3) McClelland’s Need Theory
Another well-known need-based theory of motivation, as opposed to hierarchy
of needs or satisfaction-dissatisfaction, is the theory developed by McClelland and
his associates. McClelland developed his theory based on Henry Murray‘s long list
of motives and manifest needs used in early studies of personality. His theory
focuses on Murray‘s three needs: Achievement, Power and Affiliation. They are
defined as follows:
i. Need for Achievement: This is the drive to excel, to achieve in relation to a set
of standard, and to strive to succeed. In other words, need for achievement is a
behaviour directed toward competition with a standard of excellence. McClelland
found that people with a high need for achievement perform better than those with
a moderate or low need for achievement and noted regional/national differences in
achievement motivation. Through his research, McClelland identified the following
three characteristics of high need achievers.
1. High need achievers have a strong desire to assume personal responsibility for
performing a task or finding a solution to a problem?
2. High need achievers tend to set moderately difficult goals and take calculated
risks.
3. High need achievers have a strong desire for performance feedback?
ii. Need for Power: The need for power is concerned with making an impact on
others, the desire to influence others, the urge to change people, land the desire to
make a difference in life. People with high need for power are people who like to be
in control of people and events. This results in ultimate satisfaction to man.
People who have a high need for power are characterized by:
1. A desire to influence and direct somebody else.
2. A desire to exercise control over others.
3. A concern for maintaining leader-follower relations
 50

iii. Need for Affiliation: The need for affiliation is defined as a desire to establish
and maintain friendly and warm relations with other people. The need for
affiliation, in many ways, is similar to Maslow‘s social needs. The people with high
need for affiliation have these characteristics.
1. They have a strong desire for acceptance and approval from others.
2. They tend to conform to the wishes of those people whose friendship and
companionship they value.
3. They value feeling of others.
4) Vroom’s Expectancy Theory
Victor Vroom in his Expectancy Theory offers one of the most widely accepted
explanations of motivation. It is a cognitive process theory of motivation. The theory
is founded on the basic notions that people will be motivated to exert a high level of
effort when they believe there are relationships between the effort they put forth,
the performance they achieve, and the outcomes/rewards they receive.
The relationships between notions of effort, performance, and reward are
depicted in Figure. Thus, the key constructs in the Vroom‘s expectancy theory of
motivation are:
1. Valence: Valance, according to Vroom, means the value or strength one places
on a particular outcome or reward.
2. Expectancy: It relates efforts to performance.
3. Instrumentality: By instrumentality, Vroom means, the belief that performance
is related to rewards.

Effort Performance Reward

Will my effort Will performance Will rewards

improve my Lead to satisfy my
performance? rewards? individual goals?

Thus, Vroom‘s motivation can also be expressed in the form of an equation as

follows.
Motivation = Valence x Expectancy X Instrumentality
Being the model multiplicative in nature, all the three variables must have
high positive values to imply motivated performance choices. If any one of the
variables approaches to zero level, the possibility of the so motivated performance
also touches zero level.
 51

However, Vroom‟s expectancy theory has its critics. The important ones are:
1. Critics like Porter and Lawler labeled it as a theory of cognitive hedonism
which proposes that individual cognitively chooses the course of action that
leads to the greatest degree of pleasure or the smallest degree of pain.
2. The assumption that people are rational and calculating makes the theory
idealistic.
3. The expectancy theory does not describe individual and situational
differences.
But the valence or value people place on various rewards varies. For example,
one employee prefers salary to benefits, whereas another person prefers to just the
reverse. The valence for the same reward varies from situation to situation.
In spite of all these critics, the greatest point in the expectancy theory is that it
explains why a significant segment of workforce exerts low levels of efforts in
carrying out job responsibilities.
5) Porter and Lawler’s Expectancy Theory
In fact, Porter and Lawler‘s theory is an improvement over Vroom‘s expectancy
theory. They posit that motivation does not equal satisfaction or performance. The
model suggested by them encounters some of the simplistic traditional
assumptions made about the positive relationship between satisfaction and
performance. They proposed a multi-variety model to explain the complex
relationship that exists between satisfaction and performance. What is the main
point in Porter and Lawler‘s model is that effort or motivation does not lead directly
to performance.
It is, in fact, mediated by abilities and traits and by role perceptions.
Ultimately, performance leads to satisfaction. This is depicted in the following
figure. Let we briefly discuss the main elements of the model:
i. Effort: Effort refers to the amount of energy an employee exerts on a given
task. How much effort an employee will put in a task is determined by two
factors – (i) value of reward and (ii) perception of effort-reward probability.
ii. Performance: One‘s effort leads to his/her performance. Both may be equal or
may not be. However, the amount of performance is determined by the
amount of labour and the ability and role perception of the employee. Thus, if
an employee possesses less ability and/or makes wrong role perception,
his/her performance may be low in spite of his putting in great efforts.
iii. Satisfaction: Performance leads to satisfaction. The level of satisfaction
depends upon the amount of rewards one achieves. If the amount of actual
rewards meet or exceed perceived equitable rewards, the employee will feel
satisfied. On the contrary, if actual rewards fall short of perceived ones,
he/she will be dissatisfied.
 52

Value Abilities Perceiv

of and ed
Reward Traits Equitab
le
Intrinsic Reward
Reward s
s
Satis-
Effort Perfor- -faction
-mance

Extrinsic
Rewards
Perceived Role
effort- Percept
reward --ions
probability

Rewards may be of two kinds-intrinsic and extrinsic rewards. Examples of

intrinsic rewards are such as a sense of accomplishment and self-acualisation. As
regards extrinsic rewards, these may include working conditions and status. A fair
degree of research supports that the intrinsic rewards are much more likely to
produce attitudes about satisfaction that are related to performance.
There is no denying of the fact that the motivation model proposed by Porter
and Lawler is quite complex than other models of motivation. In fact, motivation
itself is not a simple cause effect relationship rather it is a complex phenomenon.
Porter and Lawler have attempted to measure variables such as the values of
possible rewards, the perception of effort-rewards probabilities, and role
perceptions in deriving satisfaction. They recommended that the managers should
carefully reassess their reward system and structure. The effort-performance-
reward satisfaction should be made integral to the entire system of managing men
in organizations.
6) McGregor’s Theory (X & Y Theory)
Prof. Douglas McGregor has introduced two theories in his famous book, ―The
Human side of Enterprise‖. They are called ‗X‘ theory and ‗Y‘ theory.
X – Theory
This theory is based on ―papa knows best‖. In other words, a manager has
thorough knowledge and excludes workers from decision – making process. A
manager has authority or power to take decisions. The workers should follow
whatever decisions are taken by the managers.
 53
Assumptions of X – Theory
 Workers have an aversion to work inherently.
 Workers may find a way to postpone the work completion in laziness.
 Workers may do the job half – heartedly.
 Fear of punishment can motivate the workers into action.
 The worker may know the hazards of non- performance of a work.
 No worker is ready to accept any responsibility.
 There is a need for explaining the consequences of being inactive.
 Workers are not interested in achievement. They prefer to maintain status
quo.
 A worker prefers to be directed by others.
 Workers hate to improve their efficiency. They reason is that they fear losing
their present job.
 A worker is also one of the factors of production and does not deserve any
special treatment.
 Worker lacks integrity.
 A worker avoids taking decision whenever necessary.
X – Theory is regarded as the means to supervise and control the workers.
Decision – making in all the fields is entrusted with the managers. Workers are
allowed to express their suggestions and emotions. But the decisions are taken by
managers and workers are forced to follow the decisions.
Y – Theory
Y – Theory is just opposite to X – Theory. So, X – theory is considered as
traditional theory and Y- theory as modern theory. Y – Theory emphasizes the
importance of workers in the accomplishment of enterprise objectives.
Assumptions of Y – Theory
 The average human being has the tendency to work. A job is as natural just
like a play.
 Once the worker understands the purpose of job, he may extend his
cooperation for job completion.
 Worker can put in his best efforts for the accomplishment of enterprise
objectives early.
 Worker has self-direction, self-motivation, self-discipline and self-control.
 If the management prepares right motivation scheme, the worker is ready to
accept extra responsibility.
 The existing worker has competence to work and can take right decisions.
 A worker expects recognition of the successful accomplishment of task.
 A worker may exhibit his efficiency even for non-monetary rewards such as
participation in decision-making, increased responsibility etc…
 The potentialities of human beings are not fully utilized by any industry.
 54

According to Y – Theory, a worker has integrity and readiness to work hard. He

is willing to participate in the decision making process and shows a sense of
creativity and imagination. So, X – Theory may say to be a negative and pessimistic
one and Y –Theory may say to be positive and optimistic.
3.4 COMMUNICATION
The word ‗communication‘ is derived from the Latin word ‗Communis‘ which
means common. If a person affects a communication, he has established a common
ground of understanding.
“Communication in its simplest form is conveying of information from one person
to another”
- Hudson.
Stephen P Robbins views that communication refers to transference and
understanding of meaning. Thus, communication means transference of messages
or exchange of ideas, facts, opinion or feelings by two or more persons. It is the act
of making one‘s ideas and opinions known to others. Thus, communication does
not simply involve sending of a message one person. It also involves the receiver
listening to it, and responding to it or acting according to it.
3.4.1 NATURE OF COMMUNICATION
1. Communication involves two parties, one who transmits and one who receives
the message.
2. The two respective parties must have ability to convey and listen to what the
sender to communicate.
3. Communication includes sending the message and also receiving the response
to the message.
4. The message may be conveyed verbally, in writing, by means of signs,
gestures of symbols.
5. Communication is a continuous process. It pervades the entire organization.
3.4.2 PURPOSE OF COMMUNICATION
The purpose of communication in an enterprise is to effect change - to
influence action toward the welfare of the enterprise. Communication is needed to
 Establish and disseminate goals of an enterprise
 Develop plans for their achievement
 Organize human and other resources
 Select, develop and appraise members of the organization
 Lead, direct, motivate and create a climate in which people want to
contribute and
 Control performance.
3.4.3 PROCESS OF COMMUNICATION
The process of communication includes the following seven elements. (1)
Communicator, (2) encoding (3) Message (4) medium (5) decoding (6) receiver, and
(7) feedback. These are shown in the following figure.
 55

ELEMENTS OF COMMUNICATION PROCESS

Communicator Encoding Message

Receiver Decoding Medium

Feedback

1. Communicator: The communication process begins with who has an

intended message to communicate. The characteristics of the communicator
influence the communication process.
2. Encoding: It refers to converting a communication message into symbolic
form. Encoding is necessary because information can only be transmitted from
communicator to receiver through the symbols or gestures.
3. Message: The message is the actual physical product from the source of
encoding. When we speak, the speech is the message we write. When we gesture,
the movements of our arms, the expressions on our face are the message.
4. Medium: Medium is a channel through which a communication message
travels. Medium is the link that connects the communicator (sender) and the
receiver. face-to-face verbal communication, use of telephone, use of memorandum,
notice, circulars, statements, etc. are the various means available as media of
communication. Besides, non-verbal media like signals, symbols, gestures, etc. may
also be used.
5. Decoding: Translating the sender‘s message by the receiver is called
decoding. Decoding is the process by which the receiver draws meaning from the
symbols encoded by the communicator or sender.
6. Receiver: The person who receives the message is called receiver. The
communicator process is incomplete without the existence of receiver of message.
7. Feedback: The actual response of the receiver to the message communicated
to him is known as ―feedback‖. In other words, if a communicator or sender
decodes the message that he encodes, if the message is put back into his system,
we have feedback.
3.4.4 TYPES OF COMMUNICATION
The channel is the medium or path through which the message travels. The
channels of communication can be divided n the following three bases.
 Based on Relationship
 Based on Director of Flow, and
 Based on Method used.
 56
I) Based on Relationship
a) Formal Communication
The channels of communications established formally by the management are
called ‗formal communication‘. In other words, the formal channels of
communication are used for the transmission of official messages within or outside
organization
b) Informal Communication
Communication, which takes place on the basis of informal or social relations
among people in an organization, is known as informal communication. Thus,
informal communication can take place between persons cutting across positions
held by people working in different divisions and units. Hence, it is also known as
‗Grapevine‘
II) Based on Direction of Flow
a) Horizontal Communication
It refers to transmission of information among positions of the same level. This
facilitates coordination among peers or people working on same levels.
b) Upward Communication
When communication flows from lower-level employees to higher-level
employees, it called upward communication. Upward level communication
encourages employees to participate in the decision-making process and submit
valuable ideas and suggestions.
c) Downward Communication
It refers to the flow of information from higher level to lower level employees.
Such communication may consist of verbal messages, conveying orders, policies,
procedures, or written matters conveyed through notices, circulars etc.
d) Diagonal Communication
Diagonal communication refers to flow of messages between persons who are
in positions at different levels of hierarchy and also in different departments. This
type of communication takes place under special circumstances.
III) Based on Method used
a) Verbal Communication
When the message is conveyed orally, it is called verbal communication. It
produces in communication a personal touch. Verbal communication is the most
economical both in terms of time and money. However, its greatest drawback, if
any, is its non-applicability especially when the communicator and receiver are at
places far away from one another and the number of persons to be communicated
is large.
b) Written Communication
Communication that takes place between people in written form is called
written form. Formal communication is usually in written form such as orders,
instructions, reports, bulletins, etc. Communication being in written form is
permanent, tangible and verifiable. Limitations of written communication are that it
 57

is time consuming, lacks personal touch and unfolds the secrecy about the written
message.
c) Gestural Communication
When the message is transmitted through some gestures, it is called gestural
communication. People use different gestures such as moving hands and eyes to
communicate their views, ideas, etc. If the superior pats his subordinate on his
back, it is understood as appreciation for work.
3.4.5 COMMUNICATION NETWORKS
In organizations, communication flows among groups of individuals in
different patterns. The five most common communication networks are: Circle,
wheel, Chain, Y Network and All channel networks.

Circle wheel Y
All channel Chain

Circle: It is the network where each members of the group can interact with
the adjoining member. The circle network is highly decentralized because each
position can communicate directly with two other positions in the network. No one
can communicate directly with everyone.
Wheel: In case of wheel network, one person (a supervisor for example) can
communicate with (say) four workers, but the workers do not communicate with
each other. The wheel relies on the leader to act as the central control for all the
group‘s communication. Since, all communication passes through the center
position, the wheel is the most centralized communication network.
Chain: In this network, one person transmits information to another as per the
chain in the organizational hierarchy. For example, the president informs the vice-
president who then passes on the same information to the head of the department,
who tells his/her manager, who passes on to the supervisor, who then informs the
employee.
Y Network: In this type of network, two people report to a superior or boss who
occupies two positions as shown in the figure.
All-Channel: The all-channel network permits all group members to actively
communicate with each other.
 58
3.4.6 BARRIERS TO COMMUNICATION
Barriers to communication are factors that come in the way of effective
communication, Some Barriers to communication are filtering of the message,
language, physical separation, status differences and emotions.
Lack of Planning
Good communication seldom happens by change. Too often people start
talking and writing without first thinking, planning and stating the purpose of the
message. Giving the reasons for a directive, selecting the most appropriate channel
and choosing proper timing can greatly improve understanding and reduce
resistance to change.
Filtering Barrier
In formal organizations, the message travels through many layers or levels of
hierarchy. It is found that the message tends to be distorted or impaired while
passing through intermediate levels in upward and downward communications.
This is because the message is passed on to suit the convenience or serve the
interest of the ultimate receiver of the message.
Language Barrier
Language is a central element in communication. It may pose a barrier if its
use obscures meaning and distorts intent. The receivers of the message with their
different educational and cultural backgrounds find it hard to understand the
message in the senders‘ senses due to jargons used in the message language. The
word may be attributed different meanings by the sender and the receiver of the
message. This is known as the problem of semantics.
Physical Separation Barrier
The physical separation of people in the work environment poses a barrier to
communication. Physical distance between the sender and the receiver of any
message serves an obstacle to effective communication. This is because the
difficulty involved in evaluating whether the receiver has understood, accepted, and
acted upon the message sent to him when his workplace is far away from that of
the sender of the message.
Status Barrier
Status differences related to power and the organizational hierarchy pose
another barrier to communication among people at work, especially within
manager-employee pairs. It is due to the status difference that subordinates often
suppress or withhold information which may not be liked by their superiors, or
pass on distorted information to please their superiors. On the other side, status
consciousness of the superiors prevents them from fully communicating
information to their subordinates.
Emotional Barrier
When people are eloquent with emotions, it influences their understanding of
the message accordingly. Psychological barriers do also impair effectiveness of
communication. When the subordinates hold favourable image of the superior, they
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become psychologically more inclined to accept and respond positively to the

message sent by the superior. Obviously, it does not happen so when they have an
unfavourable image of their superior. The image is built on the basis of experience
and interaction between the superior and the subordinate. Any change when its
effects are uncertain also creates psychological barriers to effective communication
in an organization.
3.4.7 SUGGESTIONS FOR MAKING COMMUNICATION EFFECTIVE
 Language: While preparing the communication message, its language should
be relatively simple and the ability of the receiver to interpret the message
accurately should be kept in view. Efforts should be made to explain abstract
ideas and avoid vague expressions.
 Regulating Flow of Communication: Priority of messages to be communicated
should be determined so that the managers may concentrate on more
important messages of high priority. Similarly, the messages received should
be edited and condensed, to the extent possible, to reduce the chances of
overlooking or ignoring important messages.
 Feedback: Communication is complete when it receives feedback. Feedback
may include the receiver‘s response in terms of acceptance and
understanding of the message, his/her action, and the result achieved. Thus,
the two-way communication is considered to be more helpful in establishing
mutual understanding then one-way communication.
 Repetition: Repetition of message helps to improve effectiveness of
communication. It helps the listener interpret messages that are ambiguous,
unclear, or too difficult to understand the first time they heard. Repetition
also helps to avoid the problem of forgetting.
 Restraint over Emotions: A strong feeling and emotions on the part of either
the sender or receiver of the message distort the meaning of the message, one
may therefore, defers the communication for some time.
 Mutual Trust and Faith: Communication become effective having mutual trust
and faith between the sender and receiver of the message. The honesty of the
purpose is the best means breeding trust and faith between two parties i.e.
sender and receiver.
 Listening Carefully: A receiver-listener needs to be patient mentally well
composed, and avoids distractions while receiving the message. He/she
should seek clarification, if necessary on the message. At the same time, the
sender of the message must also be prepared to listen to what the receiver
has to say, and respond to his questions, if any.
3.4.8 ELECTRONIC MEDIA IN COMMUNICATION
Electronic equipment includes mainframe computers, minicomputers,
personal computers, electronic mail system, and electronic typewriters as well as
cellular telephones for making telephone calls from cars and beeper for keeping in
contact with the office.
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Telecommunication
Although telecommunication is just emerging a number of companies have
already effectively utilized the new technology in a variety of ways as shown by the
following examples.
 A large bank supplies hardware and software to its customers so that they
can easily transfer funds to their suppliers.
 Several banks now make bank by phone services available even to
individuals
 Facsimile main service ensures delivery of a document across the country
within hours.
 The computerized airline reservation system facilitates making travel
arrangements.
 Many firms have detailed personnel information – including performance
appraisals and career development plans - in a data bank.
Teleconferencing
Teleconferencing involves a wide variety of systems, including audio systems,
audio systems with snapshots displayed on the video monitor, and live video
systems. When a group of people interacts with each other by means of audio and
video media with moving or still pictures, the group is said to be in ‗teleconference‘
Full motion video is frequently used to hold meetings among managers. Not
only do they hear each other, buy they can also see each other‘s expressions or
discuss some visual display.
Advantages
Some of the potential advantage of teleconferencing includes savings in travel
expenses and travel time. There is no need to make travel plans long in advance.
Because meetings can be held more frequently, communication is improved
between, for example headquarters and geographically scattered divisions.
Disadvantages
Because of the case in arranging meetings in this manner, they may be held
more often than necessary. Teleconferencing is still considered as a poor substitute
for meeting with other persons face-to-face. Despite these limitations, an increased
use of teleconferencing is likely in the future.
SUMMARY
In the first part the concept of delegation in defined. The process of delegation
and the principles of delegation are explained.
In the second part, the concept of motivation is explained. The nature and
characteristics of motivation and the motivational techniques are listed. The
various theories of motivation like, Mastow‘s theory, Hertgbergs theory,
MC.Clelland‘s theory etc are explained.
In the last part of this section, the concept of communication is defined, the
nature of communication purpose and process of communication is explained, the
types of communication is listed, the communication network and barriers to
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communication are discussed. Suggestions for making communication effective and

electronic media in communication is analysed.
KEY WORDS
 Unity of command
 Span of management
 Maslow‘s need Hierarchy
 Hygiene theory
 Vroom‘s expectancy theory
 MC.Gregor‘s & Theory and theory
 Encoding decoding
 Teleconferencing
REVIEW QUESTIONS
1. Explain the process of directing
2. What are the principles of direction
3. State the importance of motivation
4. Briefly explain the motivational techniques.
5. Give a gist of the theories of motivation.
6. What are the nature and purpose of communication.
7. State the process of communication.
8. Explain the types of communication.
9. What are the barriers to communication.
10. Give your suggestions for making communication effective.
REFERENCES
1. Dr. T. Ramasamy, Principles of Management, Himalaya Publishing House, New
Delhi – 1999.
2. R. Kesavan, C.Elanchezhian and B.Vijaya Ramanth, Principles of
Management, Easwar Press, Chennai, 2004.
3. L. M. Prasad, Organisational Behaviour, Sultan Chand & Sons, New Delhi,
2004.
4. Dinkar Pagare, Principles of Management, Sultan & Sons, New Delhi, 2008.

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LESSON – 4

CO-ORDINATION AND CONTROLLING

Structure
4.0 Objectives
4.1 Introduction
4.2 Co-ordination
4.2.1 Definition
4.2.2 Principles of co-ordination
4.2.3 Techniques of co-ordination
4.3 Controlling
4.3.1 Introduction
4.3.2 Definition
4.3.3 Nature/characteristics of control
4.3.4 Need for control
4.3.5 Significance and limitations of control
4.3.6 Types of control
4.3.7 Essentials of effective control system
4.3.8 Control process
4.3.9 Control techniques
4.3.10 Types of budgets
4.3.11 Standing orders, rules and limitations
4.3.12 Personnel observation
4.3.13 New control techniques
4.3.14 PERT & CPM
4.3.15 Steps involved in developing the network
4.3.16 Uses of PERT and CPM
4.3.17 Limitations of PERT and CPM
4.0 OBJECTIVES
After going through this lesson you will be able to:
 Define the concept ‗co-ordination‘.
 State the principles of co-ordination
 Explain the various techniques of co-ordination.
 Define control and state the characteristics of control.
 Explain the purpose and limitations of control.
 Briefly write about the different control techniques.
 Explain zero base budgeting
 Write about PERT & CPM techniques.
 Enumerate the advantage and limitations of budgetary control.
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4.1 INTRODUCTION
Employees of each department perform their duties with a view to achieving
common objectives collectively. It is co-ordination. Co-ordination is the process
which ensures smooth interplay of the functions of management. Common
objectives are achieved without much wastage of time, efforts and money with the
help of co-ordination.
4.2 CO-ORDINATION
4.2.1 DEFINITION
i. J. Lundy,‖Co-ordination involves the development of unity of purpose and the
harmonious implementation of plans for the achievement of desired ends‖.
ii. Koontz and O‘Donnell, ―It seems more accurate to regard co-ordination as the
essence of manager ship for the achievement of harmony of individual efforts
towards the accomplishment of group goals as the purpose of management.
Each of the managerial functions is an exercise in co-ordination‖.
4.2.2 PRINCIPLES OF CO-ORDINATION
1. Early start: The co-ordination should be started even from the planning
function of management. The management should prepare the plan after consulting
the concerned officials. By this, the preparation of a plan and its implementation
will be every easy for the management. Then, there will be no resistance from the
concerned officials.
2. Personnel contract: Oral communication brings two persons very close. It
means, there is a possibility of personal contact. An agreement may be arrived on
methods, actions and achievement of objectives through personal contact. Ideas
views, opinions, recommendations, feelings, etc., are conveyed to the receivers
effectively through personal contacts.
3. Continuity: Co-ordination is a must so long as the organization continues to
function. Co-ordination is the key stone of the organizational structure. So, Co-
ordination starts with planning and ends with controlling.
4. Reciprocal relationship: This principle states that all factors in a situation
are reciprocally related. Each factor influences other factors and is influenced by
the other factors. Thus, the action of one employee influences the action of the
other employed and vice versa. So, there is a need for integration of all efforts,
actions and interests.
5. Dynamism: The external environment of business influences the internal
activities of the business. Besides, the internal activities and the decisions are
changed according to the circumstances prevailing. So, co-ordination is modified
according to the external environment and internal actions and decisions. Co-
ordination should be a dynamic one.
6. Simplified organization: It facilitates effective co-ordination. The management
can arrange the departments in such a way, to get better co-ordination among the
departmental heads. If two sections or two department‘s functions are most similar
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in nature, these two departments are put under one executive in charge. This
facilitates to get better co-ordination.
7. Self co-ordination: According to this principle, the function of one
department affects the other departments and in turn, is affected by the functions
of other departments. The same department modified its functions in such a
manner that it may affect other departments favorably.
8. Clear-cut objectives: The departmental heads should know clearly the
objectives of the organization. So, the management must take necessary steps to
explain the objectives to the departmental heads.
9. Clear definition of authority and responsibility: The management should
clearly define the authority and responsibility of each individual and of each
department. This will facilitate effective co-ordination in an organization. Besides, it
will reduce conflicts among the individuals. The department manager has enough
authority to exercise over the subordinates who have violated the limits and other
irregularities.
10. Effective communication: Effective communication is necessary for proper
coordination. The individual and departmental problems can be solved with the
help of coordination. In addition, the efforts of a staff are effectively utilized to
achieve the obligations of the organization.
4.2.3 TECHNIQUES OF CO-ORDINATION
i. Clearly defined objectives: Each and every organization has its own objectives.
These objectives would be clearly defined. Then, the employed of the
organization should understand the objectives of organization well. Unity of
purpose is a must for achieving proper co-ordination.
ii. Effective chain of command: In each organization, the line of authority decides
who is responsible to whom. If the line of authority and responsibility are
clearly defined, the superior has proper control over his subordinates.
iii. Co-ordination through group meetings: The common groups of problems of an
organization are discussed by the officials in group meetings. Such group
meetings help in achieving co-ordination.
iv. Harmonious policies and procedures: Rules and regulations, procedures and
programmes are used as guidelines for taking a decision in a consistent
manner. It ensures uniformity in action at every level of management.
v. Effective communication: Effective communication promotes mutual
understanding and co-operation among the various officials in an
organization. The communication should be direct as far as possible.
vi. Sound organizational structure: Sound organizational structure integrate the
activities of different units and subunits in an organization. Besides,
horizontal co-ordination is achieved with the help of sound organizational
structure.
vii. Co-operation: Co-operation is the result of better relations among the
employed of the organization. The sound policies and procedures provide a
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basis for better relations. Informal contacts are also encouraged to ensure co-
operation through co-operation.
4.3 CONTROLLING
4.3.1 INTRODUCTION
The managerial function of controlling is the measurement and correction of
performance in order to make sure that enterprise objectives and the plans desired
to attain them are accomplished. Planning and controlling are closely related. In
fact, some writers on management think that these functions cannot be separated.
Planning and controlling may be viewed as the blades of a pair of scissors; the
scissors cannot work unless there are two blades. Without objectives and planes,
control is not possible, because performance has to be compared against some
established criteria.
Controlling is the function of every manager from the president to supervisor.
Some managers particularly at lower levels forget that the primary responsibility for
the exercise of control rests in every manager charged with the execution of plans.
Occasionally, because of the authority of upper level managers and their resultant
responsibility, top and upper level control is so emphasized that people assume
that little controlling is needed at lower levels. Although the scope of control varies
among managers, those at all levels have responsibility for the execution of plans
and control is therefore an essential managerial function at every level.
4.3.2 DEFINITION
“Control is checking current performance against predetermined standards
contained in the plans with a view to ensuring adequate progress and
satisfactory performance.”
E. F L Breach.
“Controlling is the measurement and correction of performance in order to make
sure that enterprise objectives and the plans devised to attain them are
accomplished.
Harold Koontz
4.3.3 NATURE/CHARACTERISTICS OF CONTROL
1) Control process is universal
Control is essential function in any organization whether it is an industrial
unit, university, government office, hospital etc…
2) CONTROL IS A CONTINUOUS PROCESS
Control is a never-ending activity on the part of managers. It is a non-stop
process. The manager watches the operation of the management and to see whether
they are going towards the desired end and if not actions are not taken to correct
them.
3) Control is action based
Action is essential element of the control. It is the action, which ensures
performance according to the decided standards.
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4) Control is forward looking
Control is linked with future not past. A proper control system prevents losses,
minimizes wastages. It acts as a preventive measure.
5) Control is closely linked with planning
Plan gives the direction to various business activities while control verifies and
measures the performance of these activities and suggests proper measures to
remove the deviations.
4.3.4 NEED FOR CONTROL
A control system is needed for three purposes:
1. To Measure Progress.
2. To Uncover deviation and
3. To Indicate Corrective Action.
To Measure Progress
There is a close link between planning and controlling the organizations
operations. The planning process, the fundamental goals and objection of the
organization and the methods for attaining them should be established. The control
process measures progress towards there goals. As Henry Fayol clearly recognized
decades ago. ―In an undertaking, control consists in verifying whether everything
occurs in conformity with the plan adopted, the construction issued and principles
established.‖ As the navigator continually takes readings to ascertain where he is
relative to a planned course, so does the manager take readings to see where his
enterprise or department is on the charted and predetermined?
To Discover Deviations
Once a business organization is set into motion towards its specific objectives,
events occur that tend to pull it ―off target‖. A successful control process is one that
effect connections to the organization before the deviations become serious. Major
events, which tend to pull an organization ‗off target‘, are as follows.
Change: Change is an integral part of almost organizations environment.
Markets shift, new products emerge new materials are discovered and new
regulation are passed. The control function enables managers to detect changes
that are affecting their organizations product as services. They can then move to
cope with the threats or opportunities that these changes represent.
Complaints: Today‘s vast and complex organizations, with geographically
separated plants and decentralized operations make control a necessity. Diversified
product lines need to be watched closely to ensure that quality and profitability are
being maintained. Sales in different retail outlets need to be recorded accurately
and analyzed, the organizations various markets. Foreign and domestic require
close monitoring.
Mistakes: Managers and their subordinates very often commit mistakes. For
example, wrong parts are ordered, wrong pricing decisions are made, problems are
diagnosed incorrectly and so on. A control system enables manages to catch the
mistakes before they become serious.
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Delegation: When manager delegate authority to subordinates, their

responsibilities to their own superiors is not reduced. They only was manager can
determine if their subordinates are accomplishing the tasks that have been
delegated to them is by implementing a system of control. Without such a system,
manager will not be able to check on their subordinate‘s progress, and so not be
able to take corrective action until often a failure has occurred.
To Indicate Corrective Action
Controls are needed to indicate corrective actions. They may reveal, for
example, that plans need to be redrawn or goals need to be modified or there is
need for reassignment or clarification of duties for additional staffing. When the
corrective action indicated by the control system is implemented, the loop in the
system classes as in the operating principle of a thermostat as shown below
Input  Process or  Identification of  Output (Goal)
(man, operation Deviations
money & towards Goals
material)
 
programme of Feed back
corrective Analysis of
Action and it‘s causes of
Implementation Deviations
4.3.5 SIGNIFICANCE AND LIMITATIONS OF CONTROL
Significance of control
i) Policy verification
Control helps to review, revise and update the plans. In this process
organization and management can verify the quality of various policies.
ii) Adjustments in operations
A control system acts as an adjustment in organizational operations. Control
provides this clue by finding out whether plans are being observed and suitable
progress towards the objective is being made to correct any deviations if necessary.
iii) Psychological pressure
Control process puts a psychological pressure on the individual for better
performance. The sound control system inspires employees to work hard and give
better performance.
iv) Coordination
Control helps to emerge the coordination of the subordinates in the
organization. Control ensures coordination of the activities of different department
through unity of direction.
v) Employee morale
Control creates an atmosphere of order and discipline in the organization.
Control contributes order and discipline in the organization.
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vi) Efficiency and effectiveness
Proper control ensures organizational efficiency and effectiveness. The
organization is effective if it is able to achieve its objective. Since control focuses on
the achievement or organizational objectives. It necessarily leads to organizational
effectiveness.
Limitations of control
i. Control is expensive and time – consuming process.
ii. Control cannot consider the external factors such as technological changes,
political factors, social changes, government procedures etc…
iii. Human behaviour and employee morale also can not be measured.
4.3.6 TYPES OF CONTROL
There are three types of control viz. feed back or historical control, Concurrent
control and feed forward control.
a) Feed back or historical control
It is known as post action control. It examines what has happened in the past.
On the basis of this feedback corrective action is taken. Feed back control is the
process of adjusting future action on the basis of information about past
performance. For examples, disciplinary action, budgetary results and quality
inspections are some feed back controls. This control can be used to plan future
with the aid of past errors or success.
b) Concurrent control
It is as real time control. It provides measures for taking corrective action or
doing adjustments while the programme meets any obstacle. Organization control
chart is an example of concurrent control. For example riding a bicycle you must
adjust yourself depending on the turns in the road and keep your vehicle up right
and move towards your aim.
c) Feed forward control
This control involves evaluation of inputs and taking corrective actions before
a particular operation is completed. It is preventive in nature. This control allows
corrective action to be taken in advance of the problem. For example cash budget in
the organization is this type of control. The finance manager prepares the next five-
year flow of cash budget in the organization. It there is a shortage of finance for
particular month he is responsible to arrange for bank loan or other alternatives.
4.3.7 ESSENTIALS OF EFFECTIVE CONTROL SYSTEM
The essentials of an effective control system or the control process are as
follows:
Suitable
The control system should be appropriate to the nature and needs of the
activity. Controls used in the sales department will be different from those used in
finance and personnel. Similarly, a machine-based method of production requires a
control system, which is different from the system that is used in labour intensive
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methods of production. Hence, every concern should evolve such a control system
as would serve its specific needs.
Timely and forward looking
The control system should be such as to enable the subordinates to inform
their superior. Expeditiously about the threatened deviation and failures. The feed
back system should be as short and quick as possible. This would help the
manager to take immediate corrective action before the problem occurs. A manager
would surely prefer a forecast of what will probably happen next week as next
month – even though this contains a margin of error – to a report, accurate to
several decimal points, of the past about which he can do nothing.
That this is possible is illustrated by such forward-looking devices as cash
control. Cash control forecasts tells about cash needs well in advance and the
manager is enabled to take corrective action immediately.
Objective and comprehensible
The control system should be both; objective and understandable, objective
controls specify the expected results in clear and definite terms and leave little
room for arguments by the employee. They avoid red tape and provide employees
with direct access to any additional information, which they may need to perform
their task. Employees are not made to go up and down the hierarchy to get the
information.
Flexible
The control system should flexible so that it can be adjusted to suit the needs
of any change in the environment.
Economical
Economy is another requirement of every control system. The benefit derived
from a control system should be more than the cost involved in implementing it. To
spend a dollar to protect 99% is not control. It is waste. Eighty years ago this was
clearly understood by the men who built Sears, Roebuck, the worlds biggest retail
shop.
In the early days of the mail-order business the money in incoming orders was
not counted. The orders were weighted, unopened. (These were, of course, Roebuck
had run enough tests to know what average weights correspond to overall amounts
of money and this was sufficient control.
Prescriptive and operation
A control system in order to be effective and adequate must not only detect
deviations from the standards but should also provide for solutions to the problems
that cause deviations. In other words, the system should be prescriptive and
operational. It must disclose where failures are occurring. Who is responsible for
them and what should be done about them. It must focus more on action than
information.
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Acceptable to organization member
The system should be acceptable to organization member. When standards are
set unilaterally by upper level by upper level. Manager there is a danger that
employees will regard those standards as unreasonably or unrealistic. They may
then refuse to meet them. Status differences between individuals also have to be
recognized. Individuals who have to report deviations to someone they perceive as a
lower level staff member may stop taking the control system seriously.
Reveal Exceptions at Strategic Point
A Control system should be such as to reveal exceptions at strategic points.
Small exceptions in certain areas have greater significance than larger deviations in
other areas. Five percent deviations from the standard in office labour cost are
more important than 20 percent deviations from the standards in the cost of
postage stamps. That we can quantify something is no reason for measuring it. The
question is ―Is this what a managers attention should be focused on?‖
Motivate People to High Performance
A control system is most effective when it motivates people to high
performance. Since most people respond to a challenge, successful meeting a tough
standard may well provide a greater sense of accomplishment than meeting an easy
standard. However, if a target is so tough that it seems impossible to meet, it will be
more likely to discourage than to motivate effort. Standards that are too difficult
may, therefore, cause the performance of organization members to decline.
Should Not Lead to Less Attention to Other Aspects
Control over one phase of operations should not lead to less attention to other
aspects. For example, if control put pressure on employees to increase output, the
quality of work, care of equipment and prevention of waste should not be neglected.
4.3.8 CONTROL PROCESS
The controlling process involves three steps:
a) Establishing Standards.
b) Measuring performance against these standards and
c) Correcting variations from standards and plans.
a) Establishing Standards
Plans are the yardsticks against which managers desire controls, the first step
in the control process logically would be to establish plans. The step in the control
process is to establish standards against which results can be measured. Since
entire operations cannot be observed, each organization must first develop its own
list of key results areas for the purpose of control. Some key areas in all business
organization are
1. Profitability
2. Market Position
3. Productivity
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4. Personnel Development
5. Employee Attitude and
6. Public Responsibility
The standards the managers desire to obtain in each key area should be
defined as for as possible in quantitative terms. Standards expressed in vague or
general terms such as ―Costs should be reduced‖ or ―orders should be executed
quickly‖ are not as specific as ―Overheads must be reduced by 12 %‖ or ―all orders
must be executed within three working days‖.
Even standards in areas such as public relations while hard to express in
quantitative terms, can be defined more accurately by adding more specific details,
about the number and type of customer complaints.
Standards need to be flexible in order to adapt changing conditions. For
instance, a new salesman who proves to be an above average performer should
have his sales standards adjusted accordingly. Similarly, expected delivery times
need to be adjusted if the local highway is being repaired.
Every objective, every goal of the many planning programmes, every policy,
every procedure and every budget becomes a standard against which actual
performance might be measured. In practice, however, standards trend to be of the
following types.
1. Physical Standards: Such as labour hours per unit of out put units of
production per machine hour and so on.
2. Cost Standards: Such as direct and indirect cost per unit produced, material
cost per unit, selling cost per unit of sale etc.
3. Revenue Standards: Such as average sale per customer, sales per capita in a
given market area etc.
4. Capital standards: Such as the rate of return on capital invested, ratio of
current assets to current liabilities etc.
5. Intangible Standards: such as competence of managers and employees,
success of a public relation programme etc.
Generally speaking, the standards should emphasize the achievements of
results more than the conformity to rules and methods. If they do not do so, then
people will start giving more importance to rules and methods than to the final
results. ‗Doing the right things‘ will give place to ‗doing thing right‘. This would
displace organizational goals.
b) Measurement of performance
It is the second step in the control process. While measuring the performance
of standard, the following questions should be kept in mind: a) what and how to
measure? b) Why to measure? and c) How to check the performance?
Measurement of performance is an easy task when the standards and methods
of measuring performance are clear. Peter Drucker pointed out that it is very much
desirable to have clear and common measurements in all key areas of business. For
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example, the performance which is quantitative, can easily be measured in terms of

production units, sales units, gross profit, whereas the qualitative performance
such as morale, human relations, job satisfaction, etc… cannot easily be measured
because of lack of standards. Some techniques are used to measure standards,
such as personal observation, sampling, surprise visit, managerial accounting tools
and so on.
While measuring performance, comparison of the actual and standard
performance should be made in order to find out the deviations and the causes of
such deviations. This enables better control and ensures better performance.
c) Correcting the Deviations
After comparing the actual performance with the prescribed standards and
finding the deviations, the next step that should be taken by the manager is to
correct these deviations. Corrective action should be taken without easting of time
so that the normal position can be restored quickly. The manager should also
determine the correct causes for deviation. The causes for deviation may be of
different types, such as inadequate and poor equipment and machinery, inadequate
communication system, lack of motivation of subordinates, defective system of
training and selection of personnel, defective system of remuneration etc… The
remedial action that should be taken depends on the nature of causes for variation.
4.3.9 CONTROL TECHNIQUES
A variety of tools and techniques has been used over the years to help
managers control the activities in their organizations. We may classify these
techniques into Old and New.
1) Old Control Techniques
Old control techniques are those, which have long been used by managers.
Important techniques under this category are budgeting, cost accounting, Break –
even analysis, financial statements and ratio analysis, auditing, reports, rules and
personal observations. All these techniques are described below:
2) Budgeting
A budget is a statement of anticipated results during a designated time period
expressed in financial and non – financial terms. There are three essential steps in
the control process include establishing standards comparing results with
standards and taking corrective action. In terms of these steps, the preparation of
budget is, in effect, the step of establishing standards. In terms of the five types of
standards such as physical, cost, revenue, capital and intangible, the budgeting
process typically involves the use of cost standards.
The budgeting process begins when top management sets the strategies and
goals for the organization. Usually, lower level managers will then devise budgets
for their sub – units within these guidelines set by the top management. The
supervisors of those managers will then review the budgets; the supervisors will
eventually integrate lower level budgets into their own budget and sent it up the
chain of command for review. This process continues until the organizations overall
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budget has been approved by the board of directors. A budget department

committee may assist line managers in budget preparation and review.
4.3.10 TYPES OF BUDGETS
On the basis of the purpose for which budgets are prepared, they may be
classified as follows:
i. Sales Budget: It is a comprehensive sale programme and plan for developing
sales. It lays down the sales potential in terms of quantity, value, period, product
etc. Sales forecasting is the basis for preparing this budget. The factors to be
considered for preparing sales budget are population trend, consumer‘s purchasing
power, price trend of the product, nature of competition, past sales, extent of
advertising etc.
ii. Selling and Distribution Cost Budget: This budget lays down the cost of
selling and distribution of the product during the budget period. It includes
advertising cost, research and development cost, transport cost etc. The sales
manager, advertising manager and the distribution manager jointly prepare this
budget
iii. Production Budget: This budget is based on the sales budget. It lays down
the quantity of units to be produced during the budget period. The main purpose of
their budget is to maintain an optimum balance sales, production and inventory
position of the firm.
iv. Production Cost Budget: This budget is based on the production budget. It
lays down the estimated cost of carrying out production plans.
Further the production cost budget is sub divided into various sub – budgets
like raw materials budget, labour budget, production over head budget etc.
v. Capital Expenditure Budget: This budget outlines specifically capital
expenditures for plant, machinery, equipment, inventories and other items. It also
points out the plans concerning investments, expansion, growth, improvements,
replacements etc.
vi. Cash Budget: This budget gives the anticipated receipts and disbursements
for the budget period and shows the cash position arising from it. It indicates the
requirement of cash at various points of time and helps the management in
planning and arranging cash to meet the needs of the business concern. Thus, it
ensures that the concern never has any shortage of cash required. Cash budget
helps the management in controlling and coordinating the activities, which involve
receipt and payment of cash.
vii. Master Budget: A Master budget gives a summary of all the functional
budgets and shows how they affect the business as a whole. In other words, it is
complied from various subsidiary or functional budget. It provides detailed
particulars regarding production, sales, cash, fixed assets etc. The need for a
master budget containing a summary of all the subsidiary budgets arise because
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business concerns are too large to permit the detailed planning of all the aspects of
the business in one budget.
4) Advantages of Budgetary Control
i. The different functional budget clearly indicates the limits for expense and
also the results to be achieved limits for expense and also the results to be
achieved in a given period. This keeps everybody in the enterprise alert and
encourages the optimum use of its resource.
ii. Budgets make it possible to co-ordinate the work of the entire organisation. In
devising budgets, managers take into account information provided by the
sub-units of their organisation, which leads to define and integrate the
activities of all the members.
iii. Since budgets are generally prepared with the consultation of managers at
different levels, they provide to the enterprise the fruit of combined wisdom.
Lower level managers are motivated in accepting and meeting budgets that
they have had a hand in shaping.
iv. The budgetary control brings together the activities of various departments in
an overall perspective and this promotes cooperation and team spirit among
the employees.
v. Through budgetary control, the deviations from predetermined standards are
found out and the management is enabled to take suitable corrective action
immediately. This minimizes wastage and losses.
vi. The budget system helps people learn from past experience. Once the budget
period is over, managers can analyze what occurred, isolate errors and their
laws, and take steps to avoid those errors in the next budget period.
vii. Budgets improve communication. A plan cannot be put into effect unless it is
communicated to those who must carry it out. In the process of developing
the budget with those responsible for its implementation, managers can
communicate their own objectives and plans must effectively.
5) Limitations of Budgetary Control
i. Since budgets are used to evaluate results, inefficient employees do not whole
heartedly co-operate with the system.
ii. Budget estimates sometimes proves to be grossly inaccurate. This renders the
budgetary control system totally ineffective.
iii. Budgets are mostly inflexible and rigid and do not respond to internal or
external environmental changes. The standards once fixed are allowed to
continue for several years.
iv. Budgets are of little help in handling the here-and-now problems that
supervisions have. They are useful only in analyzing the past and charting the
future.
v. A budgetary control programme may sometimes become very cumbersome
and unduly expensive.
vi. A good manager is discouraged from taking initiative and undertaking
activities for which provision has not been made in the budget, even though
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they are useful for the enterprise. On the other hand, a bad manager can hide
his inefficiency behind the budget. This is because the budgets have a way of
growing from proceeded. An amount once spent becomes a floor for future
budgets. Manager asks much more than they need.
6) Zero Base Budgeting
“ZBB is defined as "a planning and budgeting process which require each
manager to justify his entire budget request in detail from scratch (hence Zero
Base) and shifts the burden of proof to each manager, to justify why he should
spend money at all. The approach requires that all activities be analysed in
decision 'packages' which are evaluated by systematic analysis and ranked in
the order of importance".
- Peter. A. Phyrr.
7) Standard Costing
The cost of production determines the profit earned by an enterprise. In view of
this fact, the modern management has given much importance to cost accounting
and cost control. Standard costing is one of the techniques used by modern
business concern for the purpose of cost reduction and cost control. The objective
of standard costing is the same as that of budgetary control. The system involves a
comparison of the actual with the standards and the discrepancy is called variance.
The various steps involved in standard costing are as follows:
1. Setting of cost standards for various components of cost such as raw
materials,
2. labours and overheads. The standards fix the limit within which the different
types of expenses must be kept.
3. Measurement of actual performance.
4. Comparison of actual cost with the standard cost laid down.
5. Finding the variance of actual cost from the standard cost.
6. Finding the cause of variance.
7. Taking necessary action to prevent the occurrence of variance in future.
8) Financial Statements and Ratio analysis
The Trading Profit and Loss Account the balance sheet of a company are the
usual financial statements which are prepared ex post (in retrospect) to indicate
what financial events occurred since the last statements. Depending on the
company, the period covered by a financial statement could be the previous year,
the previous quarter, or the previous month.
The usefulness of these statements for applying control measures is limited by
the fact that they cover only post events. However, they can provide managers with
useful information about trends. Managers can also use these statements to
compare their organizations with other organization and can thus evaluate their
own performance. In addition, they are used by people outside the organization to
evaluate the organizations strength‘s, weakness and potential.
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Ratio Analysis seeks to extract information from a financial statement in a way

that will allow an organization‘s financial performance or condition to be evaluated.
It involves selecting two significant figures from a financial statement and
expressing their relationship in terms of a percentage or ratio.
The Ratios most commonly used by organizations are as follows:
i. Liquidity Ratio: They measure the company‘s ability to pay back short – term
debts by converting assets quickly into cash. In other words, they are a
measure of a company‘s liquidity. One such ratio is the current ratio. It is
expressed by the fraction: current assets + current liabilities.
ii. Debt Ratio: While liquidity ratios are used to measure a company‘s short -
term financial position, debt ratios are computed to assess its ability to meet
long – term commitments. The simplest debt ratio is total debt divided by total
assets. This ratio tells us what proportion of the company‘s assets is owned by
its creditors.
iii. Profitability Ratio: These ratios express as percentage of sales or of total depict
the company‘s efficiency of operation. A profit of Rs.4 lakhs, for example is
unimpressive if it is derived from a total sales of Rs.40 crores or a capital
investment of Rs.100 crores.
iv. Operating Ratio: These ratios measure how efficiently the manufacturing and
sales are being carried out. Some of the more common operating ratios are the
inventory turnover ratio and the total assets turnover ratio. The inventory
turnover ratio is defined as sales + inventory. It suggests that how the assets
are being used efficiently by the firm.
The total assets turnover ratio is expressed as sales / total assets. This ratio
gives an indication of how effectively the firm‘s assets are being used.
These ratio analysis comparisons can be made in one of two ways by
comparisons over a time period. The present ratio compared with the same
organization‘s ratio in the past: and comparison with other similar organization‘s or
with the industry as a whole. The first type of comparison will indicate how the
organization performance or condition has changed: the second type will suggest
how well the organization is doing relative to its competitors.
9) Return on Investment
One particular approach to financial control that has received considerable
attention in recent years is the return on investment ratio (ROI), also known as the
Du Pont systems of financial analysis. It is expressed by the following formula:
ROI = Sales/Investment (Fixed and working capital) * profit/sales
This ratio is computed on the basis of capital turnover (sales/investment)
multiplied by earnings as a proportion of sales (profit/sales). This calculation
recognizes that one division, with a high capital turnover and a lower percentage of
earnings to sales, may be more profitable in terms of return of investment than
another with a high percentage of profits to sales but with low capital turnover.
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10) Break – Even analysis
Break – Even analysis is another control device used in business firms. It
involves of a chart to depict the overall volume of sales necessary to cover costs. It
is point which the cost and revenue of the enterprise are exactly equal. In other
words, it is that point where the enterprise neither earns a profit nor incurs a loss.
Break – even analysis can be used both as an aid in decision – making and as
a control device. The specific areas where break – even analysis can help in decision
– making include.
1. Identifying the minimum sales volume necessary to prevent loss.
2. Identifying the minimum sales volume to meet established profit objectives.
3. Providing information helpful in making decision on the effect of raising or
lowering prices, and
4. Providing data helpful in decisions to drop or add product lines.

As an aid to control, break – even analysis provides one more yardstick by

which to evaluate company‘s performance at the end of a sales period.
The break-even point can be calculated with the following formula
Break — even point = Fixed costs / Price — Variable Cost
Break — even point = Price - Variable costs per unit
11) Internal Audit and External Audit
Internal audit is another control techniques used by modern management.
Internal audit is conducted by an internal auditor who is an employee of the
organization. He makes an independent appraisal of financial and other operations.
In addition, he appraises company‘s policies, plans and management performance.
He pinpoints defects in the policies or plans and gives suggestions for eliminating
the defects. As internal audit is conducted regularly, it keeps the employees always
alert.
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External audit is an independent appraisal of the organization financial

accounts and statements. The purpose of external audit is to ensure that the
interests of shareholders and other outside parties connected with the company are
safeguard against the malpractices of the management. The external auditors is a
qualified person and he has to certify the annual profit and loss account and
balance sheet carefully examination of the relevant books of accounts and
documents. In case the external auditor is negligent in performing his duties or
becomes party to any fraud or error committed by the management, he will be liable
under both civil and criminal laws.
12) Reports
A major part of control consists of preparing reports to provide information to
the management for purpose of control and planning. The following are certain
types of reports which are prepared and submitted to the management regularly:
1. Top Management
i. Profit and loss statement.
ii. Balance sheet.
iii. Position of stock.
iv. Cash – Flow Statement.
v. Position of working Capital.
vi. Capital expenditure and forward commitments together with progress of
projects in hand.
vii. Sales, Production and Other appropriate statistics.
2. Sales Management
i. Actual sales compared with budgeted sales to measure performance by:
1. Products
2. Territories
3. Individual salesman.
4. Customers
ii. Standard Profit and Loss by a Product:
1. For fixing selling prices and
2. To concentrate sales on most profitable products.
iii. Selling expenses in relation to budget and sales value analyzed by
a) Products
b) Territories
c) Individual salesman.
d) Customers.
iv. Bad debts and accounts, which are slow and difficult in collections.
v. Status reports on new or doubtful customers.
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3. Production Management
i) To Buyer:
 Price variations on purchase analyzed by commodities.
ii) To Foreman:
 Operational efficiency for individual operators, duly summarized as
department averages.
 Labour utilization report and causes of lost time and controllable time.
 Indirect shop expenses against the standard allowed
 Scrap report.
iii) To Works Manager:
 Department operating statement.
 General works operating statement (expenses relating to all works not
directly allocable or controllable by departments).
 Plant utilization report.
 Department scrap report.
 Material usage report.
4. Special Reports
These reports may be prepared at the request of the management accountant
or the manager. The necessity for them may arise on account of the need for a more
detailed information on matters of interest first revealed by the routine reports.
Some of the matters in respect of which such reports may be prepared are:
a. Taxation, legislation and its effect on profit.
b. Estimation about the earnings capacity of a new project.
c. Break – Even analysis.
d. Replacement of capital equipment.
e. Special pricing analysis.
f. Make or buy decision.
Some important considerations in drawing up these reports are as follows:
a) Information Quality
The more accurate the information, the higher its quality and the more
securely managers can rely on it when deciding what action to take. However, the
cost of obtaining information increases as the quality of the information desired
goes up. How accurate the information needs to be will vary with the situation. But
in general, information of higher quality that does not add materially to a managers
decision – making capability is not worth the added cost.
b) Information Timeless
The information provided by a report must suggest action in time for that to be
taken. Just when information is considered timely, however, will depend on
situation. For example reports destined far top – level managers to monitor progress
on long-range objectives may be considered timely if they aware at quarterly
 80

intervals. The cost of making them available weekly would not be justified, since
long-range plans are neither reviewed not modified at such frequent intervals.
However, middle and lover level managers responsible for emerging operations and
activities may need a weekly at even daily report on machine downtime if delays are
to be minimized. The quality control managers must get a daily a weekly report on
all customer rejections. On a monthly as quarterly basis, such information would
merely be ancient history and would be of no value to the manager.
Timeliness may also be determined by company policy on by events, rather
than by the calendar. Information on inventory, for example, is provided to the
manager responsible for regarding only where a previously established minimum
level for the inventory is being approached. Requiring inventory information on a
calendar basis-such as away week. When inventory levels far mast items are well a
bore their record point would usually not be worth the added cast, since action
would not be implied by the information.
c) Information Quantity and Relevance
A report that provides too little information cash be ineffective, because it may
lead managers to make wrong at late decisions that worsen problems instead of
solving them conversely a report that provides managers too much information can
also provide ineffective because that may not isolate what they need from a flood of
irrelevant facts and figures. A good report should fill as evaluate information so that
only the most relevant information is supplied to the appropriate manager. In
addition, a good report should condense information, so that what is relevant may
be absorbed in a short period of time.
4.3.11 STANDING ORDERS, RULES AND LIMITATIONS
Standing orders, rules and limitations are also control techniques used by the
management. The manager, who authorized his subordinate to make curtain
decisions as delegates some of his powers, lays down the limits far them. Limits
may be decided on the basis of the nature of work and status of the subordinate.
The management issues standing orders and they are to be observed by the
subordinates. They may be concerned with the rules, regulations, discipline,
procedures, conditions, timings etc.
4.3.12 PERSONNEL OBSERVATION
A manager can also exercise fruitful control over his subordinates by observing
them while they are engaged in work. Personnel observations help the manager not
only in knowing the worker‘s attitude towards but also in correcting their work and
methods, if necessary. More over, when the worker knows that his superior is
observing him, he will be alert and will not waste his time. But in some cases he
may also unset being observed and may develop resistance. In any case, their
method is very costly and cannot work in large concern any degree of accuracy.
4.2.13 NEW CONTROL TECHNIQUES
These techniques which are of recent origin also not markedly overlap the
traditional control devices, but provide the kind of information not readily available
 81

with the traditional methods. Therefore, when these control techniques are used, it
is usually in addition to the control devices described in the preceding section.
4.2.14 PERT & CPM
The two major techniques under this heading are PERT (Programme
Evaluation and Review Technique) and CPM (Critical Path Method). Both
Techniques were developed independently, although virtually at the same time,
around 1957-58. PERT was first developed for the US navy in connection with the
Polaris weapon system and is credited with reducing the completion time of the
programme by two years. CPM was developed jointly by Du Pont and Remington
Rand of USA in order to facilitate the control of large, complex industrial projects.
Both PERT and CPM are primarily oriented towards achieving better
managerial control of time spent in completing a project. Under both the
techniques, a project is decomposed into activities and then all activities are
integrated in a highly logical sequence to find the shortest time required to
complete to entire project. The main difference between PERT and CPM lies in the
treatment of time estimates. PERT was created primarily to handle research and
development projects in which time spans are hard to estimate with any degree of
accuracy, consequently, PERT time span are based on probabilistic estimates. CPM,
on the other hand, is usually concerned with projects that the organisation has had
some previous experience with time estimates, therefore, can be made relatively
accurately.
The use of both PERT and CPM has spread rapidly today in controlling time-
critical projects such as reinforcing a weak class, constructing a building at an
olympic site as completing contracts that include penalty payment clauses. Many
companies, make use of three techniques for working out the cast estimates of a
project also.
4.2.15 STEPS INVOLVED IN DEVELOPING THE NETWORK
Both under PERT and CPM, the purpose is to divide the project into a number
of operations and then to draw a picture of the order in which and of the time when
these operations should be started and completed. This picture is known as the
project graph or arrow diagram. The following steps are involved in drawing this
diagram.
1. The first step is to break down the whole project into a number of clearly
identifiable activities and event. An activity is the actual performance of a
task. The preceding event is called the ‗tail event‘ and the following is called
‗head event‘.
2. Once the list of various activities is ready, we have to examine each activity in
relation to the other activity.
3. The next step is to draw the diagram portraying the precedence, concurrence
and subsequence of all activities and events. On this diagram, arrows show all
activities and circles show all events. In CPM diagrams, a single time estimate
is written against each activity. In PERT, each activity is assigned three time
estimates.
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i. Optimistic – Shortest time the activity takes place.

ii. Most likely- Time is estimated under practical situations, in which
certain things go wrong and some go as per plan.
iii. Pessimistic – Longest time the activity takes place.
Generally the three estimates for each activity are combined into a weighted
average, called expected activity time.
4. Finally, the critical path is determined. The critical path is the longest path
through the network in terms of amount of time the entire project will take. It
indicates a series of activities which must be done in sequence and which will
take longer than the other sequence of jobs that can go along simultaneously.
It is critical because the time spent on the activities that lies along this path
must be shortened if the total time of project is to be shortened.
4.3.16 USES OF PERT AND CPM
1. It ensures actual planning.
2. It makes every manager fully aware of his responsibility.
3. It ensures improved management of resources.
4. It facilitates future – oriented control.
5. It facilitates improved decision-making.
6. It ensures simultaneous performance of different parts of work.
4.3.17 LIMITATIONS OF PERT AND CPM
1. They are suitable mainly in cases where time is the essence of performance or
where cost and time are so related that by controlling time, cost is controlled.
2. Estimate of time, cost and events are seldom available with the precision
required for effective control through PERT. Errors in estimate of the
numerous inter locking points of the chart may add up to a situation to make
the PERT chart erratic and unreliable as a control technique.
3. PERT has a limited application to one time non- repetitive projects. It does not
help control in continuous processing and production.
SUMMARY
Co-ordination is the process which ensures smoth interplay of the functions of
management. The principles and techniques of co-ordination is explained. The
concept of control is defined and the characteristics of control is explained in the
later part of this section. The importance, limitations of control is explained. The
different control techniques are analysed. Zero base budgeting, PERT & CPM
method are elaborately discussed. The advantages and limitations of budgetary
control is also explained.
KEY WORDS
 Co-ordination
 Chain of command
 Hormonious policies
 Concurrent control
 Prescriptive
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REVIEW QUESTIONS
1. Define co-ordination, what are the principles of co-ordination.
2. Explain the techniques of co-ordination
3. State the purpose of control
4. What are the essential features of control?
5. Explain briefly various control techniques.
6. State and explain the different types budgets
7. What are the merits and demerits of budgetary control?
8. Explain a few ratios meant for control.
9. What are the different types of reports.
10. Write about PERT & CPM as methods of modern control techniques.
REFERENCES
1. Dr. T. Ramasamy, Principles of Management, Himalaya Publishing House, New
Delhi – 1999.
2. R. Kesavan, C.Elanchezhian and B.Vijaya Ramanth, Principles of
Management, Easwar Press, Chennai, 2004.
3. L. M. Prasad, Organisational Behaviour, Sultan Chand & Sons, New Delhi,
2004.
4. Dinkar Pagare, Principles of Management, Sultan & Sons, New Delhi, 2008.

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LESSON – 5

PRODUCTION AND MATERIALS MANAGEMENT,

PRODUCTION PLANNING AND CONTROL
Structure
5.0 Objectives
5.1 Introduction
5.2 Production and materials management
5.2.1 Production management
5.2.2 Production function
5.2.3 Product design
5.2.4 Design of production system
5.2.6 Manufacturing process
5.2.6.1 Types of manufacturing process
5.2.6.2 Factors affecting the choice of manufacturing process
5.3 Production planning and control
5.3.1 Benefits to small entrepreneur
5.3.2 Steps of production planning and control
5.3.2.1 Routing
5.3.2.2 Scheduling
5.3.2.3 Loading
5.3.3 Production
5.3.4 Dispatching n control
5.3.5 Follow up
5.3.6 Inspection
5.3.7 Corrective measures
5.0 OBJECTIVES
After studying this lesson, you should be able to
 Describe the production function and its component
 Define production management
 Analyze various factors, which are crucial for designing the production
 Explain the design of production system and manufacturing process
 List out the factors influencing the choice of production process
 Discuss the benefits, which a small entrepreneur can reap by having properly
designed production planning, and control system
5.1 INTRODUCTION
After taking decisions about the type of business, its location, layout etc. the
entrepreneur steps into the shoe of production manager and attempts to apply
managerial principles to the production function in an enterprise.
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5.2 PRODUCTION AND MATERIALS MANAGEMENT
Production is a process whereby raw material is converted into semi finished
products and thereby adds to the value of utility of products, which can be
measured as the difference between the value of inputs and value of outputs.
Production function encompasses the activities of procurement, allocation and
utilization of resources. The main objective of production function is to produce the
goods and services demanded by the customers in the most efficient and
economical way. Therefore efficient management of the production function is of
utmost importance in order to achieve this objective.
5.2.1 PRODUCTION MANAGEMENT
Production system is a system whose function is to convert a set of inputs into
a set of desired outputs. Production system is depicted under with help of chart

Figure 5.1: Production System

Production management involves the managerial decisions regarding design of
the product and design of the production system i.e. determination of production
processes and production planning and control.
Components of Production Function
Production management is not the same as production engineering, although
there is considerable area of common interest. Broadly, production engineering is
concerned with design of physical equipment, while the production management is
concerned with the management of the use of equipment and other resources.
Production engineering is the domain of engineers while knowledge of
engineering is not a necessary requirement of production management.
Production and manufacturing in several companies are considered
synonymous. Ii is not so. Manufacturing is a broader concept wherein production is
one of the activities.
Production management is essentially planning, organising and controlling of
production function. Management of production can be described in terms of
fourteen components as given under:
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A. Planning 1. Product selection and design (planning the conversion)

2. Process selection and planning process
3. Facility location - (planning the use of conversion process)
4. Factory layout and Material handling
5. Capacity planning
6. Forecasting
7. Production Planning
B. Organising 8. Work study and job design (organising for conversion)
C. Controlling 9. Production control (controlling conversion process)
10. Inventory control
11. Quality control
12. Maintenance and replacement
13. Stores & warehousing
14. Cost reduction and control
5.2.2 PRODUCTION FUNCTION
The above mentioned 14 components can be regrouped into six Ps, namely,
Product, Plant, Process, Programmes, People, and Policy. They are discussed below
briefly:
1. The Product: It is the most obvious embodiment of the interface between
marketing and production and it is not sufficient that the customers require a
product; the organisation must be capable of producing it. Agreement, therefore,
must be reached between all the business functions on matters such as
performance, aesthetics, quality, quantity, reliability, selling price or
production/operating costs, date of delivery and/or time. In reaching an agreement
on the above, cognisance must be taken of external factors, such as the needs of
the market and the existing culture, the legal constraints and the environmental
demands. At the same time, there are a number of internal considerations which
must be examined.
2. The Plant: A plant of some kind, both in terms of buildings and equipment is
required to manufacture a product. This plant, which accounts for the bulk of the
fixed assets of the organisation, must continue to be so as long as the consumers'
needs can be foreseen. Production Management therefore, will be concerned with
questions such as future possible demands, design and layout of buildings and
offices, performance and reliability of equipment, maintenance of performance,
safety of installations and operations,, social responsibility, etc. These must be
considered in conjunction with the financial, fiscal, political and cultural
constraints imposed by the environment within which a business is carried out.
3. The Process: The decision on product or service creation is made by bringing
together the technical and organisational needs of the product and the organisation
and the people within the organisation. In deciding upon a process, it is necessary
to examine factors such as plant and equipment, safety, maintenance
requirements, cost reduction, etc.
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4. The Programme: A timetable, setting down the date of transfer of products or

services to the consumers is the other visible expression of the
production/marketing interface, not merely setting down date and time but also
determining cashflow, the prime controller of organisational viability. Framing of
master timetable further helps to generate timetables for purchasing, maintenance,
storage, transport, etc.
5. The People: Production from start to finish depends upon people. Like all
other products, human beings are variable in intellect, skill and expectations. I lie
work of a social scientist lies in continuously enlarging our understanding of people
and organisations and also bringing home better communications, worker
participation, industrial democracy, job enrichment, etc. Hence, the production
manager should, be involved in discussion on wages/salaries, safety, conditions of
work, motivation, training and trade unions.
6. The Policy: Production policy is the term applied to those aspects of
corporate policy which particularly concern the production or operations
departments. Clearly production policy is an integral part of corporate policy and
must act within and not independently of it. However, it is the role of the
production manager to frame policies, decide on operational details which should
be within the organisation‘s capability in determining appropriate production
policy.
5.2.3 PRODUCT DESIGN
Product design is a strategic decision as the image and profit earning capacity
of a small firm depends largely on product design. Once the product to be produced
is decided by the entrepreneur the next step is to prepare its design. Product design
consists of form and function. The form designing includes decisions regarding its
shape, size, color and appearance of the product. The functional design involves the
working conditions of the product. Once a product is designed, it prevails for a long
time therefore various factors are to be considered before designing it. These factors
are listed below: -
(a) Standardization
(b) Reliability
(c) Maintainability
(d) Servicing
(e) Reproducibility
(f) Sustainability
(g) Product simplification
(h) Quality Commensuration with cost
(i) Product value
(j) Consumer quality
(k) Needs and tastes of consumers.
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Above all, the product design should be dictated by the market demand. It is
an important decision and therefore the entrepreneur should pay due effort, time,
energy and attention in order to get the best results.
5.2.4 DESIGN OF PRODUCTION SYSTEM
Production system is the framework within which the production activities of
an enterprise take place. Manufacturing process is the conversion process through
which inputs are converted into outputs. An appropriate designing of production
system ensures the coordination of various production operations. There is no
single pattern of production system which is universally applicable to all types of
production system varies from one enterprise to another.
Types of Production System
Broadly one can think of three types of production systems which are
mentioned here under: -
(a) Continuous production
(b) Job or unit production
(c) Intermittent production
(a) Continuous production: It refers to the production of standardized products
with a standard set of process and operation sequence in anticipation of demand. It
is also known as mass flow production or assembly line production. This system
ensures less work in process inventory and high product quality but involves large
investment in machinery and equipment. The system is suitable in plants involving
large volume and small variety of output e.g. oil refineries reform cement
manufacturing etc.
(b) Job or Unit production: It involves production as per customer's
specification each batch or order consists of a small lot of identical products and is
different from other batches. The system requires comparatively smaller investment
in machines and equipment. It is flexible and can be adapted to changes in product
design and order size without much inconvenience. This system is most suitable
where heterogeneous products are produced against specific orders.
(c) Intermittent Production: Under this system the goods are produced partly for
inventory and partly for customer's orders. E.g. components are made for inventory
but they are combined differently for different customers. Automobile plants,
printing presses, electrical goods plant are examples of this type of manufacturing.
5.1.6 MANUFACTURING PROCESS
The nature of the process of production required by these three different types
of production system are distinct and require different conditions for their working.
Selection of manufacturing process is also a strategic decision as changes in the
same are costly. Therefore the manufacturing process is selected at the stage of
planning a business venture. It should meet the basic two objectives i.e. to meet the
specification of the final product and to be cost effective.
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5.1.6.1 Types of Manufacturing Process
The manufacturing process is classified into four types.
(i) Jobbing production
(ii) Batch production
(iii) Mass or flow production
(iv) Process Production
i. Jobbing Production: Herein one or few units of the products are produced as
per the requirement and specification of the customer. Production is to meet
the delivery schedule and costs are fixed prior to the contract.
ii. Batch Production: In this, limited quantities of each of the different types of
products are manufactured on same set of machines. Different products are
produced separately one after the other.
iii. Mass or flow production: Under this, the production run is conducted on a
set of machines arranged according to the sequence of operations. A huge
quantity of same product is manufactured at a time and is stocked for sale.
Different product will require different manufacturing lines. Since one line can
produce only one type of product, this process is also called as line flow.
iv. Process Production: Under this, the production run is conducted for an
indefinite period.
5.1.6.2 Factors Affecting the Choice of Manufacturing Process
Following factors need to be considered before making a choice of
manufacturing process.
a) Effect of volume/variety: This is one of the major considerations in selection
of manufacturing process. When the volume is low and variety is high, intermittent
process is most suitable and with increase in volume and reduction in variety
continuous process become suitable. The following figure indicates the choice of
process as a function of repetitiveness. Degree of repetitiveness is determined by
dividing volume of goods by variety.

Figure 5.2: Types of Production Processes

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b) Capacity of the plant: Projected sales volume is the key factor to make a
choice between batch and line process. In case of line process, fixed costs are
substantially higher than variable costs. The reverse is true for batch process thus
at low volume it would be cheaper to install and maintain a batch process and line
process becomes economical at higher volumes.
c) Lead time: The continuous process normally yields faster deliveries as
compared to batch process. Therefore lead-time and level of competition certainly
influence the choice of production process.
d) Flexibility and Efficiency: The manufacturing process needs to be flexible
enough to adapt contemplated changes and volume of production should be large
enough to lower costs.
Hence it is very important for entrepreneur to consider all above mentioned
factors before taking a decision regarding the type of manufacturing process to be
adopted as for as SSI are concerned they usually adopt batch processes due to low
investment.
5.3 PRODUCTION PLANNING AND CONTROL
Once the entrepreneur has taken the decisions regarding the product design
and production processes and system, his next task is to take steps for production
planning and control, as this function is essentially required for efficient and
economical production. One of the major problems of small scale enterprises is that
of low productivity small scale industries can utilise natural resources, which are
otherwise lying.
Small scale sector can play an important role, similar to the one played by
small scale industries in other developed countries.
Planned production is an important feature of the small industry. The small
entrepreneur possessing the ability to look ahead, organize and coordinate and
having plenty of driving force and capacity to lead and ability to supervise and
coordinate work and simulates his associates by means of a programme of human
relation and organization of employees, he would be able to get the best out of his
small industrial unit.
Gorden and Carson observe production; planning and control involve generally
the organization and planning of manufacturing process. Especially it consists of
the planning of routing, scheduling, dispatching inspection, and coordination,
control of materials, methods machines, tools and operating times. The ultimate
objective is the organization of the supply and movement of materials and labour,
machines utilization and related activities, in order to bring about the desired
manufacturing results in terms of quality, quantity, time and place.
Production planning without production control is like a bank without a bank
manager, planning initiates action while control is an adjusting process, providing
corrective measures for planned development. Production control regulates and
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stimulates the orderly how of materials in the manufacturing process from the
beginning to the end.
5.3.1 BENEFITS TO SMALL ENTREPRENEUR
Production planning and control can facilitate the small entrepreneur in the
following ways
1. Optimum Utilisation of Capacity:
With the help of Production Planning and Control [PPC] the entrepreneur can
schedule his tasks and production runs and thereby ensure that his productive
capacity does not remain idle and there is no undue queuing up of tasks via proper
allocation of tasks to the production facilities. No order goes unattended and no
machine remains idle.
2. Inventory control
Proper PPC will help the entrepreneur to resort to just- in- time systems and
thereby reduce the overall inventory. It will enable him to ensure that the right
supplies are available at the right time.
3. Economy in production time
PPC will help the entrepreneur to reduce the cycle time and increase the
turnover via proper scheduling.
4. Ensure quality
A good PPC will provide for adherence to the quality standards so that quality
of output is ensured.
To sum up we may say that PPC is of immense value to the entrepreneur in
capacity utilization and inventory control. More importantly it improves his
response time and quality. As such effective PPC contributes to time, quality and
cost parameters of entrepreneurial success.
5.3.2 STEPS OF PRODUCTION PLANNING AND CONTROL
Production Planning and Control (PPC) is a process that comprises the
performance of some critical; functions on either side, viz., planning as well as
control. See figure 2.3.
Production planning: Production planning may be defined as the technique of
foreseeing every step in a long series of separate operations, each step to be taken
at the right time and in the right place and each operation to be performed in
maximum efficiency. It helps entrepreneur to work out the quantity of material
manpower, machine and money requires for producing predetermined level of
output in given period of time.
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Figure 5.3: PPC Process

5.3.2.1 Routing: Under this, the operations, their path and sequence are
established. To perform these operations the proper class of machines and personnel
required are also worked out. The main aim of routing is to determine the best and
cheapest sequence of operations and to ensure that this sequence is strictly followed.
In small enterprises, this job is usually done by entrepreneur himself in a rather
adhoc manner. Routing procedure involves following different activities.
1. An analysis of the article to determine what to make and what to buy.
2. To determine the quality and type of material
3. Determining the manufacturing operations and their sequence.
4. A determination of lot sizes
5. Determination of scrap factors
6. An analysis of cost of the article
7. Organization of production control forms.
5.3.2.2 Scheduling: It means working out of time that should be required to
perform each operation and also the time necessary to perform the entire series as
routed, making allowances for all factors concerned. It mainly concerns with time
element and priorities of a job. The pattern of scheduling differs from one job to
another which is explained as below:
i) Production schedule: The main aim is to schedule that amount of work
which can easily be handled by plant and equipment without interference. Its not
independent decision as it takes into account following factors.
1. Physical plant facilities of the type required to process the material being
scheduled.
2. Personnel who possess the desired skills and experience to operate the
equipment and perform the type of work involved.
3. Necessary materials and purchased parts.
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ii) Master Schedule: Scheduling usually starts with preparation of master

schedule which is weekly or monthly break-down of the production requirement for
each product for a definite time period, by having this as a running record of total
production requirements the entrepreneur is in better position to shift the
production from one product to another as per the changed production
requirements. This forms a base for all subsequent scheduling acclivities. A master
schedule is followed by operator schedule which fixes total time required to do a
piece of work with a given machine or which shows the time required to do each
detailed operation of a given job with a given machine or process.
iii) Manufacturing schedule: It is prepared on the basis of type of
manufacturing process involved. It is very useful where single or few products are
manufactured repeatedly at regular intervals. Thus it would show the required
quality of each product and sequence in which the same to be operated Scheduling
of Job order manufacturing: Scheduling acquires greater importance in job order
manufacturing. This will enable the speedy execution of job at each center point.
As far as small scale industry is concerned scheduling is of utmost importance
as it brings out efficiency in the operations and s reduces cost price. The small
entrepreneur should maintain four types of schedules to have a close scrutiny of all
stages namely an enquiry schedule, a production schedule, a shop schedule and an
arrears schedule out of above four, a shop schedule is the most important most
suited to the needs of small scale industry as it enables a foreman to see at a
glance.
1. The total load on any section
2. The operational sequence
3. The stage, which any job has reached.
5.3.2.3 Loading: The next step is the execution of the schedule plan as per the
route chalked out it includes the assignment of the work to the operators at their
machines or work places. So loading determines who will do the work as routing
determines where and scheduling determines when it shall be done. Gantt Charts
are most commonly used in small industries in order to determine the existing load
and also to foresee how fast a job can be done. The usefulness of their technique
lies in the fact that they compare what has been done and what ought to have been
done.
Most of a small scale enterprise fail due to non-adherence to delivery
schedules therefore they can be successful if they have ability to meet delivery order
in time which no doubt depends upon production of quality goods in right time. It
makes all the more important for entrepreneur to judge ahead of time what should
be done, where and when thus to leave nothing to chance once the work has begun.
5.2.3 PRODUCTION CONTROL
Production control is the process of planning production in advance of
operations, establishing the extract route of each individual item part or assembly,
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setting, starting and finishing for each important item, assembly or the finishing
production and releasing the necessary orders as well as initiating the necessary
follow-up to have the smooth function of the enterprise. The production control is of
complicated nature in small industries. The production planning and control
department can function at its best in small scale unit only when the work
manager, the purchase manager, the personnel manager and the financial
controller assist in planning production activities. The production controller directly
reports to the works manager but in small scale unit, all the three functions namely
material control, planning and control are often performed by the entrepreneur
himself production control starts with dispatching and ends up with corrective
actions.
5.3.4 DISPATCHING
Dispatching involves issue of production orders for starting the operations.
Necessary authority and conformation is given for:
1. Movement of materials to different workstations.
2. Movement of tools and fixtures necessary for each operation.
3. Beginning of work on each operation.
4. Recording of time and cost involved in each operation.
5. Movement of work from one operation to another in accordance with the route
sheet.
6. Inspecting or supervision of work
Dispatching is an important step as it translates production plans into
production.
5.3.5 FOLLOW UP
Every production programme involves determination of the progress of work,
removing bottlenecks in the flow of work and ensuring that the productive
operations are taking place in accordance with the plans. It spots delays or
deviations from the production plans. It helps to reveal detects in routing and
scheduling, misunderstanding of orders and instruction, under loading or
overloading of work etc. All problems or deviations are investigated and remedial
measurer are undertaken to ensure the completion of work by the planned date.
5.3.6 INSPECTION
This is mainly to ensure the quality of goods. It can be required as effective
agency of production control.
5.3.7 CORRECTIVE MEASURES
Corrective action may involve any of those activities of adjusting the route,
rescheduling of work changing the workloads, repairs and maintenance of
machinery or equipment, control over inventories of the cause of deviation is the
poor performance of the employees. Certain personnel decisions like training,
transfer, demotion etc. may have to be taken. Alternate methods may be suggested
to handle peak loads.
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SUMMARY
Small-scale industries have a challenge to manufacture products at
economical prices. They need to embrace management principles surrounding
production processes, which are effective for the products manufactured by them.
An upfront planning and study of the critical factors of the manufacturing
processes will not only help the small scale entrepreneurs to understand the steps
they need to take in selecting the most appropriate manufacturing process but also
help them identify areas of risk so that necessary control procedures are put in
place. This will eventually help the small entrepreneur to eliminate the wastages
and increase the production, productivity and profits.
KEY WORDS
 Continuous production
 Job or unit production
 Intermittent production
 Jobbing production
 Batch production
 Mass or flow production
 Ranking
 Scheduling
REVIEW QUESTIONS
1. Discuss with examples various manufacturing processes?
2. What factors affect the choice of manufacturing process?
3. Write short notes on
a. Production planning
b. Relationship between production planning and control
4. What do you understand by production planning and control? Discuss its
elements in brief.
5. State the requirements for an effective system of production planning and
control?
6. What benefits can small scale enterprises can derive by installing an effective
system of production planning and control?
REFERENCES
1. P. Saravanavel and S.Sumathi, Production and Material Management,
Margham Publication, Chennai- 2002.
2. R. Senapthi, Production and Materials Management, AR publication, Chennai-
2002.
3. S.N.Chary, “Theory and Problems in Production and Operations Management”,
Tata Mc. Grawhil Publishing Company Ltd, New Delhi – 1995.
4. K. Sridhara Batt, Production and Material Management, Himalaya Publishing
House, New Delhi, 2007.
5. K.R.Govindan, Plant Layout and Material Handling, Anuradha Agency
Publications, Kumbakonam, 2000.

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LESSON – 6

PLANT LOCATION AND LAYOUT

Structure
6.0 Objectives
6.1 Introduction
6.2 Plant location
6.2.1 Locational analysis
6.2.2 Selection criteria
6.2.3 Significance
6.2.4 Plant layout
6.3 Plant layout
6.3.1 Definition
6.3.2 Objectives of plant layout
6.3.3 Importance
6.3.4 Essentials
6.3.5 Types of layout
6.3.6 Factors influencing layout
6.3.7 Dynamics of plant layout
6.3.8 Applicability of plant layout
6.0 OBJECTIVES
After studying this lesson, you should be able to:
 Describe the concepts of plant location and plant layout
 Identify the various factors to be considered for selection of plant
locationfrom
 state/area to the specific site
 Distinguish among the alternative patterns of plant layout
 Discuss the various factors influencing the choice of an initial layout and its
subsequent modification
6.1 INTRODUCTION
In the previous unit you have learnt how the entrepreneur conducts the
detailed analysis comprising of technical, financial, economic and market study
before laying down a comprehensive business plan. For implementation of this
plan, he has to take various crucial decisions namely location of business, layout
(the arrangement of physical facilities), designing the product, production planning
and control and maintaining good quality of product. This lesson deals with various
aspects of plant location and layout. Investment in analyzing the aspects of plant
location and the appropriate plant layout can help an entrepreneur achieve
economic efficiencies in business operations. These decisions lay the foundation of
the business of small entrepreneurs.
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6.2 PLANT LOCATION
Every entrepreneur is faced with the problem of deciding the best site for
location of his plant or factory.
What is plant location?
Plant location refers to the choice of region and the selection of a particular
site for setting up a business or factory. But the choice is made only after
considering cost and benefits of different alternative sites. It is a strategic decision
that cannot be changed once taken. If at all changed only at considerable loss, the
location should be selected as per its own requirements and circumstances. Each
individual plant is a case in itself. Businessman should try to make an attempt for
optimum or ideal location.
What is an ideal location?
An ideal location is one where the cost of the product is kept to minimum, with
a large market share, the least risk and the maximum social gain. It is the place of
maximum net advantage or which gives lowest unit cost of production and
distribution. For achieving this objective, small-scale entrepreneur can make use of
locational analysis for this purpose.
6.2.1 LOCATIONAL ANALYSIS
Locational analysis is a dynamic process where entrepreneur analyses and
compares the appropriateness or otherwise of alternative sites with the aim of
selecting the best site for a given enterprise. It consists the following:
(a) Demographic Analysis: It involves study of population in the area in terms
of total population (in no.), age composition, per capita income, educational level,
occupational structure etc.
(b) Trade Area Analysis: It is an analysis of the geographic area that provides
continued clientele to the firm. He would also see the feasibility of accessing the
trade area from alternative sites.
(c) Competitive Analysis: It helps to judge the nature, location, size and quality
of competition in a given trade area.
(d) Traffic analysis: To have a rough idea about the number of potential
customers passing by the proposed site during the working hours of the shop, the
traffic analysis aims at judging the alternative sites in terms of pedestrian and
vehicular traffic passing a site.
(e) Site economics: Alternative sites are evaluated in terms of establishment
costs and operational costs under this. Costs of establishment is basically cost
incurred for permanent physical facilities but operational costs are incurred for
running business on day to day basis, they are also called as running costs.
Two sites A and B are evaluated in terms of above mentioned two costs as
follows:
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Table 6.1: Comparative Costs of Alternative Locations

The above cost statement indicates that site B is preferable to site A keeping in
mind economic considerations only although in some respects site A has lower
costs. By applying the definition of ideal location which is the place of maximum
net advantage or which gives lowest unit cost of production and distribution, site B
would be preferred.
6.2.2 SELECTION CRITERIA
The important considerations for selecting a suitable location are given as
follows:
a) Natural or climatic conditions.
b) Availability and nearness to the sources of raw material.
c) Transport costs-in obtaining raw material and also distribution or marketing
finished products to the ultimate users.
d) Access to market: small businesses in retail or wholesale or services should
be located within the vicinity of densely populated areas.
e) Availability of Infrastructural facilities such as developed industrial sheds or
sites, link roads, nearness to railway stations, airports or sea ports,
availability
f) of electricity, water, public utilities, civil amenities and means of
communication are important, especially for small scale businesses.
g) Availability of skilled and non-skilled labour and technically qualified and
trained managers.
h) Banking and financial institutions are located nearby.
i) Locations with links: to develop industrial areas or business centers result
in savings and cost reductions in transport overheads, miscellaneous
expenses.
j) Strategic considerations of safety and security should be given due
importance.
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k) Government influences: Both positive and negative incentives to motivate an

entrepreneur to choose a particular location are made available. Positive
includes cheap overhead facilities like electricity, banking transport, tax
relief, subsidies and liberalization. Negative incentives are in form of
restrictions for setting up industries in urban areas for reasons of pollution
control and decentralization of industries.
l) Residence of small business entrepreneurs want to set up nearby their
homelands
One study of locational considerations from small-scale units revealed that the
native place or homelands of the entrepreneur was the most important factor.
Heavy preference to homeland suggests that small-scale enterprise is not freely
mobile. Low preference for Government incentives suggests that concessions and
incentives cannot compensate for poor infrastructure.
Table given below also suggests that the locational choice undergo change with
differences in the levels of development across the regions (hills and plains).

.
6.2.3 SIGNIFICANCE
From the discussion above, we have already learnt that location of a plant is
an important entrepreneurial decision because it influences the cost of production
and distribution to a great extent. In some cases, you will find that location may
contribute to even 10% of cost of manufacturing and marketing. Therefore, an
appropriate location is essential to the efficient and economical working of a plant.
A firm may fail due to bad location or its growth and efficiency may be
restricted.
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6.4 PLANT LAYOUT
The efficiency of production depends on how well the various machines;
production facilities and employee‘s amenities are located in a plant. Only the
properly laid out plant can ensure the smooth and rapid movement of material,
from the raw material stage to the end product stage. Plant layout encompasses
new layout as well as improvement in the existing layout.
It may be defined as a technique of locating machines, processes and plant
services within the factory so as to achieve the right quantity and quality of output
at the lowest possible cost of manufacturing. It involves a judicious arrangement of
production facilities so that workflow is direct.
6.2.1 DEFINITION
A plant layout can be defined as follows:
1. Plant layout refers to the arrangement of physical facilities such as
machinery, equipment, furniture etc. with in the factory building in such a manner
so as to have quickest flow of material at the lowest cost and with the least amount
of handling in processing the product from the receipt of material to the shipment
of the finished product.
2. According to Riggs, ―the overall objective of plant layout is to design a
physical arrangement that most economically meets the required output – quantity
and quality.‖
3. According to J. L. Zundi, ―Plant layout ideally involves allocation of space
and arrangement of equipment in such a manner that overall operating costs are
minimized.
6.3.2 OBJECTIVES OF PLANT LAYOUT
The principle objective of a proper plant layout is to maximise the production
at the minimum cost. This objective should be kept in mind while designing a
layout for a new plant as well as while making necessary changes in the existing
layout in response to changes in management policies and processes and
techniques of production. Besides, it must satisfy the needs of all people associated
with the production system, i.e., workers, supervisors and managers.
If a layout is to fulfil this goal, it should be planned with the following
objectives in mind:
i. Economy in materials Handling: Economy in handling of materials, work-in-
progress and finished stock.
ii. Optimum utilisation of Resources: Ensuring optimum utilisation of men,
materials, equipment and space available.
iii. Better Inventory Control: Minimising work-in-process and maximising
inventory turnover. The material should move rapidly through the plant and
the points of congestion should be eliminated to have low levels of inventory.
iv. Good work flow: Minimising chances of delay and eliminating bottlenecks in
the production system. Ensure a good work flow avoiding accumulation of
work at vital points.
v. Efficient Control: Ensuring efficient supervision and production control.
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vi. Avoidance of Changes: Avoiding frequent changes so that production

programme is not upset, causing the cost of production to rise.
vii. Safety: Ensuring safety for the workers by eliminating or at least minimising
the chances of accidents.
viii. Better Services: Providing adequate service centres at convenient locations.
ix. Higher Morale: Boosting up employees morale by providing incentives and also
comforts while at work.
x. Flexibility: Ensuring flexibility of layout for future changes and requirements.
It should be noted here that the above objectives of plant layout are laudable
in themselves, but it is often difficult to reconcile all of them in a practical
situations. As such, a highest level of skill and judgement are required to be
exercised by a management executive. To achieve this, a close co-ordination
between him/her with the production manager is very essential.
6.3.3 IMPORTANCE
Plant layout is an important decision as it represents long-term commitment.
An ideal plant layout should provide the optimum relationship among output, floor
area and manufacturing process. It facilitates the production process, minimizes
material handling, time and cost, and allows flexibility of operations, easy
production flow, makes economic use of the building, promotes effective utilization
of manpower, and provides for employee‘s convenience, safety, comfort at work,
maximum exposure to natural light and ventilation. It is also important because it
affects the flow of material and processes, labour efficiency, supervision and
control, use of space and expansion possibilities etc.
6.3.4 ESSENTIALS
An efficient plant layout is one that can be instrumental in achieving the
following objectives:
1. Proper and efficient utilization of available floor space
2. To ensure that work proceeds from one point to another point without any
delay
3. Provide enough production capacity.
4. Reduce material handling costs
5. Reduce hazards to personnel
6. Utilise labour efficiently
7. Increase employee morale
8. Reduce accidents
9. Provide for volume and product flexibility
10. Provide ease of supervision and control
11. Provide for employee safety and health
12. Allow ease of maintenance
13. Allow high machine or equipment utilization
14. Improve productivity
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6.3.5 TYPES OF LAYOUT
As discussed so far the plant layout facilitates the arrangement of machines,
equipment and other physical facilities in a planned manner within the factory
premises. An entrepreneur must possess an expertise to lay down a proper layout
for new or existing plants. It differs from plant to plant, from location to location
and from industry to industry. But the basic principles governing plant layout are
More or less same.
As far as small business is concerned, it requires a smaller area or space and
can be located in any kind of building as long as the space is available and it is
convenient. Plant layout for Small Scale business is closely linked with the factory
building and built up area.
From the point of view of plant layout, we can classify small business or unit
into three categories:
1. Manufacturing units
2. Traders
3. Service Establishments
1. Manufacturing units
In case of manufacturing unit, plant layout may be of four types:
(a) Product or line layout
(b) Process or functional layout
(c) Fixed position or location layout
(d) Combined or group layout
(a) Product or line layout
Under this, machines and equipments are arranged in one line depending upon
the sequence of operations required for the product. The materials move form one
workstation to another sequentially without any backtracking or deviation. Under
this, machines are grouped in one sequence. Therefore materials are fed into the first
machine and finished goods travel automatically from machine to machine, the
output of one machine becoming input of the next, e.g. in a paper mill, bamboos are
fed into the machine at one end and paper comes out at the other end.
The raw material moves very fast from one workstation to other stations with a
minimum work in progress storage and material handling. The grouping of
machines should be done keeping in mind the following general principles.
i. All the machine tools or other items of equipments must be placed at the
point demanded by the sequence of operations
ii. There should no points where one line crossed another line.
iii. Materials may be fed where they are required for assembly but not necessarily
at one point.
iv. All the operations including assembly, testing packing must be included in
the line
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A line layout for two products is given below.

Advantages: Product layout provides the following benefits:

i. Low cost of material handling, due to straight and short route and absence of
ii. backtracking
iii. Smooth and uninterrupted operations
iv. Continuous flow of work
v. Lesser investment in inventory and work in progress
vi. Optimum use of floor space
vii. Shorter processing time or quicker output
viii. Less congestion of work in the process
ix. Simple and effective inspection of work and simplified production control
x. Lower cost of manufacturing per unit
Disadvantages: Product layout suffers from following drawbacks:
i. High initial capital investment in special purpose machine
ii. Heavy overhead charges
iii. Breakdown of one machine will hamper the whole production process
iv. Lesser flexibility as specially laid out for particular product.
Suitability: Product layout is useful under following conditions:
i. Mass production of standardized products
ii. Simple and repetitive manufacturing process
iii. Operation time for different process is more or less equal
iv. Reasonably stable demand for the product
v. Continuous supply of materials
Therefore, the manufacturing units involving continuous manufacturing
process, producing few standardized products continuously on the firm‘s own
specifications and in anticipation of sales would prefer product layout e.g.
chemicals, sugar, paper, rubber, refineries, cement, automobiles, food processing
and electronics etc.
(b) Process layout
In this type of layout machines of a similar type are arranged together at one
place. E.g. Machines performing drilling operations are arranged in the drilling
department, machines performing casting operations be grouped in the casting
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department. Therefore the machines are installed in the plants, which follow the
process layout.
Hence, such layouts typically have drilling department, milling department,
welding department, heating department and painting department etc. The process
or functional layout is followed from historical period. It evolved from the handicraft
method of production. The work has to be allocated to each department in such a
way that no machines are chosen to do as many different job as possible i.e. the
emphasis is on general purpose machine. The work, which has to be done, is
allocated to the machines according to loading schedules with the object of
ensuring that each machine is fully loaded. Process layout is shown in the following
diagram.

Process layout showing movement of two products

The grouping of machines according to the process has to be done keeping in
mind the following principles
a) The distance between departments should be as short as possible for
avoiding long distance movement of materials
b) The departments should be in sequence of operations
c) The arrangement should be convenient for inspection and supervision
Advantages: Process layout provides the following benefits
a) Lower initial capital investment in machines and equipments. There is high
degree of machine utilization, as a machine is not blocked for a single
product
b) The overhead costs are relatively low
c) Change in output design and volume can be more easily adapted to the
output of variety of products
d) Breakdown of one machine does not result in complete work stoppage
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e) Supervision can be more effective and specialized

f) There is a greater flexibility of scope for expansion.
Disadvantages: Product layout suffers from following drawbacks
a) Material handling costs are high due to backtracking
b) More skilled labour is required resulting in higher cost.
c) Time gap or lag in production is higher
d) Work in progress inventory is high needing greater storage space
e) More frequent inspection is needed which results in costly supervision
Suitability: Process layout is adopted when
a) Products are not standardized
b) Quantity produced is small
c) There are frequent changes in design and style of product
d) Job shop type of work is done
e) Machines are very expensive
Thus, process layout or functional layout is suitable for job order production
involving non-repetitive processes and customer specifications and
nonstandardized products, e.g. tailoring, light and heavy engineering products,
made to order furniture industries, jewelry.
(c) Fixed Position or Location Layout
In this type of layout, the major product being produced is fixed at one
location. Equipment labour and components are moved to that location. All
facilities are brought and arranged around one work center. This type of layout is
not relevant for small scale entrepreneur. The following figure shows a fixed
position layout regarding shipbuilding.

Advantages: Fixed position layout provides the following benefits

a) It saves time and cost involved on the movement of work from one
workstation to another.
b) The layout is flexible as change in job design and operation sequence can be
easily incorporated.
c) It is more economical when several orders in different stages of progress are
being executed simultaneously.
d) Adjustments can be made to meet shortage of materials or absence of
workers by changing the sequence of operations.
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Disadvantages: Fixed position layout has the following drawbacks

a) Production period being very long, capital investment is very heavy
b) Very large space is required for storage of material and equipment near the
product.
c) As several operations are often carried out simultaneously, there is
possibility of confusion and conflicts among different workgroups.
Suitability: The fixed position layout is followed in following conditions
a) Manufacture of bulky and heavy products such as locomotives, ships,
boilers, generators, wagon building, aircraft manufacturing, etc.
b) Construction of building, flyovers, dams.
c) Hospital, the medicines, doctors and nurses are taken to the patient
(product).
(d) Combined layout
Certain manufacturing units may require all three processes namely
intermittent process (job shops), the continuous process (mass production shops)
and the representative process combined process [i.e. miscellaneous shops].
In most of industries, only a product layout or process layout or fixed location
layout does not exist. Thus, in manufacturing concerns where several products are
produced in repeated numbers with no likelihood of continuous production,
combined layout is followed. Generally, a combination of the product and process
layout or other combination are found, in practice, e.g. for industries involving the
fabrication of parts and assembly, fabrication tends to employ the process layout,
while the assembly areas often employ the product layout. In soap, manufacturing
plant, the machinery manufacturing soap is arranged on the product line principle,
but ancillary services such as heating, the manufacturing of glycerin, the power
house, the water treatment plant etc. are arranged on a functional basis.
2. Traders
When two outlets carry almost same merchandise, customers usually buy in
the one that is more appealing to them. Thus, customers are attracted and kept by
good layout i.e. good lighting, attractive colours, good ventilation, air conditioning,
modern design and arrangement and even music. All of these things mean
customer convenience, customer appeal and greater business volume.
The customer is always impressed by service, efficiency and quality. Hence,
the layout is essential for handling merchandise, which is arranged as per the
space available and the type and magnitude of goods to be sold keeping in mind the
convenience of customers.
There are three kinds of layouts in retail operations today.
1. Self service or modified self service layout
2. Full service layout
3. Special layouts
The self-service layouts, cuts down on sales clerk‘s time and allow customers to
select merchandise for themselves. Customers should be led through the store in a
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way that will expose them to as much display area as possible, e.g. Grocery Stores or
department stores. In those stores, necessities or convenience goods should be
placed at the rear of the store. The use of color and lighting is very important to
direct attention to interior displays and to make the most of the stores layout.
All operations are not self-service. Certain specialty enterprises sell to fewer
numbers of customers or higher priced product, e.g. Apparel, office machines,
sporting goods, fashion items, hardware, good quality shoes, jewelry, luggage and
accessories, furniture and appliances are all examples of products that require time
and personal attention to be sold. These full service layouts provide area and
equipment necessary in such cases.
Some layouts depend strictly on the type of special store to be set up, e.g. TV
repair shop, soft ice cream store, and drive-in soft drink stores are all examples of
business requiring special design. Thus, good retail layout should be the one, which
saves rent, time and labour.
3. Services centers and establishment
Services establishments such as motels, hotels, restaurants, must give due
attention to client convenience, quality of service, efficiency in delivering services
and pleasing office ambience. In today‘s environment, the clients look for ease in
approaching different departments of a service organization and hence the layout
should be designed in a fashion, which allows clients quick and convenient access
to the facilities offered by a service establishment.
6.3.6 FACTORS INFLUENCING LAYOUT
While deciding his factory or unit or establishment or store, a small-scale
businessman should keep the following factors in mind:
i. Factory building: The nature and size of the building determines the floor
space available for layout. While designing the special requirements, e.g. air
conditioning, dust control, humidity control etc. must be kept in mind.
ii. Nature of product: product layout is suitable for uniform products whereas
process layout is more appropriate for custom-made products.
iii. Production process: In assembly line industries, product layout is better. In
job order or intermittent manufacturing on the other hand, process layout is
desirable.
iv. Type of machinery: General purpose machines are often arranged as per
process layout while special purpose machines are arranged according to
product layout
v. Repairs and maintenance: machines should be so arranged that adequate
space is available between them for movement of equipment and people
required for repairing the machines.
vi. Human needs: Adequate arrangement should be made for cloakroom,
washroom, lockers, drinking water, toilets and other employee facilities,
proper provision should be made for disposal of effluents, if any.
vii. Plant environment: Heat, light, noise, ventilation and other aspects should be
duly considered, e.g. paint shops and plating section should be located in
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another hall so that dangerous fumes can be removed through proper

ventilation etc. Adequate safety arrangement should also be made.
Thus, the layout should be conducive to health and safety of employees. It
should ensure free and efficient flow of men and materials. Future expansion and
diversification may also be considered while planning factory layout.
6.3.7 DYNAMICS OF PLANT LAYOUT
Plant layout is a dynamic rather than a static concept meaning thereby if once
done it is not permanent in nature rather improvement or revision in the existing
plant layout must be made by keeping a track with development of new machines
or equipment, improvements in manufacturing process, changes in materials
handling devices etc. But, any revision in layout must be made only when the
savings resulting from revision exceed the costs involved in such revision.
Revision in plant layout may become necessary on account of the following
reasons:
i. Increase in the output of the existing product
ii. Introduction of a new product and diversification
iii. Technological advancements in machinery, material, processes, product
design, fuel etc.
iv. Deficiencies in the layout unnoticed by the layout engineer in the beginning.
6.2.8 APPLICABILITY OF PLANT LAYOUT
Plant layout is applicable to all types of industries or plants. Certain plants
require special arrangements which, when incorporated make the layout look
distinct form the types already discussed above. Applicability of plant layout in
manufacturing and service industries is discussed below.
In case of the manufacturing of detergent powder, a multi-storey building is
specially constructed to house the boiler. Materials are stored and poured into the
boiler at different stages on different floors. Other facilities are also provided around
the boiler at different stations.
Another applicability of this layout is the manufacture of talcum powder. Here
machinery is arranged vertically i.e. from top to bottom. Thus, material is poured
into the first machine at the top and powder comes out at the bottom of the
machinery located on the ground floor.
Yet another applicability of this layout is the newspaper plant, where the time
element is of supreme importance, the accomplishment being gapped in seconds.
Here plant layout must be simple and direct so as to eliminate distance, delay and
confusion. There must be a perfect coordination of all departments and machinery
or equipments, as materials must never fail.
Plant layout is also applicable to five star hotels as well. Here lodging, bar,
restaurant, kitchen, stores, swimming pool, laundry, shaving saloons, shopping
arcades, conference hall, parking areas etc. should all find an appropriate place in
the layout. Here importance must be given to cleanliness, elegant appearance,
convenience and compact looks, which attract customers.
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Similarly plant layout is applicable to a cinema hall, where emphasis is on

comfort, and convenience of the cinemagoers. The projector, screen, sound box, fire
fighting equipment, ambience etc. should be of utmost importance.
A plant layout applies besides the grouping of machinery, to an arrangement
for other facilities as well. Such facilities include receiving and dispatching points,
inspection facilities, employee facilities, storage etc.
Generally, the receiving and the dispatching departments should be at either
end of the plant. The storeroom should be located close to the production, receiving
and dispatching centers in order to minimize handling costs. The inspection should
be right next to other dispatch department as inspections are done finally, before
dispatch.
The maintenance department consisting of lighting, safety devices, fire
protection, collection and disposal of garbage, scrap etc. should be located in a
place which is easily accessible to all the other departments in the plant. The other
employee facilities like toilet facilities, drinking water facilities, first aid room,
cafeteria etc.can be a little away from other departments but should be within easy
reach of the employees. Hence, there are the other industries or plants to which
plant layout is applicable.
SUMMARY
In this lesson you have observed that the entrepreneur has to make decisions
regarding plant location, which refers to the selection of a particular site for setting
up a business or factory. But before making such a choice, he has to go through
the detailed locational analysis considering various factors, which influence his
decision. It is a long-term strategic decision, which cannot be changed once taken.
An optimum location can reduce the cost of production and distribution to a great
extent. Thus great care and appropriate planning is required to select the most
appropriate location.
The efficiency of production depends on how well the various machines;
production facilities and amenities are located in a plant. An ideal plant layout
should provide the optimum relationship among the output, floor area and
manufacturing process.
An efficient plant layout is one that aims at achieving various objectives like
efficient utilization of available floor space, minimizes cost, allows flexibility of
operation, provides for employees convenience, improves productivity etc. The
entrepreneurs must possess the expertise to lay down a proper layout for new or
existing plants. It differs from one plant to another. But basic principles to be
followed are more or less same. From the point of view of plant layout, we can classify
small business into three categories i.e. (a) manufacturing units (b) traders (c) service
establishments. Designing of layout is different in all above three categories e.g.
manufacturing unit may follow one of Product, Process, and fixed position or
combined layout, as the case may be. Traders might go either for selfservice or full
service or special layouts whereas service establishments such as motels, hotels, and
restaurants must give due attention to customer convenience, quality of service,
efficiency in delivering the service etc. While deciding for layout for factory or unit or
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store, a small entrepreneur has to consider the factors like the nature of the product,
production process, size of factory building, human needs etc.
Plant layout is applicable to all types of industries or plants. At the end, the
layout should be conducive to health and safety of employees. It should ensure free
and efficient flow of men and materials. Future expansion and diversification may
also be considered while planning factory layout.
KEY WORDS
 Locational analysis
 Traffic analysis
 Plant Layout
 Fixed position layout
 Combined layout
REVIEW QUESTIONS
1. Describe the factors that should be taken into account in deciding the
location of plant?
2. What is the importance of location in business?
3. The governing principle is that a plant should be so located as to permit the
production of the product at the lowest cost per unit.‖ Comment.
4. What do you mean by locational analysis?
5. Explain the meaning and significance of plant location.How will you decide
the location of a mini steel plant in India?
6. Define the plant layout.
7. What are the various factors influencing the layout of grocery store?
8. What are the principles for planning the layout of a new factory?
9. Explain process layout? State its advantages and disadvantages in brief
10. Distinguish between product layout and process layout?
11. Explain the suitability of fixed position layout
12. Write about any two types of plant layout
13. What is plant layout? Discuss the objectives and advantages of a good layout
REFERENCES
1. P .Saravanavel and S.Sumathi, Production and Material Management,
Margham Publication, Chennai- 2002.
2. R. Senapthi, Production and Materials Management, AR publication, Chennai-
2002.
3. S.N.Chary, ―Theory and Problems in Production and Operations Management”,
Tata Mc. Grawhil Publishing Company Ltd, New Delhi – 1995.
4. K.Sridhara Batt, Production and Material Management, Himalaya Publishing
House, New Delhi, 2007.
5. K. R. Govindan, Plant Layout and Material Handling, Anuradha Agency
Publications, Kumbakonam, 2000.

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LESSON – 7

QUALITY CONTROL AND PRODUCTIVITY

Structure
7.0 Introduction
7.1 Objectives
7.2 Quality control
7.2.1 Significance of quality control
7.2.2 Methods of quality control
7.2.3 Quality control in small scale industries
7.2.4 Testing facilities for small-scale industries
7.2.5 Cost of quality control
7.3 Productivity
7.3.1 Significance
7.3.2 Measurement of productivity
7.3.3 Factors influencing productivity
7.0 INTRODUCTION
In the previous lesson, you have studied the various important aspects of
production management including production planning and control if done
systematically the small entrepreneur can gain immensely as it would help him in
making changes, taking necessary steps to remove the bottlenecks breakdowns etc.
and would also ensure the smooth production of quality products in right time
which would increase the productivity. In this unit, you would study about the
quality and productivity at length.
7.1 OBJECTIVES
After studying this lesson you should be able to:
 Explain the concepts of Quality Control and Productivity
 Examine the possibilities for small scale industries to have quality control
measures
 Distinguish between productivity and production
 List out the benefits associated with higher productivity
 Demonstrate the various methods of measuring productivity
 Discuss the various factors influencing the productivity
7.2 QUALITY CONTROL
Quality has different connotations- in health and hospitality it may mean
‗hygiene‘; in electrical and electronics, it may mean, ‗safety;‘ in services it may mean
‗speed‘ and ‗reliability‘ and so on. In the present context even price is a quality
measure! Operationally, however, quality refers to conformance to established
standards. Quality control consists of all those activities, which are designed to
define, maintain and control specific quality of products within reasonable limits. It
is the systematic regulation of all variables affecting the goodness of the end
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product. In other words, quality control involves determination of quality standards

and measurement and control necessary to ensure that the established standards
are practiced and maintained. It does not attempt to achieve the perfect quality but
to secure satisfactory or reasonable quality at a reasonable and competitive level of
cost through a systematic control over the variables in the manufacturing process,
variations in the quality of the product can be kept reasonably stable.
7.2.1 SIGNIFICANCE OF QUALITY CONTROL
In today's competitive environment the mere success and survival of any
enterprise whether it is a small scale unit or large scale enterprise depends upon
the achievement and maintenance of a satisfactory level of quality. Quality control
offers several advantages.
a) It helps to improve the brand image of the enterprise.
b) It facilitates standardization.
c) It helps to reduce costs by cutting down wastes caused by the production of
defective products.
d) It helps to increase sales turnover.
e) It enables the entrepreneur to face competition more effectively in domestic
as well as international markets.
f) It helps the entrepreneur to determine costs and prices at competition levels
in advance of production.
g) It enables the manufacturer to comply with quality standards prescribed by
the government.
Quality standards are set only after considering consumer's demands and cost
of the product. The variation in quality are caused by variations in the materials
used, in men, machines, tools, and equipment and in methods and procedures of
production and inspection these variables need to be controlled if quality products
are to be produced.
7.2.2 METHODS OF QUALITY CONTROL
Traditionally, there are two methods of quality control:-
1. Inspection
2. Statistical quality control
1. Inspection: There are three important aspects of inspection.
(a) Process inspection: It is designed to check raw material, machines etc. It
saves time and wastage of material and prevents process bottlenecks.
(b) Product Inspection: It is to ensure that goods sent into the market for sale
are free from defects and conform to the set standards of quality.
(c) Inspection Analysis: A thoughtful and careful analysis of inspection results
would help the entrepreneur in locating the critical points in the manufacturing
process at which control is breaking down.
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2. Statistical Quality control (S.Q.C.): Under this method a sample of items to be

controlled is selected and statistically checked to ensure that the established
standards of quality are maintained. It involves making things right rather than
discovering and rejecting those made wrong. Control charts and acceptance
sampling are used for this purpose.
(i) Quality Control Charts: A quality control chart is a graph on which the
characteristics of samples are plotted. The chart given in Fig. below is an example.

(ii) Acceptance Sampling: In this method a sample of products is checked. Full

lot is rejected if the percentage of defective items is more than the predetermined
limit otherwise the whole lot is accepted. The percentage of defective items that is
acceptable is called Acceptable Quality Level (AQL). This level involves a risk (called
producer's risk) that an unsatisfactory lot might be accepted. To minimize these
risks, lot tolerance percentage defective (LTPD) is determined. This is the highest
level of defects beyond which a lot will not be accepted for sale.
7.2.3 QUALITY CONTROL IN SMALL SCALE INDUSTRIES
It is quite possible that a small-scale entrepreneur, especially of barefoot type,
may not be conversant with the techniques described above. But then concern for
quality is not technique dependent. The entrepreneur may exercise considerable
influence on quality via personal observation and direct intervention. For example,
a roadside eating joint or a restaurateur may personally supervise the ingredients
that go into the preparation of food and sample check the ultimate dishes before
they are served. He may even oversee the waiters or usherers to personally monitor
food and beverage services. However, as the organization grows, the cult of quality
must spread to the grass root level and the entrepreneur may be well advised to put
in place the applicable quality systems. International Organisation for Standards
(ISO) has come up with series of quality standards e.g., ISO-9000 in this regard. It
may be pointed out that adherence to ISO specifications is an absolute must for the
exporting entrepreneurs. Attainment of quality necessitates fostering good
management practices. The entrepreneur may be well advised to be aware of such
measures as quality circles, kaizen (continuous improvement), benchmarking and
so on. Most importantly, the entrepreneur has to come out of the mindset that
quality is an expensive proposition; experience suggests that quality improvement
practices pay for themselves.
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In India, Bureau of Indian Standards (BIS) has been doing a great service by
prescribing quality standards for a large number of products. It not only prescribes
but also persuades small industries to adhere to quality of their products. In the
small scale sector quality control is based on four parameters:
(a) Indian standards specifications
(b) Quality marketing schemes
(c) Company standards for ancillary units
(d) Standards specified by government purchasing agencies
The following Indian Standards have been published so far for controlling
quality of products manufactured by small units
(a) Methods of statistical quality control during the production period;
(b) Manual on basic principles of lot sampling and
(c) Sampling inspection tables
Several State Governments have also been operating quality marketing
schemes and standards for various products of small-scale industries. When the
small units manufacture their products according to the standards set, the Quality
Marketing Centers of the Government stamp the "O" mark on their products. This
is an assurance for the customers that the product has been manufactured
adhering to certain quality standards.
Quality Control of Export Products-Implementation of quality control has been
very useful in raising exports from an economy also. A product can be sold in
foreign markets only when it is not only cheaper but up to a certain quality also.
Standardization of these products convinces the foreign customers better than any
sales campaign. Realizing this fact, the Government of India has made the
inspection of several products manufactured by small-scale industries compulsory
before they are consigned abroad. This has proved very beneficial for the Indian
exporters to sell their products in highly competitive foreign markets. Regional
Testing Centres and Field Testing Stations have been set up under small Industries
Development Organization (SIDO) to improve the quality of the products and to
provide testing facilities for the small scale sector.
7.2.4 TESTING FACILITIES FOR SMALL-SCALE INDUSTRIES
Small-scale units cannot afford to have all the testing facilities in their own
premises. However, such testing facilities as are not within their means have to be
obtained by them either from established testing houses, laboratories set up in
various regions, including engineering colleges. The Government Test House at
Alipore in Calcutta, the Indian Standards Institution's Laboratory at New Delhi and
the national laboratories under Central Scientific and Industrial Research
Organisations have played a significant role in offering testing facilities to small-
scale units.
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Even though small-scale units have been getting a good deal of assistance for
quality control yet more needs to be done like ensuring that these facilities are
known and made available to small units.
7.2.5 COST OF QUALITY CONTROL
There is certainly a cost of quality control, which is difficult but not
impossible. These costs should have a relatively small portion of total cost, which
depends on various factors e.g.
(a) Type of product, its use and hazards involved in its use.
(b) The degree of quality awareness prevailing in the enterprise.
7.3 PRODUCTIVITY
Productivity refers to the physical relation between the quality produced
(output) and the quantity of resource used in the course of production (input)

Output implies production while input means land, labour, capital,

management etc. Productivity measures the efficiency of the production system.
Higher productivity means producing more from a given amount of input or
producing a given amount with minimum level of inputs.
In other words the more the output from one worker or one machine (or a
piece of equipment) per day per shift, the higher is the productivity. Higher
productivity is not to be taken in sense of higher workloads or faster machines
alone but it is always elimination of waste of all type of labour (time and skill)
machine time, capital, and material management etc.
Productivity = Output per unit of input
Productivity and production are two different terms. Productivity is a relative
term indicating the ratio between total output and the total inputs used therein on
the other hand production is an absolute concept, which refers to the volume of
output. The volume of production may increase but productivity may decline due to
inefficient use of resource. Efficient use of input may increase productivity but the
volume of production may not increase. Production refers to the end result of
production system whereas productivity reflects its efficiency.
7.3.1 SIGNIFICANCE
Benefits derived from higher productivity are as follows:
1. It helps to cut down cost per unit and thereby improve the profits.
2. Gains from productivity can be transferred to the consumers in from of lower
priced products or better quality products.
3. These gains can also be shared with workers or employees by paying them at
higher rate.
4. A more productive entrepreneur can have better chances to exploit export
opportunities.
5. It would generate more employment opportunities.
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7.3.2 MEASUREMENT OF PRODUCTIVITY
Productivity may be measured either on aggregate bases or on individual
basis, which are called total and partial productivity respectively.

This index measures the efficiency in the use of all the resources.
Partial productivity Indices, depending upon factors used, it measures the
efficacy of individual factor of production. Following are productivity indices for
individual inputs.

7.3.3 FACTORS INFLUENCING PRODUCTIVITY

Productivity is outcome of several interrelated factors, which may broadly be
divided into two categories- human factors and technological factors.
1. Human Factors: Human nature and human behaviour are the most
significant determinants of productivity. Human factors include both their ability as
well as their willingness:
a) Ability to work: Productivity of an organization depends upon the
competence and caliber of its people-both workers and managers Ability to
work is governed by education, training, experience, aptitude, etc. of the
employees.
b) Willingness to work: Motivation and morale of people are very important
factors that determine productivity. These are affected by wage incentive
schemes, labour participation in management, communication systems,
informal group relations, promotion policy, union management relations,
quality of leadership, working hours, sanitation, ventilation, subsidized
canteen, company transport, etc.
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2. Technological Factors: Technological factors exert significant influence on

the level of productivity. These include the following:
a) Size and capacity of plant
b) Product design and standardization
c) Timely supply of materials and fuel
d) Rationalization and automation measures
e) Repairs and maintenance
f) Production planning and control
g) Plant layout and location
h) Materials handling system
i) Inspection and quality control
j) Machinery and equipment used
k) Research and development
l) Inventory control
3. Managerial factors: The competence and attitudes of managers have an
important bearing on productivity. In many organizations, productivity is low
despite latest technology and trained manpower. This is due to inefficient and
indifferent management. Competent and dedicated managers can obtain
extraordinary results from ordinary people. Job performance of employees depends
on their ability and willingness to work. Management is the catalyst to create both.
Advanced technology requires knowledgeable workers who in turn work
productively under professionally qualified managers. No ideology can win a greater
output with less effort. It is only through sound management that optimum
utilization of human and technical resources can be secured.
4. Natural Factors: natural factors such as physical, geographical and climate
conditions exert considerable influence on productivity, particularly in extreme
climates (too cold or too hot) tends to be comparatively low. Natural resources like
water, fuel and minerals influence productivity.
5. Sociological Factors: Social customs, traditions and institutions influence
attitudes towards work and job. For instance, bias on the basis of caste, religion,
etc., inhibited the growth of modern industry in some countries. The joint family
system affected incentive to work hard in India. Close ties with land and native
place hampered stability and discipline among industrial labour.
6. Political Factors: Law and order, stability of Government, harmony between
States, etc. are essential for high productivity in industries Taxation policies of the
Government influence willingness to work, capital formation, modernization and
expansion of plants etc. Industrial policy affects the size, and capacity of plants.
Tariff policies influence competition. Elimination of sick and inefficient units also
helps to improve productivity.
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7. Economic Factors: Size of the market, banking and credit facilities, transport
and communication systems, etc. is important factors influencing productivity.
SUMMARY
The small scale industries occupy a very important position in any economy.
Traditionally, they used to produce certain specialized item over which they
developed expertise and monopoly over the years. Many small enterprises do act as
feeder to large scale industries as their output is used as input. In controlled
economy the small scale units are protected from competition from large scale
sector by means of subsidies, grants, monetary incentives from the government
reservation of certain items of production in the small sector and so on. However, in
free economy, the small scale industrial sector is not insulated from competition
from large scale sector for their survival and growth. They have to face competition
not only from local large scale sector but also from foreign products. In recent years
Chinese toys have been a great threat for Indian toy industry. Therefore the
products of small scale sector can compete with these of large sector only if high
quality is maintained. In this competitive environment, small scale industry will
have to select such technology, which generates cost efficient and high quality
optimal output. This necessitates the introduction of quality control measures.
KEY WORDS
 SQC Statistical quality control
 Productivity
 Labour productivity index
REVIEW QUESTIONS
1. Define Productivity. What is the significance of productivity analysis?
2. How can labour productivity be calculated?
3. What are the factors that affect the level of productivity?
4. What is productivity? How is it measured? Explain.
5. What do you understand by quality control? Discuss its importance for small
scale enterprise?
6. What are the objectives of quality control?
REFERENCES
1. P. Saravanavel and S. Sumathi, Production and Material Management,
Margham Publication, Chennai- 2002.
2. R. Senapthi, Production and Materials Management, AR publication, Chennai-
2002.
3. S. N. Chary, “Theory and Problems in Production and Operations Management”,
Tata Mc. Grawhil Publishing Company Ltd, New Delhi – 1995.
4. K. Sridhara Batt, Production and Material Management, Himalaya Publishing
House, New Delhi, 2007.
5. K.R.Govindan, Plant Layout and Material Handling, Anuradha Agency
Publications, Kumbakonam, 2000.

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LESSON – 8

INVENTORY CONTROL
Structure
8.0 Objectives
8.1 Introduction
8.2 Inventory control
8.2.1 Definition
8.2.2 Classification of inventories
8.2.3 Types of inventory
8.2.4 Functions of inventory
8.2.5 ABC analysis
8.2.6 XYZ analysis
8.2.7 VED analysis
8.2.8 FSN analysis
8.2.9 HML analysis
8.2.10 SDE analysis
8.2.11 SOS analysis
8.2.12 GOLF analysis
8.0 OBJECTIVES
After study this lesson you will be able to:
 Define ‗inventory‘, what are its classifications?
 Enumerative the different types of inventory
 What are the functionsof inventory
 Explain ABC analysis of inventory control
 Write briefly about the various methods of analyzing inventory
8.1 INTRODUCTION
Inventory analysis is one of the most popular topics in production and
Materials Management. One reason is that almost all types of business
organizations have inventory. For many firms inventory is the largest current asset.
Inventory is usually thought in terms of stock of materials or idle goods that are
held by an organization for use some time in the future.
8.2 INVENTORY CONTROL
8.2.1 DEFINITION
Inventory management defines as ―stock of item kept on hand by an
organization to be used to meet customer demand‖.
8.2.2 CLASSIFICATION OF INVENTORIES
Inventories are usually classified as:
a) Raw materials,(b) Bought-out components or sub-assembles (c) Semi-
finished goods or work-in-progress or work-in-process,(d) Consumable
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stores,(e) Maintenance spare parts,(f) Finished goods stored or in transit to

warehouse or customers.
8.2.3 TYPES OF INVENTORY
a. Based on nature of materials
1. Production Inventories: Raw materials, parts and component which become
part of firm‘s finished product in the production process.
2. MRO inventories: Maintenance, repair and operation supplies which are
consumed in the production process, but which do not become part of the
finished product e.g., lubricants, grease cotton waste, spare parts for machine
repairs.
3. In-process inventories: Also known as ―work-in-process‖ or work-in-progress
or semi finished goods inventories-these are parts or sub assembles found at
various stages in the production process.
4. Finished goods inventories: Completed products kept in stores ready for
shipment.
b. Classified by how it is created
1. Cycle inventory: The position of total inventory which varies directly with lost
size (i.e., quantity ordered) For example, if Q is the order quantity or the lost
size and the supply is received exactly when the stock in nil, then the
minimum inventory is Q and the average cycle inventory is half of quantity
ordered.
2. Safety stock inventory: Safety stock inventories are held to avoid stock out
conditions which cause production stoppages and to project against
uncertainties in demand, lead time, and supply and consumption rate.
3. Anticipation inventory: Inventory of materials purchased in bulk quantities in
anticipation of price rise and products having seasonal demand produced in
quantities more than the demand during off-seasons and held in inventory to
meet higher demand rate during seasons of high demand.
4. Pipe-line Inventory: Inventory moving from point to point in the materials flow
system. Materials move from supplier to a plant, from one operation to the
next in the plant and from the plant to the warehouse or distribution centre
or to the customer. Pipe line inventories also include materials that have been
ordered but not received.
5. Fluctuation inventory: Inventory held as reserve stock to meet the unexpected
fluctuating demand over a period which cannot be predicted accurately.
8.2.4 FUNCTIONS OF INVENTORY
1. Smoothing out irregularities in supply: Inventories provide a buffer to
overcome the problem of uncertainties in supplies such as delayed deliveries
and supply of short quantities by vendors as against the promised delivery
schedules and quantities. Also, the customer demand for the goods may
increase suddenly which affects the ability of the manufactures to meet the
customer demand.
2. Buying or producing in lots or batches: When the demand for an item does
not justify its continued production throughout the year, it is produced in
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batches or lots on an intermittent basis. During the time when the item is not
being produced, demands are met from the inventory which is accumulated
by batch production.
3. To meet seasonal or cyclical demand: Companies will produce items at a
constant production rate more than the demand rate in order to meet the
seasonal demand occurring at a later period for which the production capacity
in insufficient.
4. To take advantage of price discount while buying items: A company will often
purchase large amounts of inventory to take advantage of price discounts, as
a hedge against anticipated price increases in the future. In some cases large
quantities are ordered because the cost of an order may be very high and it is
more cost-effective to have higher inventories than to order small quantities
several numbers of times in a year.
5. To maintain continuity to operations in production processes: Many
companies find it necessary to maintain in-process inventories at different
stages in a manufacturing process to provide independence if there are
temporary machine breakdowns or other work stoppages.
Inventory control techniques
Sl. Type of control Criteria Application
No
1 A-B-C Annual consumption To control inventory of raw
analysis(Always value of the item materials and W.I.P inventory.
better control)
2 X-Y-Z analysis Inventory value of To review the actual
items in stores. inventories, their uses etc., at
scheduled intervals of stock-
checking.
3 V.E.D analysis Criticality of the To determine the stocking level
item. of spare parts for machines and
equipments
4 F.S.N analysis Consumption To control obsolescence.
pattern of the item
5 H.M.L analysis Unit price of the To control purchases and to
item develop vendors
6 S.D.E analysis Purchasing problems Lead time analysis and
in regard to purchasing strategies.
availability
7 S.O.S analysis Nature of supplies Procurement and holding
and seasonality strategies for seasonal items
8 G.O.L.F analysis Source of supply of Procurement strategies.
materials
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8.2.5 ABC ANALYSIS

This is also referred to as always better control or pareto analysis this is a
basic inventory control technique which is often the starting point. It can be applied
to almost all aspects of materials management such as purchasing receiving,
inspection, storekeeping and issue of materials from stores, verification of bills,
inventory control, value analysis etc.
Basis for ABC classification
Class of item Percentage of total Percentage of total annual
number of items consumption value
A (vital) 10% 70%
B(Moderate 20% 20%
importance)
C(Trivial Many) 70% 10%
Total 100% 100%
Mechanics of ABC analysis
Step 1. Calculate the annual consumption value (ACV) for each item proposed
to be used for manufacturing a product by multiplying the number of units used by
the unit price of the item
Step 2. Arrange all the items in the order of descending sequences of annual
consumption value.
Step 3. Calculate the cumulative annual consumption value for each item,
item-by-item.
Step 4. Compute the cumulative percentage of annual consumption value for
each item.
Step 5. Locate the item in the list for which the cumulative annual
consumption value is 70% of near 70% of the total annual consumption value.
Categories all the previously listed items up to this item is‘ A‘ category items.
Step 6. Locate the item in the list for which the cumulative annual
consumption is 90% of the total ACV. Categories the items listed after ‗A‘ category
items and up to this item as ‗B‘ category items.
Step 7. Categories the remaining items as ‗C‘ category items
8.2.6 XYZ ANALYSIS
This classification is based on the value of inventory of materials actually held
in stores at a given time. It helps to control average inventory value by focusing
efforts to reduce the inventory of ‗X‘ items which are usually 10% of the number of
items stores, but accounting for 70% of the total inventory value. Similarly ‗Y‘ items
are 20% of the number of items stores and account for 20% of the total inventory
value. The remaining 70% of the items accounting for 10% of the total inventory
value are ‗Z‘ items.
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8.2.7 VED ANALYSIS
‗V‘ stands for vital, ‗E‘ stands for essential and ‗D‘ Stands for desirable. This
classification is usually applied for spare parts to be stocked for maintenance of
machines and equipments based on the criticality of the spare parts. The stocking
policy is based on the criticality of the items. The vital spare parts are those which
can cause stoppage of the plant, if not available. Usually such spare parts are
known as capital or insurance spares.
8.2.8 FSN ANALYSIS
It stands for fast-moving, slow-moving, and non-moving items. The
classification is based on past consumption pattern. Items which are usually are
drawn from stores frequently are classified as fast moving items, items which are
drawn only once or twice a year are classified as slow moving and items not at all
drawn for the past two years are classified as non-moving items. FSN analysis is
useful to control obsolescence of raw materials, components, tools and spare parts.
8.2.9 HML ANALYSIS
This stands for high value, medium value and low value items based on unit
based price of the item. For instance, a firm may decided to categories items having
unit price more than Rs5000 as ‗H‘ items. From Rs.1000 to 5000 as ‗M‘ items and
below Rs.1000 as ‗L‘ items. On this basis materials management may delegate
authority to various levels of purchase officers to authorize and sign purchase
orders.
8.2.10 SDE ANALYSIS
This stands for scarce items, difficult to procure item and easy to procure
items. A scarce item is one which is not easily available in the market and reliable
source may have to be developed. For example, imported items may have to be
stocked because it is difficult to producer and takes a long lead time.
8.2.11 SOS ANALYSIS
‗S‘ stands for seasonal items and ‗OS‘ stands for Off- Seasonal items. It may be
advantageous to buy seasonal items at low prices and keep inventory or buy at high
price during off seasons. Based on the fluctuation in prices and availability,
suitable decision has to be taken regarding how much to purchase and at what
prices.
8.2.12 GOLF ANALYSIS
This stands for Government, poems market, local or foreign source of supply.
For example items, imports are canalized through government agencies such as
State Trading Corporations, Mineral and Meals trading Corporations, Indian Drugs
and Pharmaceuticals etc.
KEY WORDS
 MRO inventories
 Cycle inventory
 VED Analysis
 FSN Analysis
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 HML Analysis
 SDE Analysis
 SOS Analysis
 GOLF Analysis
REVIEW QUESTIONS
1. Define The term ―Inventory‖
2. What are the classifications of inventory?
3. State the different types of inventories.
4. Explain the different techniques of inventory control.
REFERENCES
1. P. Saravanavel and S. Sumathi, Production and Material Management,
Margham Publication, Chennai- 2002.
2. R. Senapthi, Production and Materials Management, AR publication, Chennai-
2002.
3. S.N. Chary, “Theory and Problems in Production and Operations Management”,
Tata Mc. Grawhil Publishing Company Ltd, New Delhi – 1995.
4. K. Sridhara Batt, Production and Material Management, Himalaya Publishing
House, New Delhi, 2007.
5. K.R. Govindan, Plant Layout and Material Handling, Anuradha Agency
Publications, Kumbakonam, 2000.

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LESSON – 9

HUMAN RESOURCES MANAGEMENT,

RECRUITMENT, SELECTION AND TRAINING
Structure
9.0 Objectives
9.1 Introduction
9.2 Human Resource Management
9.2.1 Definition
9.2.2 Scope of HRM
9.2.3 Objectives of HRM
9.2.4 HRM functions
9.3 Recruitment
9.3.1 Meaning
9.3.2 Sources of recruitment
9.3.3. Internal sources
9.3.4 External sources
9.4 Selection
9.4.1 Meaning
9.4.2 Selection procedure
9.5 Training
9.5.1 Meaning
9.5.2 Importance of training
9.5.3 Benefits of training to employees
9.5.4 Principles or concepts of training
9.5.5 Training methods
9.0 OBJECTIVES
After reading through this lesson you will be able to:
 Explain the concept the Human Resource Management
 Write about the scope and objectives of HRM.
 State the functions of HRM
 Explain the sources of recruitment
 Write about the steps in selection procedure.
 Discuss different training methods.
9.1 INTRODUCTION
Simply put, Human Resource Management (HRM) is management functions
that helps manager‘s recruit, select, train and develop members for an organization.
Obviously, HRM is concerned with the people‘s dimension in organizations.
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9.2 HUMAN RESOURCE MANAGEMENT
9.2.1 DEFINITION
We quote three definitions on HRM. But before quoting the definitions, it is
useful to point out the essentials which must find their place in any definition. The
core points are:
1. Organizations are not mere bricks, mortar, machineries or inventories. They
are people. It is the people who staff and manage organizations.
2. HRM involves the application of management functions and principles. The
functions and principles are applied to acquisitioning, developing,
maintaining, and remunerating employees in organizations.
3. Decisions relating to employees must be integrated. Decisions on different
aspects of employees must be consistent with other human resource (HR)
decisions.
4. Decisions made must influence the effectiveness of an organization must
result in betterment of services to customers in the form of high-quality
products supplied at reasonable costs.
5. HRM functions are not confined to business establishments only. They are
applicable to non-business organizations, too, such as education, health care,
recreation, and the like.
The following three definitions collectively cover all the five core points:
1. ..a series of integrated decisions that form the employment relationship; their
quality contributes to the ability of the organizations and the employees to
achieve their objectives.
2. …is concerned with the people dimension in management. Since every
organization is made up of people, acquiring their services, developing their
skills, motivating them to higher levels of performance and ensuring that they
continue to maintain their commitment to the organization are essential to
achieving organizational objectives. This is true, regardless of the type of
organization government, business, education, health, recreation, or social
action.
3. ….management is the planning, organizing, directing and controlling of the
procurement, development, compensation, integration, maintenance and
separation of human resources to the end that individual, organizational, and
social objectives are accomplished.
Thus, HRM refers to a set of programmes, functions and activities designed
and carried out in order to maximize both employee as well as organizational
effectiveness.
9.2.2 SCOPE OF HRM
The scope of HRM is indeed vast. All major activities in the working life of a
worker-from the time of his or her entry into an organization until he or she leaves-
come under the purview of HRM. Specifically, the activities included are-HR
planning, job analysis and design, recruitment and selection, orientation and
placement, training and development, performance appraisal and job evaluation,
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employee and executive remuneration, motivation and communication, welfare,

safety and health, industrial relations (IR) and the like. For the sake of convenience,
we can categories all these functions into seven sections – (i) introduction to HRM,
(ii) employee hiring, (iii) employee and executive remuneration, (iv) employee
motivation, (v) employee maintenance, (vi) IR, and (vii) prospects of HRM.
9.2.3 OBJECTIVES OF HRM
The primary objective of HRM is to ensure the availability of a competent and
willing workforce to an organization. Beyond this, there are other objectives, too.
Specifically, HRM objectives are four fold-societal, organizational, functional and
personal.

Personal Objectives

Functional Objectives

Organisational Objectives

Societal Objectives

i) Societal Objectives: To be ethically and socially responsible to the needs and

challenges of the society while minimizing the negative impact of such demands
upon the organization to use their resources for the society‘s benefit in ethical ways
may lead to restrictions. For example, the society may limit HR decisions through
laws that enforce reservation in hiring and laws that address discrimination, safety
or other such areas of societal concern.
ii) Organizational Objectives: To recognize the role of HRM in bringing about
organizational effectiveness. HRM is not an end in itself. It is only a means to assist
the organization with its primary objectives. Simply stated, the department exists to
serve the rest of the orgnaisation.
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iii) Functional Objectives: To maintain the department‘s contribution at a level

appropriate to the organisation‘s needs. Resources are wasted when HRM is either
more or less sophisticated to suit the organisation‘s needs. Resources are wasted
when HRM is either more or less sophisticated to suit the organisation‘s demands.
The department‘s level of service must be tailored to fit the organization it serves.
iv) Personal Objectives: To assist employees in achieving their personal goals
enhance the individual‘s contribution to the organization. Personal objectives of
employees must be met if workers are to be maintained, retained and motivated.
Otherwise, employee performance and satisfaction may decline and employees may
leave the organization.
9.2.4 HRM FUNCTIONS
In order to realize the objectives stated above, HRM must perform certain
functions. These functions have been stated while outlining the scope of HRM.
Generally, it may be stated that there is a correlation between the objectives and
the functions. In other words, some functions help realize specific objectives. For
example, the organizational objective is sought to be met by discharging such
functions as HR planning, recruitment and selection, training and development,
and performance appraisal. Similarly, the personal objective is sought to be realized
through such functions as remuneration, assessment, and the like. Table 1.2.
Contains the full list of objectives and functions.
Who will perform these activities in a typical organization? What is his or her
place in the organizational structure? The following section seeks to answer these
questions
9.3 RECRUITMENT
9.3.1 MEANING
Recruitment is the process of identifying the sources of potential employees
and encouraging them to apply for jobs in the organization. According to Dalton E.
McFarland, ―The term recruitment applies to the process of attracting potential
employees to the company.‖ The main purpose of recruitment is to create a pool of
candidates from which personnel with required skills can be selected. Every
organization has to recruit personnel through the amount of recruitment may differ
from organization to organization depending upon the size of the organization,
nature of job and the recruitment policy, etc.
9.3.2 SOURCES OF RECRUITMENT
The sources of recruitment can be broadly classified into two categories:
internal and external. Internal sources refer to the present working force of a
company. Selecting individuals from amongst the existing employees of the
company may fill vacancies other than at the lowest level. Recruitment sources are
two types. They are internal and external sources.
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9.3.3 INTERNAL SOURCES
 Present permanent employees
 Present temporary/casual employees
 Retired employees
 Dependents of deceased, disabled, retired and present employees.
Merits of internal sources
 Internal recruitment can be used as a technique of motivation.
 Morale of the employees can be improved
 Employees‘ economic needs for promotion, higher income can be satisfied.
 Trade unions can be satisfied.
 Employees become loyal to the enterprise
 Industrial peace is ensured.
 People recruited from within the organization do not need induction training.
 A better employee – employer relationship is established.
Demerits of Internal Sources
 It may encourage favouritism and nepotism.
 This method limits the choice of selection to the few candidates available
within the enterprise.
 It may lead to inbreeding, resulting in promotion of people who have
developed a respect for the tradition and who have no new ideas of their own.
It is generally the new blood which brings in new ideas.
9.3.4 EXTERNAL SOURCES
 Re employing former employees
 Friends and relatives of present employees
 Applicants at the gate
 College and technical institutions
 Employment exchanges
 Advertising agency
 Labour union
1. Re-employing former employees
Former employees who have been laid-off or have left for personal reasons may
be re-employed. These people may require less initial training than that needed by
total strangers to the enterprise.
2. Friends and relatives of present employees
Some industries with a record of good personnel relations encourage their
employees to recommend their friends and relatives for appointment in the concern
where they are employed.
3. Applicants at the gate
The factory representative interviews unemployed persons who call at the
gates of the factories and those who are found suitable for the existing vacancies
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are selected. This is an important source in countries where there is a lot of

unemployment.
4. College and technical institutions
Many big companies remain in touch with the colleges and technical
institutions from where young and talented persons may be recruited. This type of
source is more popular in advanced countries where there is a shortage of highly
qualified technical people.
5. Employment exchanges
Employment exchanges also serve as an important source of recruitment for a
number of business concerns. They are considered a useful source for the
recruitment of clerks, accountants, typists, etc.
6. Advertising the vacancy
One more source that is tapped by the companies is advertising the vacancy in
leading papers. This source may be used in case the company requires the services
of persons possessing certain special skills or if there is an acute shortage of labour
force.
7. Labour unions
In companies with strong labour unions, persons are sometimes recommended
for appointment by their labour unions. This may also be done in pursuance to an
agreement between the union and the management.
9.4 SELECTION
9.3.1 MEANING
Selection is the process of carefully screening the candidates who offer
themselves for appointment so as to choose the most suitable persons for the jobs
that are to be filled. It is the process of matching the qualifications of candidates
with the requirements of jobs to be filled.
9.3.2 SELECTION PROCEDURE
There can be no standard procedure to select different types of employees or to
be adopted by all concerns. In practice, selection procedure differs from job to job
and from organization to organization. In some cases, selection is a very simple and
one-step process. But in many cases, it is quite complex and time-consuming.
The main steps in selection procedure may be as follows
 Preliminary Interview
 Application blank
 Selection tests
 Employment interview
 Group discussion
 Checking of references
 Physical examination, and
 Final approval.
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1) Preliminary interview
The purpose of preliminary interview is to eliminate the totally unsuitable
candidates. It is generally brief and may take place across the counter in the
employment office of the company. It consists of a short exchange of information
regarding the candidate‘s age, qualifications, experience and interests. It helps to
determine whether it is worthwhile for the candidate to fill in an application form. It
saves the expense of processing unsuitable candidates and saves the candidate
from the trouble of passing through the long procedure. Preliminary interview
provides basic information about candidates.
2) Application blank
Candidates who get through the preliminary interview are asked to fill up a
blank application form specially designed to obtain the required information about
the candidate. Different types of application forms are used by different
organizations and for different jobs. As far as possible, the application blank should
be brief and simple. It should elicit only such information, which is relevant for the
job concerned. Generally, an application form contains information regarding (a)
personal history – name, date of birth, sex, marital status, nationality, etc. of the
candidate, (b) educational qualifications, (c) job experience, and (d) references, etc.
3) Selection tests
Tests have become an important device in the process of selection. These are
used to measure such skills and abilities, which are needed for efficient
performance of the job. Several types of tests are used in practice for screening
applicants. Written test may be descriptive or objective in nature.
4) Employment interview
Personal interview is perhaps the most widely used method for selecting
employees. It is a face-to-face talk between the employer and the candidate. It is
more thorough and comprehensive than the preliminary interview. The main
purpose of employment interview are: (a) to check the information obtained in
earlier steps, (b) to seek more information about the candidate, (c) to test the
qualities of the candidate, and (d) to inform the candidate about the job and the
organization. Personal and social traits like aptitude, interest, motivation,
communicating skill, etc. can better be judged in an interview.
5) Checking reference
Candidates are usually required to provide some reference, i.e., names of
persons to whom inquiries as to his educational background, experience, ability,
character, etc., could be addressed. A reference can be a useful source of
information in case lie is sufficiently knowledgeable and truthful. He may be the
previous employer or teacher of the candidate. Before making final selection, the
enterprise may contact the references to seek information on the candidate‘s ability
and integrity. A letter of recommendation may also be asked form the candidate.
Checking the references may help to point out discrepancies regarding the
candidate‘s previous employment, past salary and reasons for leaving the job.
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6) Group discussion
This method is being increasingly used for the selection of executives and civil
servants. Under this method, several candidates are brought together and given a
topic for discussion. Interviewers sit at the back and observe how each candidate
participates in the discussions. This method reveals personality characteristics,
communication skills, ability to argue logically, ability to get on with others, ability
to appreciate others‘ ideas, etc.
7) Physical examination
Physical or medical examination of a candidate is carried out to ascertain his
physical fitness for the job. A proper medical examination will ensure high
standards of health and physical fitness of the employees. It will reduce the rates of
absenteeism, accidents and labour turnover. A thorough medical check of
candidates fulfills three objectives:
First, it helps to ascertain the applicant‘s physical capability to meet the job
requirement.
 Secondly, it helps to prevent communicable diseases entering the
organization.
 Thirdly, it protects the organization against unwarranted claims under the
Workmen‘s Compensation Act.
8) Final approval
After screening the candidates a list of suitable candidates is prepared. The list
is sent to the line manager who requisitioned the personnel. He gives the final
approval. The candidates formally approved by the manager concerned are
appointed by issuing appointment letters and concluding service agreements.
9.5 TRAINING
9.5.1 MEANING
Training is an organized process for increasing the knowledge and skills of the
people for doing a particular job. It is a learning process involving the acquisition of
skills and attitude. The purpose of training is to improve the current performance.
Training is a continuous process because a person never stops training. Training
should be differentiated from education development. Methods of Training
9.5.2 IMPORTANCE OF TRAINING
A well planned and well executed training programme can provide the
following advantages:
1. Higher Productivity. Training helps to improve the level of performance.
Trained employees perform better by using better method of work. Improvements in
manpower productivity in developed nations can be attributed in no small measure
to their educational and industrial training programmes.
2. Better Quality of Work. In formal training, the best methods are standardised
and taught to employees. Uniformity of work methods and procedures helps to
improve the quality of product or service. Trained employees are less likely to make
operational mistakes.
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3. Less Learning Period. A systematic training programme helps to reduce the

time and cost involved in learning. Employees can more quickly reach the
acceptable level of performance. They need not waste their time and efforts in
learning through trial and error.
4. Cost Reduction. Trained employees make more economical use of inaterials
and machinery. Reduction in wastage and spoilage together with increase in
productivity help to minimise cost of operations per unit. Maintenance cost in also
reduced due to fewer machine breakdowns and better handling of equipments.
Plant capacity can be put to the optimum use.
5. Reduced Supervision. Well-trained employees tend to be self-reliant and
motivated. They need less guidance and control. Therefore, supervisory burden is
reduced and the-span of supervisor can be enlarged.
6. Low Accident Rate. Trained personnel adopt the right work methods and
make use of the prescribed safety devices. Therefore, the frequency of accidents is
reduced. Health and safety of employees can be improved.
7. High Morale. Proper training can develop positive attitudes among
employees. Job satisfaction and morale are improved due to a rise in the earnings
and job security of employees. Training reduces employee grievances because
opportunities for internal promotion are available to well trained personnel.
8. Personal Growth. Training enlarges the knowledge and skills of the
participants. Therefore, well trained personnel can grow faster in their career.
Training prevents obsolescence of knowledge and skills. Trained employees are a
more valuable asset to any organisation. Training helps to develop people for
promotion to higher posts and to develop future managers.
9. Organisational Climate. A sound training programme helps to improve the
climate of an organisation. Industrial relations and discipline are improved.
Therefore, decentralisation of authority and participative management can be
introduced. Resistance to change is reduced. Organisations having regular training
programmes can fulfil their future needs for personnel from internal sources.
Organisational stability is enhanced because training helps to reduce employee
turnover and absenteeism. Training is an investment in people and, therefore,
systematic training is a sound business investment. In fact, "no organisation can
choose whether or not to train employees, the only choice left to management is
whether training shall be haphazard, casual and possibly misdirected or whether it
shall be made a carefully planned part of an integrated programme of personnel
administration".
9.5.3 BENEFITS OF TRAINING TO EMPLOYEES
Training is useful to employees in the following ways
(i) Self confidence: Training helps to improve the self confidence of an
employee. It enables him to approach and perform his job with enthusiasm.
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(ii) Higher Earnings: Trained employees can perform better and thereby earn
more.
(iii) Safety: Training helps an employee to use various safety devices. He can
handle the machines safely and becomes less prone to accidents.
(iv) Adaptability: Training enables an employee to adopt to changes in work
procedures and methods.
9.5.4 PRINCIPLES OR CONCEPTS OF TRAINING
Since training is a continuous process and not a one shot affair, and since it
consumes time and entails much expenditure, it is necessary that a training
programme or policy should be prepared with great thought and care, for it should
serve the purposes of the establishment as well as the needs of employees.
Moreover, it must guard against over-training, use of poor instructions, too much
training in skills which are unnecessary for a particular job, initiation of other
company training programmes, misuse of testing techniques, inadequate tools and
equipment, and over reliance on one single technique — e.g., on slides, pictures or
lectures — and not enough on practice.
A successful training programme presumes that sufficient care has been taken
to discover areas in which it is needed most and to create the necessary
environment for its conduct. The selected trainer should be one who clearly
understands his job and has professional expertise, has an aptitude and ability for
teaching, possesses a pleasing personality and a capacity for leadership, is well-
versed in the principles and methods of training, and is able to appreciate the value
of training in relation to an enterprise.
Certain general principles need be considered while organising a training
programme. For example:
1. Trainees in work organisations tend to be most responsive to training
programmes when they feel the need to learn, i.e., the trainee will be more
eager to undergo training if training promises answers to problem or needs he
has as an employee. The individual who perceives training as the solution to
problems will be more willing to enter into a training programme than will the
individual who is satisfied with his present performance abilities."
2. Learning is more effective where there is reinforcement in the form of rewards
and punishments, 18 i.e., individuals do things that give pleasure and avoid
things that give pain. In other words, after an action, if satisfaction is
received, the action will be repeated. If no satisfaction is received, the action
will not be repeated.
3. In the long run, awards tend to be more effective for changing behaviour and
increasing one's learning than punishments.
4. Rewards for the application of learned behaviour are most useful when they
quickly follow the desired performance.
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5. The larger the reward for good performance following the implementation of
learned behaviour, the greater will be the reinforcement of the new
behaviour."
6. Negative reinforcement, through application of penalties and heavy criticism
following inadequate performance, may have a disruptive effect upon the
learning experience of the trainee than positive reinforcement.
7. Training that requests the trainee to make changes in his values, attitudes,
and social beliefs, usually achieves better results if the trainee is encouraged
to participate, discuss and discover new, desirable behaviour norms.
8. The trainee should be provided with 'feedback' on the progress he is making
in utilising the training he has received. As Miller has stated, "If a person with
the required abilities is to improve his performance, he must (i) know what
aspect of his performance is not up to par; (ii) know precisely what corrective
actions he must take to improve his performance.1123 The feedback should
be fast and frequent, especially for the lower level jobs which are often routine
and quickly completed.
9. The development of new behaviour norms and skills is facilitated through
practice and repetition. Skills that are practised often are better learned and
less easily forgotten.
10. The training material should be made as meaningful as possible, because if
the trainee understands the general principles underlying what is being
taught, he will probably understand it better than if he were just asked to
memorize a series of isolated steps.
The National Industries Conference Board, U.S.A., states some other principles
like the following:"
i. The purpose of the training is to help meet company objectives by providing
opportunities for employees at all organisational levels to acquire the requisite
knowledge, skills and attitudes;
ii. The first step in training is to determine needs and objectives;
iii. The objectives and scope of a training plan should be defined before its
development is begun in order to provide a basis for common agreement and
co-operative action;
iv. The techniques and processes of a training programme should be related
directly to the needs and objectives of an organisation;
v. Training is properly the responsibility of any one in the management who
wants to attain a particular objective;
vi. The purpose behind the training of personnel is to assist line management in
the determination of training needs and in the development, administration,
conduct and follow-up of training plans;
vii. To be effective, training must use the tested principles of learning;
viii. Training should be conducted in the actual job environment to the maximum
possible extent.
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9.5.5 TRAINING METHODS
The various methods of training and developing executives may be classified as
follows:
1. On-The-Job Methods
 Experience
 Coaching
 Under study
 Position Rotation
 Special Projects and Task Forces
 Committee assignments
 Multiple Managements
2. Off-The-Job Methods
 Selected readings
 Conferences and seminars
 Special Courses
 Case Study
 Programmed Instruction
 Brain storming
 In-Basket exercise
 Role Playing
 Management games
 Sensitivity training
a) On-the-Job Training
On the job training involves by doing. It is considered to be an effective
approach for making managers more competent. The trainee is motivated to learn
because the training takes place in the real job situation. Little additional space
and equipment is needed for training. But neither the trainee nor the trainers are
free from the daily pressure of job. The trainer has seldom the time and patience to
impart effective training.
i) Experience
This is one of the oldest methods of on-the-job training. It involves learning by
doing. It is the most practical and effective method. But it is wasteful and
inefficient.
ii) Coaching and counseling
Under this method, the senior or superior plays the role of the guide and
instructor of the management trainee. He provides personal instruction and
guidance. He demonstrates the task operations and answers queries. The trainee
observes the superior carefully to learn the necessary skills of the functional area.
He mentally visualizes and rehearses different facts of the job. Coaching is one of
the oldest and the vest methods of developing managers on the job. Training rakes
place in a realistic environment and the trainee is motivated to learn. The senior is
in the best position to monitor and develop managerial qualities in the subordinate.
But the stress and strain of the daily duties do not permit complete concentration
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on training. The senior seldom finds enough time and attention for providing
training. He may not be properly trained and oriented himself.
iii) Under study or Attachment method
When a person is promoted to higher level he is given training in the job to
which he is to be appointed. He is chosen as the successor to the current
incumbent who is going to retire or resign. The trainee is attached with the senior
and is called an understudy assistant too apprentice. He is given adequate
authority to take decision. He is not penalized for the mistakes committed during
the course of learning.
iv) Position Rotation
Position rotation is the process of training executives by rotating them through
a series of related jobs or positions. The trainee learns several different jobs within
a work unit or department. He performs each job for a specified and limited period.
Some companies follow the channel method under which a particular discipline is
earmarked for progression of the junior manager.
v) Special project and task forces
Under this method the trainee is assigned a project closely related to his job.
For example, management trainees in accounts may be asked to develop a cost
control system. The trainee learn by performing the special assignment not only
work procedures but organizational relationships too. Some times a task force is
created consisting of executives from different functional areas. The trainee learns
how to work with others.
vi) Committee assignments
Under this method the trainee managers are appointed as members of a
committee. The committee deliberates upon and discusses problem of enterprises.
By participating in meetings and discussions, every member learns analytical
thinking and decision making skills managers keep abreast of current devilments
either respective areas of specialization. Committees provide an opportunity to
know what is happening in the rest of the organization.
vii) Junior boards or Multiple Management
This technique was developed by Carles Mc Cormick of Baltimore, USA under
it a junior board of executives is constituted. In this board executives discuss real
life problems debate different viewpoints and take decisions, the participants learn
comprehension analysis and decision-making.
b) Off the Job Training
In recent years formal training and management development programmers
have become very popular due to the limitations of on the job training does not
provide adequate expertise environment and facilities. Secondly on the job training
is inadequate for developing improved behavior patterns in managers. Thirdly
highly sophisticated tasks and techniques of management development are now
available. Training has become a specialized job. Fourthly effective training requires
a great deal of participation and group discussion among participants from diverse
disciplines and cultures. This is not always possible in case of on the job training.
Fifthly, a behavior modification of trainees requires a simulated and highly
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maneuvered atmosphere not found in on the job training. In on the job training,
trainees are under the pressure and inhabitations of the daily work routine. Of the
job training provides an uninhibited and relaxed environment. The main drawback
in off the job training is the artificial work environment, which requires adjustment
to the actual work situations after the training.
i) Selected readings
This is a self-improvement programme under which executives acquire
knowledge by reading professional journals and advanced books on management.
Many organizations maintain their own libraries of this purpose. Moreover,
executives may become members of the professional associations to keep abreast of
latest developments in management.
ii) Conferences and seminars
In a conference, participants are required to pool their ideas viewpoints and
suggestions. The participants are normally drawn form different companies and
sectors. Sometimes a conference is divided into small groups. These groups discuss
thoroughly the problems of common interest and report their recommendations to
the conference. Conferences provided a common platform for intensive group
discussion and allow the participants to look at the problem from different angles.
iii) Special courses and lectures
Special courses are designed by the company itself or by management schools.
Companies sponsor their executives to attend these courses. The participants are
given classroom instructions through lectures and audiovisual aids; they are
imparted concepts, principles and techniques in various areas of managements. For
example, General management, finance and accounts, marketing, production,
personnel, and industrial relations.
iv) Case study method
A case is typically a record of an actual business issue, which has been faced
by business executives together with surroundings facts, opinions and prejudices
upon which executive decision had to depend. The case is presented to the trainee
for discussion and analysis. The trainee are accepted to identify and diagnose the
problem involved, generate alternative courses of an action analyze the pros and
cons of each alternative and arrive at recommendation which the managements
should adopt under the given circumstances.
v) Programmed instruction
It is a technique of instruction without the intervention of a human instructor.
It is a learner-centered method wherein the subject matter is presented to the
trainees in small steps and they are asked to make frequent responses. They are
given feedback on their responses the information is broken into meaningful units
and rearranged into a proper machines sequence so as to form learning package
manuals electronic teaching machines and computer systems are useful method for
building knowledge and for retention of that knowledge.
vi) Brain storming
Under this method a problem is put before a group of trainees and they are
encouraged to offer ideas or suggestions. Criticism of any idea is not allowed so as
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to reduce inhibiting forces. Each trainee is allowed maximum possible

participations later on all the ideas are critically examined the purpose is to
maximize innovation and creativity on the part of executives.
vii) In Basket exercise
The in basket contains a number of correspondences, each of which possess a
problem. The problem is of different kinds and resembles real life problems. The
trainees study memos letters, reports, and other documents in the basket. They are
required to solve each problem and to record their decisions within a specified time
period. The participants learn logical thinking; inter relationship between problems
and decision-making skills.
viii) Role Playing
Under this method two or more trainees spontaneously act out or play role in
artificially created situations. They act out the given roles, as they would be playing
in real life situations. They are informed of the roles, as they would be playing in
real life situation. They are informed of the situation and the roles they are expected
to play.
ix) Management Games
Under this method, an actual business situation is presented as a model. The
participants compete with each other to analyze the problem and to take decisions;
their decisions are processed in stages. A performance report is prepared
periodically to measures the success of the participants. This method is useful in
developing the ability of taking decisions with incomplete data and amid conditions
of uncertainty. It improves power of anticipation and prediction of the competitor‘s
action.
x) Sensitivity Training
Under this method, a small group meets in an unstructured situation. There is
no plan or schedule and no agenda or other inhibitions. The numbers of the groups
are allowed to communicate with each other freely so that each can gain an insight
of his behavior as others see. The trainees are encouraged to probe their feelings
and abilities building interspersonal relationships.
xi) Technologies Changes
To computerisation of banking operations. No organisation can take advantage
of latest technology without a well trained personnel. New jobs require new skills.
Thus, both new and old employees require training.
a) Organisational Viability. In order to survive and grow an organisation must
continually adopt itself to the changing environment. With increasing economic
liberalisation and globalisation in India, business firms are experiencing expansion,
growth and diversification. In order to face international competition, the firms
must upgrade their capabilities. Existing employees need refresher training to keep
them abreast of new knowledge. Training programmes foster the initiative and
creativity of employees and help to prevent obsolescence of skills. An organisation
can build up a second line of command through training in order to meet its future
needs for human resources. Trained staff is the most valuable asset of a company.
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b) Internal mobility. Training becomes necessary when an employee moves from

one job to another due to promotion and transfer. Employees chosen for higher
level jobs need to be trained before they are asked to perform the higher
responsibilities. Training is widely used to prepare employees for higher level jobs.
Thus, there is an ever present need for training people so that new and
changed techniques may be taken advantage and improvements in old methods are
effected. Need for training has increased due to growing complexity of jobs,
increasing professionalisation of management, growing uncertainities in the
environment, global competition, growing aspirations, vast untaped human
potential, ever-increasing gap between plans and results and suboptimal
performance levels.
SUMMARY
The definition and meaning of Human Resource Management, importance,
scope and objective of HRM are explained in the initial pages. Meaning of
recruitment and sources of recruitment are discussed in this section. The selection
procedure and important steps in selection are explain in this part.
KEYWORDS
 Recruitment
 Selection
 Tests
 Group discussion
 Physical examination
REVIEW QUESTIONS
 Explain the concept Human Resource Management
 What are the objectives of HRM
 Explain the scope and functions of HRM
 What are the important sources of recruitment
 Explain the step involved in the selection process
 What are the various method of training.
REFERENCES
 K.Aswathappa, Human Resource and Personnel Management, Tutor MC
Grawhill publishing Co Ltd, New Delhi, 2001.
 C.B.Gupta, Human Resource Management, S.Chand & Sons, New Delhi,
2005.
 C.B.Memoria and S.V.Gankar, Personal Management, Himalaya Publishing
House, 2002.
 C.B.Memoria & Memoria, Personal Management, Sultan Chand & Sons, New
Delhi, 2007.
 S.S.Khanka, Human Resource Management, S.Chand & Company Ltd, New
Delhi, 2003.
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LESSON – 10

WAGE AND SALARY ADMINISTRATION

Structure
10.0 Objectives
10.1 Introduction
10.2 Wage and salary administration
10.2.1 Employee compensation may be classified into two categories:
10.2.2 Objectives of wage and salary administration
10.2.3 Principles of wage and salary administration
10.2.4 Essentials of a sound wage and salary structure
10.2.5 Factors affecting wages
10.3 Methods of wage payment
10.3.1 Methods of wage payment
10.0 OBJECTIVES
After going this lesson you will be able to:
 Explain the objectives of wages and salary administration
 State the principles of wage and salary administration
 List the essentials of a sound wage and salary structure.
 Discuss the factors affecting wages.
 Explain the methods of wage payments.
10.1 INTRODUCTION
Employee compensation is a vital part of human resource management.
Wages, salaries and other forms of employee compensation constitute a very large
component of operating costs. "One of the biggest factors affecting industrial
relations is the salary or wage-the compensation an employee receives for a fair
day's work". Majority of union management disputes relate to remuneration. No
organisation can expect to attract and retain qualified and motivated employees
unless it pays them fair compensation. Employee compensation, therefore,
influences vitally the growth and profitability of the company.
10.2 WAGE AND SALARY ADMINISTRATION
For employees, pay is more than a means of satisfying their physical needs. It
provides them a sense of recognition and determines their social status.
Remuneration is directly or indirectly one of the mainsprings of motivation in our
society. Wages and salaries have significant influence our distribution of income,
consumption, savings, employment and prices. This is all the more significant in an
under-developed country like India suffering from problems of concentration of
income, inflation and unemployment. Thus, employee compensation is a very
significant issue from the view-point of employers, employees and the nation as a
whole.
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10.2.1 EMPLOYEE COMPENSATION MAY BE CLASSIFIED INTO TWO CATEGORIES:
(i) Base or primary compensation, and
(ii) Supplementary compensation
Base or primary compensation refers to basic pay in the form of wages and
salaries. It is a fixed and non-incentive payment on the basis of time expended on
the job. Supplementary compensation consists of incentive and variable payments,
based on either individual output or output of the group as a whole. In this chapter
we are concerned with base compensation. Supplementary compensation is
explained in the next chapter.
Administration of employee compensation is called compensation management
or wage and salary administration. It involves formulation and implementation of
policies and programmes relating to wages, salaries,-s and other forms of employee
compensation. It includes job evaluation, wage/salary survey, development and
maintenance of wage structure rules for administration of wages, profit sharing and
other incentives and control of payroll c costs. The basic purpose of wage and
salary administration is to establish and maintain an equitable wage and salary
structure and an equitable labour cost structure.
10.2.2 OBJECTIVES OF WAGE AND SALARY ADMINISTRATION
A sound wage and salary administration seeks to achieve the following
objectives:
i. To establish a fair and equitable remuneration: There should, internal and
external equity in remuneration paid to employees. Internal equity means
similar pay for similar work. In other words, wage differentials between jobs
should be in proportion of differences in the worth of f jobs. External equity
implies pay for a job should be equal to pay for a job should be equal to pay of
a similar job in other organizations. Payments based on jobs requirements,
employee performance and industry levels minimise favouritism and
inequities in pay.
ii. To attract competent personnel: A sound wage and salary administration helps
to attract qualified and hard, working people by ensuring an adequate
payment for all jobs.
iii. To retain the present employees: By paying at competitive levels, the company
can retain its personnel. It can minimise the incidence of quitting and
increase employee loyalty.
iv. To improve productivity: Sound wage and salary administration it hvIlo4 to
improve the motivation and morale of employees which in turn lead to higher
productivity.
v. To control costs: Through sound wage and salary administration labour and
administrative costs can be kept in line with the ability of the company to pay.
It facilitates administration and control of pay roll. The company can
systematically plan (payroll budgeting) and control labour costs.
vi. To establish job sequences and lines of promotion wherever applicable.
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vii. To improve union management relations: Wages and salaries based on

systematic analysis of jobs and prevailing pay levels are more acceptable to
trade unions. Therefore, sound wage and salary administration simplifies
collective bargaining and negotiations over pay. It reduces grievances arising
out of wage inequities.
viii. To improve public image of the company: Wage and salary programme also
seeks to project the image of a progressive employer and to comply with legal
requirements relating to wages and salaries.
10.2.3 PRINCIPLES OF WAGE AND SALARY ADMINISTRATION
The following guidelines should be followed in the administration of wages and
salaries:
i. Wage policy should be developed keeping in view the interests of the
employer, the employees, the consumers and the community.
ii. Wage policy should be stated clearly in writing to ensure uniform and
consistent application
iii. Wage and salary plans should be consistent with the overall plans of the
company. Compensation planning should be an integral part of financial
planning.
iv. Wage and salary plans should be sufficiently flexible or responsive to changes
in internal and external conditions of the organisation.
v. Management should ensure that employees know and understand the wage
policy of the company. Workers should be associated in formulation and
implementation of wage policy.
vi. All wage and salary decisions should be checked against the standards set in
advance in the wage policy.
vii. Wage and salary plans should simplify and expedite administrative process.
viii. An adequate database and a proper organisational set up should be developed
for compensation determination and administration.
ix. Wage policy and programme should be reviewed and revised periodically in
conformity with changing needs.
10.2.4 ESSENTIALS OF A SOUND WAGE AND SALARY STRUCTURE
The main requirements of a sound structure of base compensation are as
follows:
1. Internal Equity: It implies a proper relationship between wages paid for
different jobs within the company. If, for example, the salary of a clerk is lower than
that of a peon, there is lack of internal equity. Pay differentials should be related
directly to differentials in job requirements. Fair pay differentials between jobs can
be established with the help of job evaluation Job evaluation helps to determine
relative worth of a job. It is useful in eliminating widely varying wages for jobs of
equal difficulty. It also minimises wage differentials on the basis of sex, religion,
caste, etc. Thus, the relationship of wages and salaries paid for different jobs is just
as important for good personnel relations as is the firm's general level of wages".
 144

2. External Competitiveness: Wages and salaries in the organisation Should be

in line with wages and salaries for comparable jobs in other organisations.
Otherwise the organisation may not be able to attract and retain competent
personnel. Data relating to pay levels in other organisations can be collected
through wage and salary survey. A salary survey reveals what other organisations
pay for specific jobs and the basis for payment. Once the going rate prevailing in
the region is known, the company can decide a higher or lower level for its
employees without disturbing internal equity.
3. Built-in Incentive: Wage or salary plan should contain a built in incentive so
as to motivate employees to perform better. Such an incentive can be developed
through performance based payment. A part of the total payment should be linked
to industrial or group performance. A sound performance appraisal system should
be used to measure accurately and objectively the performance of individual
employees.
4. Link with Productivity: Some part of the total pay should be linked to
productivity. Such linkage is necessary because workers expect a share in
productivity gains. This will also help to control labour costs.
5. Maintain Real Wages: At least a part of the increase in the cost of living
should be neutralised so as to protect the real wages of labour. Dearness allowance
is used in India for this purpose.
6. Increments: Compensation policy can be good motivates if pay increases are
linked with merit. But annual increments should partly be linked o seniority or
years of service. The logic for seniority based increments is that is a person
accumulates experience his skills get sharpened and his efficiency ends to increase.
10.2.5 FACTORS AFFECTING WAGES
The main factors influencing wage or salary levels are as follows
(i) Demand for and Supply of Labour: Wage or salary is the price for the services
rendred by a worker. Forces of demand and supply of labour determine the going
wage-rate. When there is no dearth of labour (as in India) wages tend to be low. On
the other hand, executive salaries have increased in India after liberalisation, due
to rise in demand for professionally trained managers.
(ii) Ability to Pay: An organisation's ability to pay its employees is an important
determinant of wage level. Ability to pay depends upon the profit earning capacity of
the enterprise. Multinational corporations pay relatively higher salaries due to their
higher paying capacity.
(iii) Labour Unions: Well-organised trade unions exert pressure for higher
wages and allowances. This pressure is exercised through collective bargaining,
strikes and other methods. Salary levels in commercial banks are relatively high
due to higher bargaining power of bank unions.
(iv) Cost of Living: Due to inflation, the real wages decline affecting the
purchasing power of workers. Therefore, dearness allowance is given according to
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changes in consumer price index. Labour agreements generally have a clause

providing for automatic increase in pay as cost of living rises.
(v) Prevailing Wage Rates: While fixing wages, prevailing wages in the
particular industry/region are taken into account. This is necessary to retain and
attract qualified workers.
(vi) Job Requirements: Basic wages depend largely on the difficulty level and
physical and mental effort required in a particular job. The relative worth of a job
can be estimated through job evaluation.
(vii) Productivity: There is an increasing trend towards linking wage increases
to gains in productivity or performance of workers. In some concerns annual
increment in wages is based on merit. While in other companies pay increases every
year without any relation to the performance of a worker.
(viii) State Regulation: Wage policy and laws of the Governmentexercise a
significant influence on wage levels. Government has enacted laws to protect the
interests of the working class. No organisation can violate laws relating to minimum
wages, payment of bonus, dearness allowance and other allowances, equal pay for
equal work, etc.
The factors given above exert a general influence on wage rates. In addition
some factors influence the individual differences in wages rates. These specific
factors are as follows:
a) Worker's age and potential
b) Educational qualifications
c) Work experience
d) Promotion possibilities
e) Hazards involved in the job.
f) Stability of employment
g) Demand for the product
h) Industry's role in the economy.
All the factors given above account for the wage differentials between in-
dustries, regions and occupations.
10.3 METHODS OF WAGE PAYMENT
Before we discuss the methods of wage payment, let us first know what wages
means. In the widest sense, wages means any economic compensation paid to the
employer under some contract to his workers for the services rendered by them.
Based on the needs of the workers, capacity of the employer to pay, and the general
economic conditions prevailing in a country, the committee on Fair Wages (1948)
and the 15th session of the Indian Labour Confernece (1957) propounded certain
wage concepts such as minimum wage. fair wage, living wage and need based
minimum wage. While the first three types (concepts) of wages were defined by the
Committee on Fair Wages, the last one was defined by the 15th session of the
Indian Labour Conference. These definitions are considered here one by one.
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i) Minimum Wage: A minimum wage is a compensation to be paid by an

employer to his workers irrespective of his ability to pay. The Committee on Fair
Wage 9 has defined minimum wage as "the wage must provide not only for the bare
sustenance of life, but for the preservation of the efficiency of the workers. For this
purpose, minimum wage must provide some measures of education, medical
requirements and amenities".
ii) Living Wage: A living wage is one which should enable the earner to provide
for himself and his family not only the bare essentials of food, clothing and shelter
but a measure of frugal comfort, including education for his children, protection
against ill-health, requirement of essential social needs and a measure of insurance
against the more important misfortunes, including old-age. Thus, a living wage
represents a standard of living. A living wage is fixed considering the general
economic conditions of the country.
iii) Fair Wage: Fair wage, according to the committee on Fair Wage", is the wage
which is above the minimum wage but below the living wage. The lower limit of the
fair wage is obviously the minimum wage; the upper limit is set by the capacity of
the industry to pay. The concept of fair wage is essentially linked with the capacity
of the industry to pay. The fair wage depends on considerations of such factors as:
(i) the productivity of labour, (ii) the prevailing rates of wages in the same or
neighbouring localities, (iii) the level of the national income and its distribution, and
(iv) the place of the industry in the economy of the country.
iv) Need-Based Minimum Wage: The Indian Labour Confernecell in its 15th
session held in July 1957 suggested that minimum wage should be need based and
should ensure the minimum human needs of the industrial worker, irrespective of
any other consideration.
The need-based minimum wage is calculated on the following basis:
i. The standard working class family should be taken to consist of 3
consumption units for the earner; the earnings of women, children and
adolescents should be disregarded.
ii. The minimum food requirements should be calculated on the basis of the net
intake of 2,700 calories, as recommended by Dr. Akroyd, for an average
Indian adult of moderate activity.
iii. The clothing requirements should be estimated at a per capita consumption of
18 yards per annum which would mean an average worker's family of 4, a
total of 72 yards.
iv. In respect of housing, the norms should be the minimum rent charged by the
Government in any area for houses provided under the Subsidised Housing
Scheme for low income groups.
v. Fuel, lighting and other miscellaneous items of expenditure should constitute
20 per cent of the total minimum wage.
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However, the Minimum Wages Act, 1948 did not define minimum wage. While
employers go by the definitioin given by the Committee on Fair Wages, 1948,
expectedly Trade Unions like to consider the need based minimum wage concept.
10.3.1 METHODS OF WAGE PAYMENT
There are two basic methods of wage payment, i.e., payment by time me and
payment by results (PBR). The latter one is also known as the incentive wage
system which is discussed in detail in the next Chapter 16.
i) Payment By Time: This is the age-old and most prevalent method of wage
payment. In this method, the employee is paid on the basis of time worked such as
per day, per week, and per month rather than output. This is the main difference
between this system and the incentive system. The wage rate is predetermined by
negotiation, by reference to local rates, pr by job evaluation. This method is useful
when a worker has to do unstandardized job. This is generally the method adopted
for white collar clerical and managerial jobs.
The advantage of payment by time rate for an employee is that earnings are
predictable and steady. This breeds a sense of security by assuring employee a
fixed packet. The employee also does not need to argue with wage fixer about
his/her remuneration.
However, the disadvantage of time rate is that it does not provide any
motivation of a direct incentive relating the reward to the effort.
ii) Payment By Results (PBR): Under this method, the wage/pay of an employee
is paid on the basis of the number of items an employees produces in the
organisation, rather than considering the job done by the employee at a given time
1. This may be through the following two systems:
1. Straight Piece-Work
2. Differential Piece-Work System
iii) Straight Piece Work: Under this method, wage payment is made to
employees at a uniform rate per unit of production. In other words, in this system,
employee is paid a flat price (in money) for each unit or piece completed, or paid for
time allowed to complete the particular task. This method of wage payment is more
appropriate where production is of repititive character and can easily be divided
into similar units of production.
iv) Differential Piece-Work System: In this method, wage is paid in relation to
output. The rate of wages per unit of production decreases with increase in
production. But, wage rate per hour still increases, of course, not in proportion to
the increased output. This method is applicable where efforts can be related to
production and work is standardised, repetitive, and measurable.
v) Balance Method: This method is a combination of time wage and piece wage
methods. In this method, a workeris paid a fixed wage based on the time rate with a
provision of piece wage method How'? This is just like minimum rent with a
provision of short working recoupment in case of royalty. If a worker produces less
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quantity in a period, he is given wages as per time rate and excess payment over
piece rate is treated as credit. This credit is compensated in the period when
he/she produces more than time rate wages. Thus, he is given time wage whether
he produces more or less than it, i.e., time wage.
SUMMARY
In this lesson, objectives of wage and salary administration, principles,
essentials of a sound wage policy, factors that affect the wages and different
methods of wage payment are discussed in detail.
KEYWORDS
1. Primary compensation
2. Internal equity
3. Built in incentive
4. Increments
REVIEW QUESTIONS
1. What are the objectives of wage and salary administration.
2. Explain the principles of wage and salary administration.
3. What are the essentials of a sound wage and salary structure
4. State the factors influencing wages and salary.
REFERENCES
1. K. Aswathappa, Human Resource and Personnel Management, Tutor McGraw
Hill publishing Co Ltd, New Delhi, 2001.
2. C.B.Gupta, Human Resource Management, S.Chand & Sons, New Delhi, 2005.
3. C.B.Memoria and S.V.Gankar, Personal Management, Himalaya Publishing
House, 2002.
4. C.B.Memoria & Memoria, Personal Management, Sultan Chand & Sons, New
Delhi, 2007.
5. S.S.Khanka, Human Resource Management, S. Chand & Company Ltd, New
Delhi, 2003.

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LESSON – 11

JOB EVALUATION AND PERFORMANCE APPRAISAL

11.0 Objectives
11.1 Introduction
11.2 Job evaluation
11.2.1 Definition of job evaluation
11.2.2 Objective of job evaluation
11.2.3 Principles of job evaluation programme
11.2.4 Methods of job evaluation
11.3 Performance appraisal
11.3.1. Meaning
11.3.2. Criteria for performance appraisal
11.3.3 Objectives of performance appraisal
11.3.4 Benefits of performance appraisal
11.3.5 Methods of performance appraisal
11.0 OBJECTIVES
After reading through this lesson you will able to:
 Explain the concept of job evaluation
 State the principles of job evaluation
 Write the objectives of job evaluation
 Explain the methods of job evaluation
 State the objectives of performance appraisal
 Enumerate the methods of performance appraisal.
 Explain the importance of performance appraisal
11.1 INTRODUCTION
Job evaluation is the output provided by job analysis. As seen earlier, Job
analysis, describes the duties of a job, authority relationships, skills required,
conditions of work, and additional relevant information. Job evaluation on the other
hand, uses the information in job analysis to evaluate each job – valuing its
components and ascertaining relative job worth. It involves, in other words, a
formal and systematic comparison of jobs in order to determine the worth of one job
relative to another, so that a wage or salary hierarchy results. So its is a process by
which jobs in an organization are evaluated.
11.2 JOB EVALUATION
11.2.1 DEFINITION OF JOB EVALUATION
Below are given some important definition of job evaluation:
The I.L.O. defines job evaluation as ―an attempt to determine and compare
demands which the normal performance of a particular job make on normal
workers without taking into account the individual abilities or performance of the
workers concerned.
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The Bureau of Labour Statistics, U.S.A., say that ―job evaluation is the
evaluation or rating of jobs to determine their position in the job hierarchy. The
evaluation may be achieved through the assignment of points or the use of some
other systematic method for essential job requirements, such as skills, experience
and responsibility.
11.2.2 OBJECTIVE OF JOB EVALUATION
 To secure and maintain complete, accurate and impersonal descriptions of
each distinct job or occupation in the entire plant;
 To provide a standard procedure for determining he relative worth of each job
in a plant;
 To determine the rate of pay for each job which is fair and equitable with
relation to other jobs in the plant, community or industry;
 To ensure that like wages are paid to all qualified employees for like work;
 To promote a fair and accurate consideration of all employees for
advancement and transfer;
 To provide a factual basis for the consideration of wage rates for similar jobs
in a community and in an industry; and
 To provide information for ‗work organisaiton, employees‘ selection,
placement, training and numerous other similar problems.
11.2.3 PRINCIPLES OF JOB EVALUATION PROGRAMME
There are certain broad principles, which should be kept in mind before
putting the job evaluation programme into practice. According to Kress, these
principles are;
i. Rate the jobs and note the man. Each element should be rated on the basis of
what the job itself requires.
ii. The elements selected for rating purposes should be easily explainable in
terms and as few in number as will cover the necessary require sites for every
job without any overlapping.
iii. The elements should be clearly defined and properly selected.
iv. Any job rating plan must be sold to foremen and employees. The success ion
selling it will depend on a clear-cut explanation and illustration of the plan.
v. Foremen should participate in the rating of jobs in their own departments.
vi. Maximum co-operation can be obtained from employees when they
themselves have an opportunity to discuss job ratings.
vii. In talking to foremen and employees, any discussion of money value should
be avoided. Only point values and degrees of each element should be
discussed.
viii. Too many occupational wages should not be established. It would be unwise
to adopt an occupational wage for each total of point values.
11.2.4 METHODS OF JOB EVALUATION
Various methods of job evaluation may be grouped as under
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1. Non-quantitative methods
(a) Ranking or Job comparison
(b) Grading or job classification
2. Quantitative methods
(a) Point Rating
(b) Factor Comparison
Under non-quantitative methods, n, job is compared as a whole with other
jobs. In quantitative methods key factors of the job are selected and measured.
i) Ranking Method
In this method, each job as a whole is compared with other jobs. comparison,
all jobs are arranged from the highest to the lowest in order of importance as
judged by duties, responsibilities and demands on the job holder. Three techniques
can be used for ranking jobs. These techniques are as follows:
(a) Job Description: In this technique, a written jobs description is prepared for
every job. The job descriptions are then studied and analysed. The differences
between them in terms of duties, responsibilities, skill requirements, etc. are noted.
Each job is assigned a rank depending upon its relative a1pnificance. Several raters
may independently rank each job. The average of these ratings is calculated to
determine the final rankings. The following table illustrates the procedure.
In this method, the rater is required to keep in mind all the jobs being ranked.
This may not be possible when the number of jobs is large. The rain may overlook
significant differences among jobs. As a result accuracy of ranking may be low.
Paired comparisons can be used to overcome this problem:
(b) Paired Comparisons: In this technique each job is paired with every other
job in the series. The more difficult job in each pair is identified. Rank is then
assigned on the basis of the number of times a job is rated more difficult. For
example, the pairs and ratings in an organisation may be as follows.
(c) Ranking along a Number Line: In this technique, ranks obtained through job
descriptions and paired comparisons are spread along a number line. Each job is
then placed along the line on the basis of its closeness to the highest ranked job.
For example, in the following numberline, A is the highest ranked job, E is the
lowest ranked job. Other jobs are spaced according to their closeness to the highest
ranked job.
Advantages
Ranking method has the following advantages:
i. It is the simplest and the oldest method
ii. It is very economical and less time consuming
iii. It involves little paper work
Disadvantages
This method suffers from the following limitations:
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i. It does not indicate the degree of difference between different jobs. It merely
reveals that one job is more important than others
ii. It involves subjective judgment because a job is not analysed and key factors
are not compared. Therefore, it is less accurate and is not fully reliable
iii. The rater is required to be thoroughly familiar with all the jobs to be rated
Ranking method is appropriate for small organisations in which there are few
and simple jobs. It is also useful for ranking managerial jobs wherein the work
content cannot be measured in quantitative terms. Ranking method can be used as
a first step in the initial stages of job evaluation programme.
ii) Job Classification or Grading Method
In this method, the procedure is as follows:
i. Job classes or grades are established. A job grade is a group of different jobs
of similar difficulty or requiring similar knowledge and skills to perform
ii. Each job grade is defined in the form of a written description
iii. Each job is classified into an appropriate grade depending on how well its
iv. characteristics match the grade definitions. For this purpose job descriptions
are carefully analysed. In this way, a series of job grades is developed and a
different wage rate is fixed for each job grade.
Advantages
(i) This method is easy to understand and simple to operate (ii) It is more
accurate and systematic than the ranking method (iii) It is economical and
therefore suitable for small concerns. (iv) It provides an opportunity to develop a
systematic organisation structure (v) Pay grades can be compared with those of
other concerns. Grouping of jobs into grades simplifies wage administration (vi)
This method is used in Government offices.
Disadvantages
(i) It is very difficult to write accurate and precise descriptions of job grades (ii)
Some jobs may involve tasks which overlap more thins one grade. It is difficult to
classify such jobs in a particular grade (iii) The system is rigid and personal
judgment is involved in deciding job classes mid assigning jobs to specific classes.
iii) Factor Comparison Method
Under this method, a few key jobs are selected and compared in term-, is(
common factors. The procedure involved is as follows:
(i) Select and Define the factors: The factors common to all jobs are selected
and defined clearly. Skill, physical and mental effort, responsibility and working
conditions are the main factors used.
(ii) Select Key, Jobs: Key jobs serve as standards against which other jobs can
be compared. A key job is one having standardized contents, and w accepted pay
rate. Key jobs should be a cross-section of all jobs in the organisation representing
all levels of pay.
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(iii) Rank Key Jobs by Factors: Job descriptions are carefully analysed and the
key jobs are rated in terms of the selected factors.
(iv) Decide rates for key job: A fair and equitable wage rate (hourly lint daily) is
determined for each key job
(v) Apportion the Wage Rate: The wage rate for a job is allocated among the
identified and ranked factors. A specimen rating and allocation scheme given below:
(vi) Evaluate the Remaining Jobs: The remaining jobs are compared with the
key jobs in terms of each factor. Suppose, 'carpenter' job is to be evaluated. After
comparison, it is found to be similar to tool maker in skill (Rs.25), machinist in
physical effort (Rs.7), Welder in mental requirements (Rs.14), Painter in
responsibility (Rs.12), and painter in working conditions (Rs.18). Then, the wage
rate for this job would be Rs. 76 (Rs. 25+7+14+12+18).
Advantages
(i) It is a relatively more analytical and objective method (ii) As few factors are
utilised the chances of overlap are less. (iii) The procedure involved is logical (iv) The
method is flexible as there is no upper limit on the rating of a factor (v) It is more
reliable and valid as each job is compared with all other jobs in terms of key
factors. (vi) Money values are assigned in a fair and objective manner depending on
factor rankings.
Disadvantages
(i) It is difficult to understand and operate (ii) It is a time consuming and
expensive method (iii) The use of present wage rates for key jobs may lead to error
in the beginning. As the contents and value of key jobs change over time, errors
may arise in future.
iv) Point Method
It is the most widely used method of job evaluation. Under it, jobs are divided
into component factors. Points or weights are assigned to each factor depending on
the degree of its importance in a particular job. The total points for a job indicate its
relative worth or value. The procedure involved is as follows:
(i) Determine the job to be evaluated: In a large organisation, there are several
jobs involving different skills, efforts, working conditions, etc. Therefore, a few
benchmark or representative jobs are selected from each job category.
(ii) Select the factors: The selected jobs are anlaysed and factors common to all
these jobs are identified. The factors choosen for evaluation should be measurable,
significant, mutually exclusive and acceptable to both management and workers.
The selected factors may be divided into sub-factors as given below:
(iii) Define the factors: The selected factors and sub-factors are defined clearly
in writing. This is necessary to ensure that different raters interpret a particular
factor in the same way
(iv) Determine the degrees: Different degrees of each factor are decided and
defined clearly. The same number of degrees should be used for each factor so as to
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ensure consistency. For, example, the degrees of 'education' may be defined as

follows:
(v) Determine Relative Values of Job Factors: The relative value of various
factors depends upon their significance to the job. Maximum points for each factor
may be as follows:
The total points for a particular factor should be allocated among its
subfactors. For instance, the total points for 'skill' may be allocated as education
75, experience 125, training 100 and judgment 100.
(vi) Assign Point Values to Degrees: Point values for different degrees of a factor
may be decided on the basis of arithmetic progression as shown in the following
Table.
(vii) Find Point Value of the Job: The various points assigned to different factors
in a job are added up to find out the total points which indicate the relative worth of
the job
(viii) Assign Money Values: Once the worth of a job in terms of total points is
known these are connected to money values keeping in view the prevailing wage
rates. A standard unit of money may be assigned to each point so as to convert
point scores into monetary values. This is illustrated in the following table
Conversion of Job Points in to Rupee Wages
Advantages
(i) Point method is the most comprehensive and accurate method of job
evaluation. Factors are divided into subfactors and different degrees• of a factor are
considered (ii) Assignment of point scores and money values is consistent thereby
minimising bias and human judgment (iii) Systematic wage differentials according
to content of the job can be determined.
Disadvantages
(i) Point method is complicated and an average worker cannot understand it
easily (ii) It is time-consuming and expensive (iii) Errors may occur if assigned point
values are not realistic. It is difficult to determine factor levels and assign point
values (iii) It is difficult to apply this method to managerial jobs wherein the work
content is not measurable in quantitative terms.
11.3 PERFORMANCE APPRAISAL
11.3.1 MEANING
Performance appraisal or merit rating is one of the oldest and most universal
practices of managements. It refers to all the formal procedures used in working
organizations to evaluate the personalities and contributions and potential of group
members.
11.3.2 CRITERIA FOR PERFORMANCE APPRAISAL
There are a number of performance criteria, which may be used to measure
the proficiency of an employee. These criteria may be classified into two main
categories: objective criteria and subjective criteria. Amount of quality of
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production, work sample tests, length of service, amount of training necessary,

absenteeism, accidents etc., are all examples of objective criteria ratings of
employees job proficiency by their superiors, peers and subordinates, extent of
upward communication of ideas, degree of knowledge about corporate goals,
contribution to socio cultural values etc., are examples of subjective criteria. Since
all subjective criteria depend upon human judgment and opinion, they are subject
to certain kinds of errors likely to be found in rating process.
11.3.3 OBJECTIVES OF PERFORMANCE APPRAISAL
The main purposes of performance appraisal are as follows:
i. to provide feedback to employees so that they come to know where they stand
and can improve their job performance.
ii. to provide a valid database for personnel decisions concerning placements,
pay, promotion, transfer, punishment, etc.
iii. to diagnose the strengths and weaknesses of individuals so as to identify
further training needs.
iv. to provide coaching, counselling, career planning and motivation to
subordinates.
v. to develop positive superior-subordinate relations and thereby reduce
grievances.
vi. to facilitate research in personnel management.
vii. to test the effectiveness of recruitment, selection, placement and k induction
programmes
Thus, performance appraisal aims at both judgemental and developmental
efforts. The first two objectives are judgemental whereas the remaining are
developmental. Under developmental efforts employees are helped to identify their
weakness and take steps to overcome them. It is largely self development of
employees. By focussing attention on performance, performance appraisal goes to
the heart of personnel management and reflects management's interest in the
progress of employees.
11.3.4 BENEFITS OF PERFORMANCE APPRAISAL
Performance appraisal is a significant element of the information and control
system in organisation. It can be put to several uses concerning the entire
spectrum of human resource management functions. Some common applications of
performance appraisal are given below:
(i) Performance appraisal provides valuable information for personnel decisions
such as pay increases, promotions, demotions, transfers and terminations.
Management gets an objective basis for discussing salary increases inil promotions
with the staff. Thus, performance appraisal serves as the basis il suitable personnel
policies.
(ii) It helps to judge the effectiveness of recruitment, selection, placement and
orientation systems of the organization
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(iii) It is useful in analysing training and development needs. These needs can
be assessed because performance appraisal reveals people who require further
training to remove their weaknesses. It also identifies individuals with high
potential who can be groomed up for higher positions.
(iv) Performance appraisal can be used to improve performance through
appropriate feedback, working and counselling to employees. It serves as a means
of telling a subordinate how he is doing and suggesting necessary changes in his
knowledge behaviour and attitudes. It serves to stimulate and guide employee's
development.
(v) Performance appraisal facilitates human resource planning, career planning
and succession planning.
(vi) It promotes a positive work environment which contributes to productivity.
When achievements are recognised and rewarded on the basis of objective
performance measures, there is improvement in work environment.
(vii) A competitive spirit is created and employees are motivated to improve
their performance. Systematic appraisal provides management an opportunity to
properly size up the employees. It also enables a manager to understand his
strengths and weaknesses.
(viii) Systematic appraisal of performance helps to develop confidence among
employees. Appraisal records protect management from charges of discrimination
leveled by trade union leaders. Employee grievances can be reduced.
11.3.5 METHODS OF PERFORMANCE APPRAISAL
The various methods of performance appraisal may broadly be classified into
two categories – i) Trait –based appraisal, and ii) Appraisal by results.
i) Trait Based methods of Appraisal
Traditionally, managers have been evaluated against standards of personal
traits and work characteristics. The traits (qualities) generally considered are as
follows:
e) Job knowledge,
f) Ability to get along with people
g) Analytical competence
h) Leader ship
i) Judgment, and
j) Initiative
The main methods of performance appraisal based on the traits of employees
are given below.
1. Ranking method
Under this method an employee is compared with all other employees in the
group and placed in a simple rank order. In this way all individuals are rated from
the best to the worst. This method is very simple and natural. It is the oldest
method. But it suffers from several limitations. First, the method is highly
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subjective. Secondly, it does not evaluate individual traits and only the personality
of the whole man is evaluated. Thirdly, degree of difference in ability between ranks
is not measured. Fourthly, in a large group the rater finds it very difficult to
compare several people simultaneously. This method is useful if the number of
employee is very small.
2. Paired Comparison Method
This is a variation of the ranking method. In this method, the rater compares
each individual in the group with every other individual. The final ranking of each
worker is determined by the number of times he was judged better than the others.
The number of pairs (comparisons) to be made can be determined by the following
formula:
Number of pairs = N (N-1) / 2
Where N stands for the number of person to be rated. This is an improvement
over the ranking method. One limitation of this approach is that the number of
comparisons becomes very large. For example, in a group of 50 workers, there
would be 1,225 comparisons.
3. Graphic Rating Scales
A graphic scale is a chart that presents the list of qualities and the range of
degree for each quality. Numerical values are assigned to each quality on the scale.
The scales used are generally of two types‘ viz., discrete scales and continuous
scales.
a) Discrete scales: In which two or more categories representing discrete
degrees of ability are given. For example, the trait ‗job knowledge‘ may be divided
into five categories, as shown below

Poor Below Average Average Above average Outstanding

b) Continuous scales: Wherein an uninterrupted lines in given and the rater

can tick at any point along its length as shown below:
1,2 3 4,5 6,7 8,9,10
PoorBelowAverageAboveExceptionally
Average Average Good
The basic idea behind this type of scale is to provide the rater with a
continuum representing varying degrees of a particular trait.
Graphic rating scales are widely used for rating employees. These scales
provide information on the size of differences in ratings and help to overcome the
problem of a larger number of ratings. It is easy to construct and administer the
scales. But there is a tendency on the part of the raters to pile up the ratings either
at the middle or at the higher end of the scale. There may be differences in
interpretation among different raters and as a result the ratings by different raters
might not be comparable. Statements describing the actual behavior of people e.g.,
‗unfamiliar with work‘, ‗fairly familiar with work‘ and ‗thoroughly familiar with work‘
convey a better meaning than adjectives like ‗poor‘, ‗below average‘, etc.
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4. Forced Distribution method
Under this method certain categories (grades) of ability are established and
certain percentage of marks is assigned for each grade. The rater is forced to
distribute the ratings fairly among different grades. Example, poor 10% Below
average 20%, Average 40% Above average 20% and Outstanding 10%. The employee
is assigned the grade which best represents his caliber. This method overcomes the
limitation of piling up of rating on one side of the scale. It minimizes the bias of the
rater. But employees are rated for overall performance and not for individual traits.
5. Forced Choice Description
In this method, a number of statements describing the employees are prepared
and the rater is forced to choose among the descriptive statements. The statements
may be both favorable and unfavorable. The rater ticks two statements, one most
characteristic and the other least characteristic of the person being rated. For
example, a forced choice block may be as follows:
i. He is hard working
ii. He is not dependable
iii. He gives clear instructions
iv. He shows favoritisms towards some employees.
6. Checklist Method
A checklist is a list of statements that describe the worker and his behaviour.
Each statement is assigned a weight or value depending upon its importance. The
rater writes ‗yes‘ or ‗on‘ against each statement depending upon whether it is
applicable to the worker being rated or not. An individual‘s rating is determined by
adding together the weights of statements applicable to the individual. A specimen
checklist is given below:
i. He is punctualYes / No
ii. He has thorough knowledge of the jobYes / No
iii. He can easily locate faultsYes / No
iv. He does not discriminate among employeesYes / No
7. Critical Incidents Method
Under this method certain key factors that make the difference between
success and failure are identified. These critical incidents are converted into scales.
The superior then observes and records instances and events of on-the –job
behavior falling under any of the identified factors. In this way a concrete
performance record based on actual happenings is obtained. For example, the
critical incidents in the career of an employee may be as follows:
i. Suggested improvement in work method,
ii. Refused to obey orders
iii. Violated the established rule, and
iv. Averted a serious accident.
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8. Appraisal by Results
Trait –based appraisal is simple and economical. But it is not very reliable
because of the subjectivity and bias on the part of raters. Executives dislike being
evaluated by traits rather than on their accomplishments. Managers feel that
performance is in itself the most reliable indicator of quality and potential. This
feeling has led to the growth of appraisal by results. The method under plays traits
and other characteristics, focusing on performance results. The process of result-
oriented appraisal consists of the following steps:
1. The superior and each of his subordinates jointly establish the subordinate‘s
tasks and responsibilities.
2. The subordinate prepares a plan for a specified period, e.g., six months or one
year.
3. Through mutual consultation, the final target to be achieved by the
subordinate and superior‘s supporting role are fixed.
4. At the end of the specified period, the superior makes an appraisal of the
subordinate on the basis of mutually agreed criteria.
5. Superior discusses the results and his evaluation with the subordinate.
Corrective actions, if necessary, are suggested and mutually agreed upon
targets are fixed for future.
9. 360o Performance Appraisal
The appraiser may be any person who has through knowledge about the job
content, contents to be appraised, standards of contents and who observes the
employee while performing a job. The appraiser should be capable of determining
what is more important and what is relatively less important. He should prepare
reports and make judgments without bias.
Typical appraisers are:
 Supervisors
 Peers
 Subordinates
 Employees themselves
 Users of service and
 Consultants.
Performance appraisal by all these parties is called ―360o Performance
Appraisal.‖ Pond‘s, General Electric, Hindustan Lever Limited, Grasim, Colgate-
Palmolive, Hewlett-Packard, companies adopted 360o performance appraisal.
10. Supervisors
Supervisors include superiors of the employee, other superiors having
knowledge about the work of the employee and department head or manager.
General practice is that immediate superiors appraise the performance which in
turn is reviewed by the departmental head/manager.
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11. Peers
Peer appraisal may be reliable if the work group is stable over a reasonably
long period of time and performs tasks that require interaction. However, little
research has been conducted to determine how peers establish standards for
evaluating others or the overall effect of peer appraisal on the group‘s attitude.
12. Subordinates
The concept of having superiors rated by subordinates is being used in most
organizations today, especially in developed countries. Such a novel method can be
useful in other organizational settings too provided the relationships between
superiors and subordinates are cordial.
13. Self Appraisal
If individuals understand the objectives they are expected to achieve and the
standards by which they are to be evaluated, they are to a great extent in the best
position to appraise their own performance. Also, since employee development
means self development, employees who appraise their own performance may
become highly motivated. Thermax, Escorts, Wipro etc. implement self appraisal.
14. Users of Services/Customers
Employee performance in service organizations relating to behaviours,
promptness, speed in doing the job and accuracy can be better judged by the
customers or users of services.
For example, teacher‘s performance is better judged by students and the
performance of a doctor is judged by the patients.
15. Consultants
Sometimes consultants may be engaged for appraisal when employees or
employers do not trust supervisor appraisal and the management does not trust
self-appraisal, peer appraisal or subordinate appraisal. In this situation,
consultants are trained and they observe the employee at work for a sufficiently
long time for the purpose of appraisal.
SUMMARY
In this section the meaning and definition of job evaluation, principles of job
evaluation, objectives of job evaluation and methods of job evaluation are
discussed.
The performance appraisal concept, objectives of performance appraisal,
importance and different methods of performance appraisal are explained in the
alter part of this section.
KEY WORDS
 Job Evaluation
 Job Rating
 Paired Comparison
 Factor Comparison
 Point method
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 Ranking method
 Graphic rating scale
 Forced distribution method
 Forced choice description
 Checklist method
 Critical incident method
 Appraisal by Results
REVIEW QUESTIONS
1. Define the concept of job evaluation?
2. State the4 principles of job evaluation?
3. What are the objectives of job evaluation?
4. Explain the methods of job evaluation?
5. State the objectives of performance appraisal?
6. Enumerate the different methods of performance appraisal?
7. Explain the criteria and give the importance of performance appraisal?
REFERENCES
1. K. Aswathappa, Human Resource and Personnel Management, Tutor MC
Grawhill publishing Co Ltd, New Delhi, 2001.
2. C.B.Gupta, Human Resource Management, S.Chand & Sons, New Delhi, 2005.
3. C.B.Memoria and S.V.Gankar, Personal Management, Himalaya Publishing
House, 2002.
4. C.B.Memoria & Memoria, Personal Management, Sultan Chand & Sons, New
Delhi, 2007.
5. S.S.Khanka, Human Resource Management, S.Chand & Company Ltd, New
Delhi, 2003.

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LESSON – 12

LABOUR ATTRITION AND INDUSTRIAL RELATIONS

Structure
12.0 Objectives
12.1 Introduction
12.2 Labour attrition
12.2.1 Brief history of attrition
12.2.2 What is attrition?
12.2.3 Causes of attrition
12.2.4 Combating attrition
12.2.5 The cause
12.2.6 Diagnosing the cause
12.2.7 The effect
12.2.8 Attrition and opportunity
12.2.9 Attrition and age factor
12.2.10 Attrition and ethics issue
12.2.11 As advantage lever
12.2.12 Influences on the personal front
12.2.13 Conclusion
12.3 Industrial relations
12.3.1 Introduction
12. 3.2 Definition
12. 3.3 Objectives of industrial relations
12. 3.4 Aspects of industrial relations
12. 3.5 Industrial relations strategy
12. 3.6 The external factors affecting industrial relations strategy
12. 3.7 Scope of industrial relations work
12.3.8 Functional requirements of a successful industrial
relations programme
12.0 OBJECTIVES
After studying this lesson you will be able to:
 Write a brief history of attrition.
 State the causes for employee attrition
 Explain the consequence of labour attrition
 Define the concept industrial relations.
 List out the objectives of industrial relations.
 Explain the industrial relations strategy.
 State the factory affecting industrial relations.
 Explain the requirements of a successful industrial relation.
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12.1 INTRODUCTION
In today's fiercely competitive business landscape, success hinges much on
the retention of employees. In a knowledge-driven economy, it is the people who -
any emerging as key competitive differentiators and retaining the talent has become
a matter of paramount importance. But swelling attrition levels across the
businesses are strait-jacketing the distraught HR practitioner's ability to come out
with good retention strategies. Willy-nilly, attrition Is here to stay and Is not a
fringe concern for the companies any more. The trick lies in having sound human
resource practices In pace that can effectively comoat the scourge of attrition. The
article focuses on the causes of attrition and the strategies to be put in place to
manage the ballooning attrition rates.
A human resource manager conjures up the scene in his mind. A highly
competent employee walks into his room and wants to have a word with the
employee's behavior is uncharacteristically cagey, restive, sheepish and tentative.
When the employee slams the glass-rimmed door behind him, the HR manager
knows intuitively what is going to hit him.
A highly valued, productive and coveted employee is about to resign. A smack
in the HR manager's face, one may wonder. Cut back to the reality. The possibility
of the prized talent walking out the door is something HR managers are coming to
terms with, albeit grudgingly. Employee attrition is increasingly becoming a
ubiquitous phenomenon and its reverberations are felt across the companies in the
broad swathe of industries. In today's knowledge-driven business sweepstakes,
people are emerging as tile key competitive differentiators. A highly-talented, skilled
and knowledgeable employee pool will help the company leapfrog the competitor;
therefore, managing this talented employee's base is of paramount importance. In
taxing times such as today, unswerving commitment and indefatigable energy levels
of employees are vital, but more often than not, they are very fragile than one can
envisage. Today, opportunities abound for people with relevant skill sets even "is
there is enough talent pool for the companies to pick from, but the unacceptably
high levels of attrition is bleeding the organizations dry.
12.2 LABOUR ATTRITION
12.2.1 BRIEF HISTORY OF ATTRITION
The unspoken, unwritten lakshman rekha between employer and employee got
irretrievably broken. Corporate culture was on the cusp of major transformation.
Companies in their bid to restructure the operations and reduce the bloating
workforce, took to slash and burn business practices with diabolic vengeance.
Employees got the deafening message that "no one is indispensable" and "doing a
good job is not a protection enough". Employee retention was the last thing, oil the
radar screen of the companies. If an employee were o leave, finding a replacement
was quite easy as the labor pool was bountiful. Companies, in their eagerness to
attack cost vigorously, pared down the budgetary allocations made for employee
training, development and benefit. Somewhere along the way, a tectonic shift
happened in the minds of employees. Suddenly, nee idioms like "taking control of
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my own career", "managing my own professional life" and "boo-to my- boss! I can
see beyond-ply-career found greater resonance among the employees. By 2000, the
basic covenant governing employer and employee got turned oil Its head. Employees
emerged as free agents" and "corporate vagabonds" focused more on boosting their
own employability and the attendant gain than becoming sensitive, to employee
concern and triumphs. Around the same time, India's IT and ITES industry scripted
a fantastic story and needless to say, much of its competitive advantage hinged oil
its vast, high quality, cost effective and knowledgeable base of its workers. Clearly,
India emerged as a magna for overseas software client, by virtue of its vast pool of
talented manpower. At one level, the, killed employee is at premium. At another
level, an attrition level is soaring. Ai d how?
12.2.2 WHAT IS ATTRITION?
Attrition' may be defined as gradual reduction in membership or personnal as
through retirement, resignation or death. In other words, attrition can be defined as
the number of employees leaving the organization which includes both voluntary
and involuntary separation. The employee gradually reduces his/her ties with the
company than crib about the underlying factors causing attrition.
It is symptomatic of a much deeper malaise that cuts deeper into the innards
of organizations. Attrition is rife across the corporate landscape in India today.
Attrition rates vary from sector to sector and industry to industry.
12.3.3 CAUSES OF ATTRITION
If the opinion of industry analysts and the exit interviews conducted by
various organizations are anything to go by, attrition happens due to a variety of
reasons. job-hopping due to 'moolah' factor, lack of congenial work environment,
lack of career mobility and crushing organization culture are some of the reasons
for employees to leave an organization. Scratch the surface and many other reasons
may also, tumble down.
1) 'Moolah' Is the Culprit
There may be any number of reasons as to why an employee leaves, but it all
boils down to one major or factor—the money. Companies are wooing the best of
the talent, with mind-boggling
Table How Does Attrition Level stock up in India
S. No. Sector / Industry Attrition %
1 Retail 20-25 %
2 Animation 20-30 %
3 Telecom 30-40 %
4 Knowledge processing 30 %
5 Aviation 46 %
6 Hospitality 25-35 %
7 BPO 40-45 %
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8 Pharmaceutics 35-40%
9 Facial Services 44 %
10 Construction 25 %
Salary levels and attractive designations. Little wonder, the salary levels are
heading northwards. This trend is -note pronounced in Information Technology
sector where the techies leave an organization for a another for - few thousands of
rupees.
2) Lack of Career Mobility and Challenges
Given the choice between money and a challenging job, many employees may
still prefer the latter as it allows them an opportunity to broad base their domain
expertise and also provides an opportunity to with cutting-Edge technology
Employees also compare the training and development program of prospective
organizations with that of their current companies. How committed an organization
is in nurturing the key talent, influences employee's perception to a great extent.
Employees know that honing newer and advanced skills will put them ahead of the
pack in the competitive labor market. Employees seek a job, which offers them
stratospheric levels of responsibility and high growth trajectory. If the organizations
do not deliver on these expectations, employee exodus cannot be contained.
3) Working Environment
An Employee may leave an organization if the 'witness of the system does not
inspire his/her confidence. Organizations which pay scant regards towards
employee safety and care will also have to face the mounting attrition levels.
4) High Levels of Stress and Lack of Work-Life Balance
Companies, in their zeal to squeeze out every little ounce of productivity from
their employees and further increase: profitability, may opt for less number of
employees. In the immediate co-.text, it may produce palpable results. But in the
long-run perspective, stress levels may soar as employees groan under the weight of
excessive workload. Employees' personal life will also go for a to- s, due to the
alarmingly high levels of' work' pressure. Employee burnout and steep fall in
productivity, are the obvious fallout. Sooner than later, employees will be con
trained to rethink their priorities and join an organization that promises a relax, d
pace of work and a breathing space.
5) Lack of Confidence in Supervisors
It may sound cliche', but the fact is that many employees leave an organization
bet use of the immediate superior. If the supervisor lacks competence, empathy and
trust in employees, they will fail to command the respect of the subordinates.
Employees do not trust the leaders who establish a yawning credibility gap between
their action and intent. Employees expect the leaders to have a grandiose, but a
clear and achievable vision, abundance of confidence in their ability to accomplish
the vision, the ability to take this vision to its logical conclusion, build a highly
cohesive, well-knit team to execute the, vision and the capacity to follow it up with
vengeance and perseverance. If the leaders cannot generate such confidence,
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employees will make a beeline for some other organization. As the pithy aphorism
goes "employees leave the leader, but not the job".
6) Lack of Employee-job Fit
It is not uncommon to see employees being treated as interchangeable
components and pushed into whatsoever position that needs to be filled up.
'Employee's innate talent and aptitude are given a short shaft. There is a
widespread notion that the employee's natural flair per se is not as important as
new skills and knowledge acquired oil the job: that with the learning attitude and
traveling employees can do wonders in any job. This may hold water in short-term,
where the employee's work basically entails a nitre execution of the job assigned.
But in the long run it may prove to be a counter-productive move. Employees
demonstrate a good deal of commitment, job satisfaction, self- motivation and
productivity when they are assigned a job that is in time with their natural talents.
It calls for rethink oil the part of the company to just discover what its e0 tire
brood of employees would prefer to do.
7) Lack of Coaching and Feedback
It is a popular fallacy to think that doling out a good feedback and Coaching is
just about having a string of long-winded meetings. The manager and the employee
should create a vibrant culture of more open, candid and long-lasting relationships
anchored in mutual trust and respect. It is quite important for managers not to
simply point out weaknesses in the performance alone. Employees Would definitely
appreciate if the manager would help them identify the corrective measures they
should take to surmount the perceived weaknesses in their performance. It is also
quite natural for employees to become defensive when negative feedback is given.
Here is where the role of manager becomes critical. If the manager can sweeten the
pill by giving negative feedback along with positive one, employees can understand
the whole thing in the fright perspective. On the contrary, dissections only can
cause recrimination and bad blood.
12.2.4 COMBATING ATTRITION
So, what should the companies do to retain their greatest resource—
employees? Companies, saddled as they are with the baggage of high attrition, can
conduct a comprehensive research mid identify what and where the problems are
rearing their ugly head. Companies should develop effective trigger points
indicating when the alarm should go and when to introduce retention measures.
Most demonstrable benefit of low employee attrition is that it translates into a very
few day- to-day -problems, lesser delays, greater flow of work, enhanced service
delivery and a heightened strategic focus. Here are sonic measures companies can
contemplate.
1) Strengthen the Recruitment Process
Employee retention invariably depends upon effective recruitment. When an
organization hires an employee who has the right mix- of, skill set and personality,
he is pretty much likely to stick to his job. It is quite necessary for an organization
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to have clear, accurate and a very transparent recruitment process. It is equally

important to be frank and realistic with potential hire.. Companies, in their
desperate bid to sell themselves to a prospective recruit, should not promise the
moon.
2) Employee's Referral Helps
Existing employees are one of the most valuable sources of providing in man
power. Companies can contemplate introducing employee referral scheme where,
employees are awarded a cash prize to recommend another employee.
3) Make Induction Program a Pleasant Experience
Companies should ensure that an employees first brush with them is quite a
memorable and pleasant experience. The entire exercise of induction into the team,
organization and role should be.lone on the day one so that the employee gets
sense of what is expected of him. A good induction program should make the new
hire feel welcome. Companies can also put in place the buddy system where, sc
seasoned employee helps a new employee to ease into the job. This alone can
enhance the employee's "stickiness" factor with an organization.
4) Career Opportunities
World-class training, development and career management are effective tools
that will help an organization to retain its talent. It makes sense to find out
employees' expectations vis-à-vis the company and ensure that it is delivered.
Companies should provide an opportunity to put the employees' career on high-
growth trajectory mode. Employee should be encouraged to attend meetings
interval and seminars at peg -lap Companies should have a constant dialog with
employees abouttheirprofessional aspic coons. Companies can financially sponsor
and support the employees to pursue higher qualifications without losing their
gainful employment.
5) Working Environment
Working environment and the organization culture play a decisive role in
retaining 'the talent. Ensuring safety in the workplace, a greater degree of fairness
and transparency in performance evaluation exercises, a fair and equitable
compensation -policy and merit-based promotional policies will go a long way in
inspiration confidence in the mind, of employees.
6) Training and Development
Companies can combat attrition with smart training. Companies, desirous or
retaining employees, should keep two-key aspects in mind. Training should be
highly relevant and should sufficiently broad-base the employee's perspective and
experience. raining should be relevant to the job employees are doing. if they
cannot leverage the training to do their job effectively employees feel it is a
monumental waste of time, energy and cost. Training should help employees
acquire new skills in addition to replenishing their old skills.
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7) Eliminate the Poor Managers
A good deal of research ascribes the alarming level of attrition to weak bosses.
Leadership style of the boss has a strong impact on the employees. Employees tend
to look upon a good supervisor as "A wind beneath their fluffy wings". At the same
time, employees blanch at the possibility of dealing with a weak boss, who 'does not
wield any influence in the organization.
Employees may call it a day rather than do business with a leader who doesn't
pack the punch. The way forward is to ease out the weak manager and rope in a
new manager who can script a compelling vision, communicate it convincingly to
people down the line and spearhead initiatives in line with the broader strategy of
the company.
8) Show Deadwood the Door
Employers often hate the presence of underperformers within their work unit.
Invariably, underperformer s shy away from responsibility passing in the burden of
extra work to the other members. The presence of such underperformers is quite
widespread in many companies. Companies treat such underperformers with
kid;loves, leading to huge build-up of resentment and consequently high attrition.
The whole exercise of eliminating the deadwood may be unpleasant. But then there
is no gain without pain.
9) Involvement of Employees in the Decision-making Process
Employees like to be a part of an organization where their voices are heard and
opinions really matter. The greater an employee's involvement in decision-making
process, better is the organization's ability to retain its talent.
10) Employee Satisfaction Surveys: A Way Forward
Companies should conduct employee satisfaction survey at periodical
intervals. intervals. Such survey may throw up the potential flash points-, so much
sq that an organization can galvanize itself into action and take remedial measures
forthwith.
11) Work-Life Balance
Achieving a good balance between work and personal life and responding to
the needs and expectations of an employee play a very crucial role in employee
retention. Companies can reach out to the employees by introducing raft of
initiatives such as work from home, part-time working, flexitiming and
telecommuting. Companies can put in place work structures that can create these
opportunities and create a very balanced professional-personal life for their
employees.
12) Making the Organization Very Transparent
There is no gainsaying the fact that employees hate to work in black-box like
organization where information is at premium or may be doled out on a need-to-
know basic. Employees are more comfortable working in a highly transparent
organization where much of the details regarding its functioning, development and
performance are freely available to the employees.
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13) ESOP – A Best Retention Tool
The new millennium powerful aphrodisiac for the despondent, disillusioned
and distraught HR practioners is the ammunition called Employee Stock Option
Plan (ESOP). The underlying objective of ESOP is to attract, reward and retain the
best of the talents and generate a strong option plan ( ESOP) in the company. In
this age and time, where know ledge is considered as vital to make strides, ESOP is
such a dynamic HR tool `or retaining the best talent.
14) Employment Branding Holds the Key
It a time where companies are outdoing each other to recruit the best of the
talent, employer needs to be more visible in the crowd. employment brand can help
build the perception about an organization as employer of choice. This will help
bring down the attrition rate. An employee always strives hard to join reputed and a
well-known, company. This could be done by building the brand, which results in
attracting and retaining,, the best talent. Employment brand should be rooted in
reality. Any chasm between the brand claims and ground reality could prove to he a
counter-productive move, leading to employee exodus.
12.2.5 THE CAUSE
Employees quit. an organization for several reasons. They may get attracted to
a new job or for better prospect which 'pulls' them-, on the other hand due to
disappointment in their present jobs they are 'pushed' to seek alternative
employment. Sometimes it may be mixture of both pull and push factors.
Individual's personal reason also prompts resignation, as could be the case when
someone relocates with his/her spouse or even scope of better education leads to
an alternative location.
However, rarely people leave jobs in which they are happy,, even when they
have an offer of better pay-package elsewhere sine, most employees prefer stability.
Industry experience advocates that the push factors are significant in most
resignations. The attrition may be caused due to both internal and external factors.
Internal factors include partisan and / or authoritative behavior of 'he immediate
boss, feeling of idle or career stagnation, managements hypocrisy in handling
employee grievances, back-dated policies and procedures, strenuous, job profile,
etc. The external factors include the growing employability due to the advent of
multi-national pavers with the promise of fat way pat-age. An organization hardly
hay any control over the external factors as it can do very little to stop the market
forces and the employee. But if the attrition s taking place due to their influence on
internal factors then the situation is alarming and the firm must resort to some
immediate soul-searching. The identification of internal factors always remains a
daunting task for the management and most of the organizations fail to accomplish
it and consequently pad a heavy price by losing potential employees.
12.2.6 DIAGNOSING THE CAUSE
Organization must sensing device to know which ii is the internal or external
fact I that is causing the attrition. Often the route of the "exit interview" is utilized
but by and large the same has proved to be u reliable, as departing employees opt
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to give socially acceptable reasons rather than genuine on-s. The employee's
interests do not let served by fu Wishing any negative reason of leaving. The need
for references at a later stage always remains a cause of concern and the employee
prefers to remain safe by not giving the real reasons. The employee avoids
completing detailed questionnaires, resulting in incomplete answers. One may opt
for 'anonymity' to improve reliability of*exit interview but in the true sense the same
can hardly:. be practiced. Alternatively, the peers could utilized to know why the
colleagues left and what ca: keep them from leaving. Often, the employees develop
informal relations in their workplace and share personal issues and the
organization must capitalize on these informal lines of communication to get vital
inputs for diagnosing the cause of attrition.
12.2.7 THE EFFECT
The attrition of employee has lasting effect on the firm's bottom line. when an
employee quit,, the need for replacement arises, the organization incurs some
tangible costs. The impact ranges from costs of replacement to culture management
issue with the new recruit. The major categories of its on the account are:
 Cast of administration of the resignation.
 Cost of covering, dining the period in which there is a vacancy
 Cost of administration of the recruitment and selection process.
 Cost of induction training for the new employee.
Most of the above costs consist of indirect costs like cost of management or
administrative staff time but direct cost. may also he considered where
advertisement, Agencies or specialized consultancy services are used in the
recruitment process. If inadequate notice is served by employee who is quality, the
management will not have time to recruit, train and deploy the replacement and a
temporary employee will need to fill in. It is quite obvious that there is drop in
productivity if sufficient notice is not being given by the employee as the loyalty to
the organization issue suffers during the transition phase. Sometimes, there may
be an overlapping period of weeks or months where two people are on the payroll to
do the same job—the departing employee staying on to train the replacement. An
in-depth review of these costs explains why management should be concerned
about minimizing employee attrition. But, when in employee leaves, he does not
alone. He often takes away key talent customers and. business Secrecy with him.
A high rate of attrition implies a disruption in the efficient running of an
organization. When the employee turnover is excessive or when it is confirmed to
the superior performers it may turn out to be a major hurdle for the organizations
effectiveness. The change of jobs in rapid success n also has hidden consequences
as these people often fail to acquire in depth domain knowledge and remain
unexposed to run the business affecting overall productivity.
12.21.8 ATTRITION AND OPPORTUNITY
With the market throwing job opportunities every next day, everyone wants to
grab them. The rate of attrition reflects a definite change in people's attitudes about
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their career choices. The organization with low paying capacity in the competitive
hiring market, especially when the MNCs are head-hunting with thee: hard
currency advantage, can do very little to stop toe flier, The growing economy throws
new challenges to those firms and sudden upsurge of pay package across the board
may upset the financial health of the organization. The differential pay package also
leads to industrial unrest; the least desirable for any firm. in this scenario the best
thing the firm could do is -to wait as some people will move out and some people
will move in from other organizations. The best way to retain talent is to continually
check that the remunerations are competitive and make sure individual employees
feel challenged and appreciated. Today, the demand-supply gap is so large that
companies are busy attracting the best of the lot, not focusing on the career path of
the employee, overlooking the loyalty or stability factor. But once the economy
stabilizes it is the loyal people who will ultimately survive.
12.2.9 ATTRITION AND AGE FACTOR
In the corporate circles the common saying is, "Dead wood stays with, talent
flies away". Till recent times people intended to pass their complete work-life in a
single organization but the days have changed considerably. 'Loyalty' is a word now
treated as a prehistoric one. Even the organizations these days hardly give airy
credit for loyalty. If one spent more than three-four years in the organization,
he/she is regarded as corporate fossil with average skid. The employees in their 20s
are very mobile and have very high ambitions career. They keep changing jobs and
reach the top of the career in a very short period. The following graphical
presentation will help as to note the correlation. between age of the employee and
level of attrition. It is evident that during the early years of employment attrition
level is at its peak and gradually drops down and finally at the fag end of
employment of the employees leave due to VRS or medical reasons. Usually,
employees in the age group of 30-40 bring the same results, sometimes even better
than their younger counterparts by virtue of stability and wish to remain in the c
organization. The employee's position and respect he gets are more important than
money during this phase of one's career. To neutralize attrition factor the entire set
of employees should not belong to one particular age group mix of employees
should be suitably addressed. While the younger ones add vitality by bringing fresh
ideas to the system, the older ones enrich the organization with their experience
and stability.
The organizational life cycle also has its determining effect over the attrition
rate. The new generation organisation with young set of employees has more
attrition than the old generation organization. In the life cycle is the organization
reaches maturity the attrition escalates mostly out f exodus of its matured,,top-level
aspiring talent with better scope. The firm must show sufficient respect and evolve
target-spec career development device to retain these grey cells within its office
walls. The following graphical presentation is explanatory in this regard.
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12.2.10 ATTRITION AND ETHICS ISSUE
Often organizations face the problem of non-compliance of resignation-related
formalities by the quitter and raises ethical issues related to the mentality of
moving out only to gain a better package/ position on the part of ex-employee.
They also propose legal contracts to stop employees from joining -.he
organization of competitors. By and large, it remains a debatable issue that is right
or what is wrong, especially when a good number of employers players resort to
hire-n-fire practice and hardly bother about employee loyalty. It is t1w turn of
employees to retaliate. Ethically, the move from one job to another with the right
reasons is fine but definitely not at the cost of the ex-. The organization better
pronounce its policy to release the employment the lie earliest, provided the
employee is open abort: it and tenders sufficient notice so that the successor could
be groomed before the employee leaves.
12.2.11 AS ADVANTAGE LEVER
All attrition need not be regarded as negative. People leaving voluntarily through
VRS may have been poor or marginal performers but because of the group dynamics,
union affiliation or sympathetic bosses just carry on—a peaceful departure is always
positive to the organization. The attrition, in controlled fashion, is not at all bad rather
it is beneficial to the organization. In fact, a healthy level Of employee turnover keeps
the company younger, cost-effective, technically more adept and managerially more
person-independent. It keeps the company away from growing central tendency and
mediocrity by bringing fresh ideas. With sensitivity and astute business sense, attrition
can be turned into a win-win situation for the organization. The organization must
adopt a strategy to trade off hiker attrition for lower labor
The challenge while addressing and understanding attrition is that it involves
people and is therefore tenuous and ridden with nuances. Therefore, the reason
behind the high turnover rate cannot be attributed to a single factor, but instead to
a combination of workplace environmental influences and choices that people mike.
12.2.12 INFLUENCES ON THE PERSONAL FRONT
 Steep growth is one of the reasons for the high attrition rates, according to
many in the industry.
 High stress levels at the job.
 4- Monotonous nature of the job.
 4- Demand-supply disparity.
 Loss of identity.
 Mismatch with normal cycle, i.e., complete change of lifestyle.
 Workplace/Environment Influences of Vague values and visions.
 4- Lack of positive direction.
 4, Limited or lackluster training.
 4- Wrong hiring policies.
 Mismatched measures and rewards.
 Overwork and burnout.
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A recent study by Hill and Associates, security and risk management

consultants, on the attrition rate in the BPO sector, threw up some interesting
insights. The study was conducted on targeted respondents that included the
young population who are undergraduates, graduates and post-graduates employed
in the outsourcing business and who had changed their job at least once in the
past three years.
Costs predominantly when the replacement costs are lower and the firm is
getting rid of dead wood' It develops the opportunity of replacing an individual with
someone of higher skills, open up increased opportunities for promotions and
increase level of motivation. It also creates an opportunity for introducing "temping
arrangement" for recently created vacancies and thus helps the organization to
optimize its manpower inventory.
12.2.13 CONCLUSION
There is no set level of attrition rate, above which the sane becomes
detrimental to the organization. It is dependent upon the type of labor market is in.
Where it is relatively easy to find and train a new entrant at lower cost, it is possible
to SU rain service levels deposit high.rate of attrition. On the contrary, when skills
are relatively scarce, recruitment is costly or time-consuming; attrition is a cause of
concern for the organization. This predominates when. the firm is losing people to
direct competitors.
The days are gone when people use,! to spend their whole career in a single
organization, moving up the ladder gradually and retiring with a fat pension. It is
impossible to stop employees from leaving the organization with the growing
economy and rising employment opportunity. The management must also take
initiatives so that the attrition may not be excessive and used as value addition in
building competitive advantages for better. economic sustainability of the firm.
Often, while exercising attrition management the monetary effect of the same to the
firm is overlooked. The management must keep a close eye on attrition control
devices so that the cost does not exceed the benefit. After all,
"Great people stay bad jobs with good bosses,
Great people leave good jobs with bad bosses""
12.3 INDUSTRIAL RELAIONS
12.3.1 INTRODUCTION
―Industrial relations‖ pose one of the most delicate and complex problems to
modern industrial society. With growing prosperity and rising wages, workers have
achieved a higher standard of living; they have acquired education, sophistication
and greater mobility. Career patterns have changed, for larger sections of the people
have been constrained to leave their farms to become wage-earners and salary
earners in urban men, women and children have migrated to a few urban areas. In
the circumstances, a clear understanding of the factors which make for this unrest
and which are likely to eliminate it would be a rewarding experience for anyone who
is interested in industrial harmony.
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12.3.2 DEFINITION
i. Industrial relations refer to a dynamic and developing concept which is not
limited to ―the complex of relations between trade unions and management
but also refers to the general web of relations normally obtaining between
employers and employees – a web much more complex than the simple
concept of labour capital conflict‖
ii. ―Industrial relations are an integral aspect of social relations arising out of
employer employee interaction in modern industries, which are regulated by
the state, the legal system, and the workers‘ and employers‘ organizations at
the institutional level; and of the patterns of industrial organization, capital
structure, compensation of the labour force, and a study of market forces-al
at the economic level.
12.3.3 OBJECTIVES OF INDUSTRIAL RELATIONS
The main objectives of industrial relations are as follows:
i. To develop and maintain harmonious relations between management and
labour so essential for higher productivity of labour and industrial progress in
the country.
ii. To safeguard the interests of labour as well as management by securing the
highest level of mutual understanding and goodwill between all sections in
industry.
iii. To establish and maintain industrial democracy based on the participation of
labour in the management and gains of industry, so that the personality of
every individual is fully recognised and developed.
iv. To avoid all forms of industrial conflict so as to ensure industrial peace by
providing better working and living standards to workers.
v. To raise productivity in an era of full employment by reducing the tendency of
higher labour turnover and absenteeism.
vi. To bring about Government control over such industrial units which are
running at loses for protecting employment or where production needs to be
regulated in public interest.
vii. To ensure a healthy and balanced social order through recognition of human
rights in industry and adaptation of complex social relationships to the
advancements in technology.
Thus, the maintenance of good human relationships is the main aim of
industrial relations because in the absence of such relationships the whole edifice
of industry may collapse. According to the National Commission on Labour, "the
goal of labour management relations may be stated as maximum productivity
leading to rapid economic development, adequate understanding among employers,
workers and Government of each other's role in industry, commitment to industry
and to the individual way of life on the part of labour as well as management,
sound unionism, efficient institutionalized mechanisms for handling industrial
disputes and willingness among parties to cooperate as partners in the industrial
system."
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12.3.4 ASPECTS OF INDUSTRIAL RELATIONS
1. Development of healthy labour management relations
a) The existence of strong, well-organized, democratic and responsible trade
unions and associations of employers in an industry.
b) Collective bargaining and a willingness to accept voluntary arbitration.
Collective bargaining pre-supposes an equality of status between two
contending groups which are in conflict with each other, and prepares the
ground for mutual trust and goodwill which will ensure fair discussion,
consultation and negotiation on matters common interest to both industry
and labour.
c) The welfare work undertaken by the government, the unions and employers
creates and maintains good labour management relations and paves the way
for industrial peace.
2. Maintenance of industrial peace
a) Machinery for the prevention and settlement of industrial disputes is
provided in the form of legislative enactments and administrative action.
b) The Government has armed itself with appropriate powers to refer disputes
to an adjudicator when the situation gets out of control and the industry is
faced with economic collapse because of strikes.
c) The government has the power to maintain the stains quo and exercises it
when it discovers that, after a dispute has been referred to an adjudicator.
d) There is provision for bipartite and tripartite forms of the settlement of
disputes which operate on the basis of the code of conduct, the code of
efficiency and welfare and on the basis of model standing orders, grievance
redressal procedure and the grant of voluntary recognition to trade unions
by industrial organizations; and
e) Implementation and evaluation committees are created and maintained for
the specific purposes of ensuring the implementation of agreements,
settlements and awards, and of looking into any violations of statutory
provisions of the various labour laws.
3. Industrial democracy
a) There are joint management councils which endeavor to improve the
working and living conditions of employees, to step up their productivity, to
encourage suggestions from workers.
b) There is a recognition of human rights in an industry-a recognition of the
fact that ―Labour is no longer an article or a commodity of commerce‖ which
can be bought and disposed of at the whims and caprices of an employer.
c) There is increased labour productivity.
d) There is suitable material and social environment, to which workers may
adjust and adapt themselves while they are at work in an organization.
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12.3.5 INDUSTRIAL RELATIONS STRATEGY
It is necessary to have a clear-cut strategy for industrial relations. Two sets of
factors, internal as well as external, influence industrial relations strategy. The
internal factors are:
1. The attitudes of management to employees and unions.
2. The attitudes of employees to management.
3. The attitudes of employees to unions.
4. The inevitability of the differences of opinions between management and
unions.
5. The extent to which management can or wants to exercise absolute authority
to enforce decisions affecting the interest.
6. The present and the future strength of the unions.
7. The extent to which there are dominating unions or the existence of multiple
unions leading to inter-union rivalry.
8. The extent to which effective and agreed producers for discussing and
resolving grievances or handling disputes.
9. The effectiveness of managers and supervisors in dealing with industrial
relations problems and disputes.
10. The prosperity of the company, the degree to which it is expanding, stagnating
or running down and the extent to which technological changes are likely to
affect employment conditions and opportunities.
12. 3.6 THE EXTERNAL FACTORS AFFECTING INDUSTRIAL RELATIONS STRATEGY ARE
1. The militancy of the unions- nationally or locally.
2. The effectiveness of an union and its officials and the extent to which the
officials can and do control the activities of supervisors within the company.
3. The authority of effectiveness of the employers‘ association.
4. The extent to which bargaining is carried out at national or local or plant
level.
5. The effectiveness of any national or local procedure, agreements that may
exist.
6. The employment and pay situational nationally and locally.
7. The legal framework within which industrial relating exist.
12. 3.7 SCOPE OF INDUSTRIAL RELATIONS WORK
1. Administration, including overall organization, supervision and co-ordination
of industrial relations policies and programmes.
2. Liaison with outside groups and personnel departments as well as with
various cadres of the management staff.
3. The drafting of regulations, rules, laws or orders, and their construction and
interpretation.
4. Position classification, including overall direction of job analysis, salary and
wage administration, wage survey and pay schedules.
5. Recruitment and employment of workers and other staff.
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6. Employment testing, including intelligence tests, mechanical aptitude tests

and achievement tests.
7. Placement, including induction and assignment.
8. Training of apprentices, production workers, foremen and executives.
9. Performance reports or merit ratings.
10. Employee counseling on all types of personnel problems-educational,
vocational, health or behavior problems.
11. Medical and health services.
12. Safety services, including first aid training.
13. Group activities, including group health insurance, housing, cafeterial
programmes and social clubs.
14. Suggestion plan and their uses in labour, management and production
committees.
15. Employee relations, especially collective bargaining with representatives, and
setting grievances.
16. Public relations.
17. Research in occupational trends and employee attitudes, and analysis of
labour turnover.
18. Employee records for all purposes.
19. Control of operation surveys fiscal research and analysis.
20. Benefit, retirement and pension programmes.
12. 3.8 FUNCTIONAL REQUIREMENTS OF A SUCCESSFUL INDUSTRIAL RELATIONS
PROGRAMME
a) Top management support: Since industrial relations are a functional staff
service, it must necessarily derive its authority from the line organization.
This is ensured by providing that the industrial relations director should
report to a top line authority to the president, chairman or vice president of
an organization.
b) Sound personnel policies: These constitute the business philosophy of an
organization and guide it in arriving at its human relations decisions.
c) Adequate practices should be developed by professionals: In the field to
assist in the implementation of the policies of an organization. A system of
procedures is essential if intention is to be properly translated into action.
d) Detailed supervisory training: To ensure that organizational policies and
practices are properly implemented and carried into effect by the industrial
relations staff. Job supervisors should be trained thoroughly, so that they
may survey to the employees the significance of those policies and practices.
e) Follow-up of results: A constant review of an industrial relations programme
is essential, so that existing practices may be properly evaluated and a
check may be exercised on certain undesirable tendencies, should they
manifest themselves.
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SUMMARY
In the first part, the concept of labour attrition, causes for employee attrition
and the consequences of labour attrition are explained.
In the second part, the concept of industrial relations, objectives and strategies
of industrial relations are discussed. The factors affecting industrial relations and
requirements for the successful industrial relations are explained.
KEY WORDS
 Attrition
 Career mobility
 Stress
 Work life balance
 Ethics issue
REVIEW QUESTIONS
1. Define labour attrition.
2. What are the causes for employee attrition?
3. Explain the consequences of labour attrition?
4. What steps would you take to reduce the labour attrition rate?
5. Define the concept of industrial relations?
6. List out the objectives of industrial relations?
7. Explain the industrial relations strategy
8. State the factors affecting industrial relations?
9. What are the requirements of a successful industrial relations.
REFERENCES
1. K. Aswathappa, Human Resource and Personnel Management, Tutor MC
Grawhill publishing Co Ltd, New Delhi, 2001.
2. C.B.Gupta, Human Resource Management, S.Chand & Sons, New Delhi, 2005.
3. C.B.Memoria and S.V.Gankar, Personal Management, Himalaya Publishing
House, 2002.
4. C.B.Memoria & Memoria, Personal Management, Sultan Chand & Sons, New
Delhi, 2007.
5. S.S.Khanka, Human Resource Management, S.Chand & Company Ltd, New
Delhi, 2003.

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LESSON – 13

FINANCIAL MANAGEMENT, NATURE AND SCOPE

Structure
13.0 Objectives
13.1 Introduction
13.2 Financial management
13.2.1 Definitions
13.2.2 Objectives of financial management
13.2.3 Scope of finance
13.2.4 Real and financial assets
13.2.4.1 Real assets
13.2.5 Financial assets
13.2.6. Equity-and borrowed funds
13.2.7 Finance functions
13.2.7.1 Investment decision
13.2.7.2 Financing decision
13.2.7.3 Dividend decision
13.2.7.4 Liquidity decision
13.2.7.5 Financial goal
13.2.8 Profit versus wealth
13.2.8.1 Profit maximisation
13.2.8.2 Shareholders‘ wealth maximisation (SWM)
13.2.9 An overview of financial management
13.0 OBJECTIVES
After reading through this lesson you will be able to:
 Classify the different classes of assets.
 Write the importance financial decisions.
 Explain the scope of financial management
13.1 INTRODUCTION
―Financial Management‖ is that managerial activity which is concerned with
the planning and controlling of the firms financial resources.
Financial Management is concerned with the proper planning, organizing,
directing and controlling of financial activities in a business enterprise. Financial
management is concerned with identifying sources of profit and factors which
affects profit. Financial management, therefore, means the entire gamut and
managerial efforts devoted to the management of finance both its sources and uses
– of the enterprise.
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13.3 FINANCIAL MANAGEMENT
13.3.1 DEFINITIONS
1. According to solmon, ―Financial management is concerned with the efficient
use of an important economic resource namely capital funds‖.
2. Phillippatus has given a more elaborate definition of the term financial
management. According to him ―financial management is concerned with the
management decisions that results in the acquisition and financing of long-
term and short-term credits for the firm. As such it deals with the situations
that require section of specific assets as well as the problem of size and
growth of an enterprise. The analysis of these decisions is based on the
expected inflows and outflows and funds and their effects upon managerial
objectives‖.
Thus, financial management is mainly concerned with the proper management
of funds. The finance manager must see that the funds are procured in a manner
that the risk, cost and control considerations are properly balanced in a given
situation and these is optimum utilization of funds.
13.3.2 OBJECTIVES OF FINANCIAL MANAGEMENT
The objectives financial management can be put into two categories:
1. Basic objectives
2. Other objectives
Basic Objectives
Traditionally the basic objectives of financial management have been (i)
maintenance of liquid assets and (ii) maximization of profitability of the firm.
However, these days there is a greater emphasis on (iii) shareholder‘s wealth
maximization rather than on profit maximization. All these aspects are being
discussed below:
(i) Maintenance of Liquid Assets: Financial management aims at maintenance
of adequate liquid assets with the firm to meet its obligations at all times. It may be
noted that investment in liquid assets has to be adequate-neither too low nor too
excessive. The finance manager, as discussed later, has to maintain a balance
between liquidity and profitability. There is an inverse relationship between the two.
The more the assets are liquid, less they are profitable and vice versa.
(ii) Profit Maximisation: A business firm is profit seeking organization. Hence,
profit maximization is an important objectives of financial management. However,
the concept of profit maximization has come under severe criticism, in recent times,
on account of the following reasons:
(a) It is vague. It does not clarify which profit does it mean; whether short-term
or long-term. Profits in the short-term may be quite different from those in the long-
run.
(b) It ignores timing. The concept of profit maximization does not help in
making a choice between projects giving different benefits spread over a period of
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time. The concept ignores the fact that a rupee recovered to-day is much more
valuable than a rupee received tomorrow.
(c) It overlooks quality aspect of future activities. The business is not solely run
with the objective of earning higher possible profits. Some firms place a high value
on the growth of sales. They are willing to accept lower profits to gain stability
provided by a large volume of sales. Other firms use a part of their profits to make
contribution for socially productive purposes. Moreover, profit maximization at the
cost of social or moral obligations is a short-sighted policy even as a pragmatic
approach.
(iii) Maximasation of Wealth. Profit maximization, on account of the reasons
given above, is not considered to be an ideal criterion for making investment and
financial decisions. Professor Ezra Soloman has suggested the adoption of wealth
maximization as the best criterion for the financial decision making. He has
described the concept of wealth maximization as follows:
―The gross present worth of a course of action is equal to the capitalized value
of the flow of future expected benefits, discounted (or capitalised) at the rate which
reflects their certainty or uncertainty. Wealth or net present worth is the difference
between grow present worth and the amount of capital investment required to
achieve the benefits. Any financial action which creates wealth or which has a not
present worth above zero is a desirable one and should be undertaken. Any
financial action which does not meet this test should be rejected. If tow or more
desirable courses of action are mutually exclusive (ie., if only one can be
undertaken), then the decision should be to do that which creates most wealth or
shows the greatest amount of net present worth. In short, the operating objectives
for financial management is to maximize wealth or net present worth‖.
Wealth maximization is, therefore, considered to be the main objective of
financial management. This objective is also consistent with the objective of
maximizing the economic welfare of the shareholders of a company. The value of a
company‘s shares depends largely on its net worth which itself depends on earning
per share (E.P.S.). The finance manager should, therefore, follow a policy which
increases the earning per share in the long run.
Steps for Wealth Maximisation
In order to maximize wealth, a firm should take the following steps:
i. Avoid high levels of risks. The firm should avoid such projects which involve
high profits together with high risks. This is because accepting of such
projects ay be disastrous for the firm in the long run in case any factor goes
wrong.
ii. Pay dividends. Payment of regular dividends increases the firm‘s reputation
and consequently the value of the firm‘s shares. While declaring dividends the
market trends and the expectations of the shareholders must be kept in mind.
iii. Maintain growth in sales. The firm should have a large, stable and diversified
volume of sales. This protects the firm from adverse consequences of
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recessions, changes in customer‘s preferences or fall in demand for the firm‘s

products on account of other reasons. A firm should therefore consistently
seek growth in sales by developing new markets, projects, etc.
iv. Maintain price of firm‟s equity shares. Maximisation of shareholders wealth is
closely connected with maximization of the value of the firm‘s equity shares.
The firm can take a number of steps to maintain the value of its equity shares
at reasonable levels. For example, the management can encourage people to
invest their savings in the firm‘s shares by explaining their actions. They can,
by high-lighting the firm‘s past performance and glorious future, create a new
demand for firm‘s shares which will push up the value of its equity shares.
Similarly adoption of sound investment policies will also considerably help in
improving the image of the firm.
It may, however, be noted that wealth maximization objective cannot be
carried too far. It is subject to certain limitations:
1. Social responsibility: The management cannot ignore its social
responsibility, e.g., protecting the interest of the consumers, paying fair wages to
workers, maintain proper working conditions, providing educational and physical
facilities to their workers and involving themselves in environmental issues like
clean air, water, etc.
Some of the social actions are in the long run in the interests of the
shareholders and may therefore be adopted. However, other e.g., providing clean
environment, may considerably reduce the firms profitability and ultimately the
shareholders wealth.
2. Government constraints. On account of the growing concept of a welfare
state, there are a number of statutory provisions which considerably reduce a firm‘s
freedom to act. Restrictions imposed by the Government regarding establishment,
expansion, closure, etc., of business firm may force the management to act in a
manner which may not result in maximization of shareholders wealth.
In conclusion it can be said that a firm should follow the objective of wealth
maximization to the extent it is viable in the context of its social responsibility and
constraints imposed by Government.
Other objectives. Besides the above basic objectives, the following are the other
objectives of financial management:
i. Ensuring a fair return to shareholders.
ii. Building up reserves for growth and expansion
iii. Ensuring maximum operational efficiency by efficient and effective utilization
of finances.
iv. Ensuring financial discipline in the organisation.
13.3.3 SCOPE OF FINANCE
Three most important activities of a business firm are Finance, Production and
Marketing. A firm secures whatever capital it, needs and employ it (finance activity)
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in activities which generate returns on invested capital (production and marketing

activates).
13.3.4 REAL AND FINANCIAL ASSETS
A firm requires a number of real assets to carry on its business.
13.3.4.1 Real Assets

Tangible Intangible
Eg: Plant, Machinery, Buildings etc., Eg: Patents, Copyrights, Goodwill etc.
13.3.5 FINANCIAL ASSETS
The firm sells financial assets or securities, such as shares and bonds or
debentures, to investors in capital markets to raise necessary funds. It also
includes lease obligations and borrowing from banks, financial institution and
other sources.
Funds applied to assets by the firm are called ―Capital expenditures‖ or
―investment‖. The firm expects to receive returns on its investments and distribute
returns (as dividends) to investors.
13.3.6 EQUITY-AND BORROWED FUNDS
Funds

Equity borrowed
 A firm has to sell shares to acquire equity funds. Shares represent ownership
rights of their holders.
 Buyers of shares are called share holders, and they are the legal owners of
the firm whose shares they hold.
 Share holders invest their money in the shares of a company in the
expectation of a return on their invested capital. The return on the share
holders capital consists of divided and ―Capital Gain‖. Share holders make
capital gains by selling their shares.
Share holders

Ordinary/common Preference
Preference share holders receive dividend at a fixed rate and they have a
priority over common shares holders. The dividend rate for common shareholders is
not fixed, and it can vary from year to year depending on the decisions of the board
of directors. Since common share holders receive dividend (or re-payment of
invested capital, only when the company is wound up) after meeting the obligation
of others. They are generally called “Owners of Residue”.
Dividends paid by a company are not deductible charges for calculating
corporate become taxes.
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Equity funds can also be obtained by a company by retaining a portion of

earning available for shareholders. This method of acquiring funds internally is
called ―earnings return‖ Retained earnings are undistributed returns on equity
capital. It can be considered as a form of receiving new capital. If a company
distributes all earnings to shareholders, then it can reacquire new capital from the
same sources (existing share holders) by issuing new share called ―Rights Issue”:.
Another important source of receiving capital is ―Creditors or leaders‖. They
make money available to the firm in lending basis and retain title to the funds lent.
The return on loans or borrowed funds is called interest. The amount of interest is
allowed to be treated as expense for computing corporate income taxes. Thus
payment of interest on borrowing provides tax shield to the firm.
13.3.7 FINANCE FUNCTIONS
Finance functions or decisions include:
- Investment or long term asset-mix decision.
- Financing or capital-Mix decision
- Dividend or profit allocation decision.
- Liquidity or short term asset – Mix decision.
A firm performs finance functions simultaneously and continuously in the
normal course of the business. While performing the finance functions, the
financial manager should strive to maximize the market value of shares.
13.3.7.1 Investment Decision
Investment decision or capital budgeting involves the decision of allocation of
capital or commitment of funds to long-term assets that would yield benefits in the
future. Two important aspects of the investment decision are:
i. the evaluation of the prospective profitability of new investments, and
ii. the measurement of a cut-off rate against that the prospective return of new
investments could be compared.
Future benefits of investments are difficult to measure and cannot be
predicted with certainty. Because of the uncertain future, investment decisions
involve risk. Investment proposals should, therefore, be evaluated in terms of both
expected return and risk. Besides the decision to commit funds in new investment
proposals, capital budgeting also involves decision of recommitting funds when an
asset becomes less productive or non-profitable.
There is a broad agreement that the correct cut-off rate is the required rate of
return or the opportunity cost of capital. However, there are problems in computing
the opportunity cost of capital in practice from the available data and information.
A decision maker should be aware of these problems.
13.3.7.2 Financing Decision
Financing decision is the second important function to be performed by the
financial manager. Broadly, he or she must decide when, where and how to acquire
funds to meet the firm‘s investment needs. The central issue before him or her is to
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determine the proportion of equity and debt. The mix of debt and equity is known
as the firm‘s ―capital structure”. The financial manager must strive to obtain the
best financing mix or the optimum capital structure for his or her firm. The firm‘s
capital structure is considered to be optimum when the market value of shares is
maximized. The use of debt affects the return and risk of shareholders; it may
increase the return on equity funds but it always increases risk.
A proper balance will have to be struck between return and risk. When the
shareholders‘ return is maximized with minimum risk, the market value per share
will be maximized and the firm‘s capital structure would be considered optimum.
Once the financial manager is able to determine the best combination of debt and
equity, he or she must raise the appropriate amount through the best available
sources. In practice, a firm considers many other factors such as control, flexibility,
loan covenants, legal aspects etc. in deciding its capital structure.
13.3.7.3 Dividend decision
Dividend decision is the third major financial decision. The financial manager
must decide whether the firm should distribute all profits, or retain them, or
distribute a portion and retain the balance. Like the debt policy, the dividend policy
should be determined in terms of its impact on the shareholders‘ value. The
optimum dividend policy is one that maximizes the market value of the firm‘s
shares. Thus, if shared holders are not indifferent to the firm‘s dividend policy, the
financial manager must determine the optimum dividend-payout ratio. The payout
ratio is equal to the percentage of dividends to earnings available to shareholders.
The financial manager should also consider the questions of dividend stability,
bonus shares and cash dividends in practice. Most profitable companies pay cash
dividends regularly. Periodically, additional shares, called bonus shares (or stock
dividend), are also issued to the existing shareholders in addition to the cash
dividend.
13.3.7.4 Liquidity Decision
Current assets management that affects a firm‘s liquidity is yet another
important finance function, in addition to the management of long-term assets.
Current assets should be managed efficiently for safeguarding the firm against the
dangers of illiquidity and insolvency. Investment in current assets affects the firm‘s
profitability, liquidity and risk. A conflict exists between profitability and liquidity
while managing current assets. If the firm does not invest sufficient funds in
current assets, it may become illiquid. But it would lose profitability as idle current
assets would not earn anything. Thus, a proper trade-off must be achieved between
profitability and liquidity. In order to ensure that neither insufficient nor
unnecessary funds are invested in current assets, the financial manager should
develop sound techniques of managing current assets
It would thus be clear that financial decisions directly concern the firm‘s
decision to acquire or dispose off assets and require commitment or recommitment
of funds on a continuous basis. It is in this context that finance functions are said
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to influence production, marketing and other functions of the firm. This, in

consequence, finance functions may affect the size, growth, profitability and risk of
the firm, and ultimately, the value of the firm. To quote Ezra Solomon.
―The function of financial management is to review and control decisions to
commit or recommit funds to new or ongoing uses. Thus, in addition to raising
funds, financial management is directly concerned with production, marketing and
other functions, within an enterprise whenever decisions are made about the
acquisition or distribution of assets.‖
13.3.7.5 Financial Goal
The firm‘s investment and financing decisions are unavoidable and
continuous. In order to make them rationally, the firm must have a goal. It is
generally agreed in theory that the financial goal of the firm should be the
maximization of owners‘ economic welfare. Owners‘ economic welfare could be
maximized by maximizing the shareholders‘ wealth as reflected in the market value
of shares.
13.3.8 Profit Versus Wealth
13.1.8.1 Profit Maximisation
Profit maximization means maximizing the rupee (or any other currency such
as dollar, pound or bath) income of firms. Firms produce goods and services. They
may function in a market economy, or in a government-controlled economy. In a
market economy, prices of goods and services are determined in competitive
markets. Firms in a market economy are expected to produce goods and services
desired by society as efficiently as possible.
Price system is the most important organ of a market economy indicating what
goods and services society wants. Goods and services in great demand command
higher prices. This results in higher profit for firms; more of such goods and
services are produced. Higher profit opportunities attract other firms to produce
such goods and services. Ultimately, with intensifying competition an equilibrium
price is reached at which demand and supply match. In the case of goods and
services which are not required by society, their prices and profits fall. Such goods
and services are dropped out by producers in favour of more profitable
opportunities. Price system directs managerial efforts towards more profitable goods
or services. Prices are determined by the demand and supply conditions as well as
the competitive forces, and they guide the allocation of resources for various
productive activities.
A legitimate question may be raised. Would the price system in a free market
economy serve the interests of the society? The answer has been given by Adam
Smith many years ago. According to him. (The businessman), by directing….
Industry in such a manner as its produce may be of greater value… intends only
his own gain, and he is in this, as in many other cases, led by an invisible hand to
promote an end which was not part of his intention… pursuing his own interest he
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frequently promotes that of society more effectually than he really intends to

promote it.
It is thus generally held by the economists following Smith‘s logic that under
the conditions of free competition, businessmen pursuing their own self-interests
also serve the interest of society. It is also assumed that when individual firms
pursue the interest of maximizing profits, society‘s resources are efficiently utilized.
In the economic theory, the behaviour of a firm is analysed in terms of profit
maximization. While maximizing profit, a firm either produces maximum output for
a given amount of output, or uses minimum input for producing a given output.
Thus, the underlying logic of profit maximization is efficiency. It is assumed to
cause the efficient allocation of resources under the competitive market conditions,
and profit is considered as the most appropriate measure of a firm‘s performance.
i) Objections to Profit Maximisation
The profit maximization objective has, however, been criticized in recent years.
It is argued that profit maximization assumes perfect competition, and in the face of
imperfect modern markets, it cannot be a legitimate objective of the firm. It is also
argued that profit maximization, as a business objective, developed in the early 19th
century when te characteristic features of the business structure were self-
financing, private property and single entrepreneurship. The only aim of the single
owner then was to enhance his or her individual wealth and personal power, which
could easily be satisfied by the profit maximization objective. The modern business
environment is characterized by limited liability and a divorce between management
and ownership. The business firm today is financed by shareholders and lenders
but it is controlled and directed by professional management. The other interested
parties are customers, employees, government and society. In practice, the
objectives of these constituents (or stakeholders) of a firm differ and may conflict
with each other. The manager of the firm has the difficult task of reconciling and
balancing these conflicting objectives. In the new business environment, profit
maximization is regarded as unrealistic, difficult, inappropriate and immoral.
It is also feared that profit maximization behaviour in a market economy may
tend to produce goods and services that are wasteful and unnecessary from the
society‘s point of view. Also, it might lead to inequality of income and wealth. It is
for this reason that governments tend to intervene in business. The price system
and therefore, the profit maximization principle may not work due to imperfections
in practice. Oligopolies and monopolies are quite common phenomena of modern
economies. Firms producing same goods and services differ substantially in terms
of technology, costs and capital. In view of such conditions, it is difficult to have a
truly competitive price system, and thus, it is doubtful if the profit-maximising
behaviour will lead to the optimum social welfare.
However, it is not clear that abandoning profit maximization as a decision
criterion would solve the problem. Rather, government intervention may be sought
to correct market imperfections and to promote competition among business firms.
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A market economy, characterized by a high degree of competition, would certainly

ensure efficient production of goods and services desired by society.
Apart from the aforesaid objections, profit maximization fails to serve as an
operational criterion for maximizing the owner‘s economic welfare. It fails to provide
an operationally feasible measure for ranking alternative courses of action in terms
of their economic efficiency. It suffers from the following limitations.
 It is vague
 It ignores the timing of returns
 It ignores risk.
ii) Definition of Profit
The precise meaning of the profit maximisaiton objective is unclear. The
definition of the term profit is ambiguous. Does it mean short-or-long-term profit?
Does it refer to profit before or after tax? Total profits or profit per share? Does it
mean total operating profit or profit accruing to shareholders?
iii)Time value of Money
The profit maximization objective does not make a distinction between returns
received in different time periods. It gives not consideration to the time value of
money, and it values benefits received today and benefits received after a period as
the same.
iv) Uncertainty of returns
The streams of benefits may possess different degree of certainty. Two firms
may have same total expected earnings, but if the earnings of one firm fluctuate
considerably as compared to the other, it will be more risky. Possibly, owners of the
firm would prefer smaller but surer profits to a potentially larger but less certain
stream of benefits.
v) Maximising Profit after Taxes
Maximization of profit means maximizing profits after taxes, in the sense of net
profit as reported in the profit and loss account (income statement) of the firm. It
can easily be realized that maximizing this figure will not maximize the economic
welfare of the owners. It is possible for a firm to increase profit after taxes by selling
additional equity shares and investing the proceeds in low-yielding assets, such as
the government bonds. Profit after taxes would go up but earnings per share would
go down. To illustrate, let us assume that a company has 10,000 shares
outstanding, profit after taxes of Rs.50,000 and earnings pers hare of Rs.5. If the
company sells 10,000 additional shares at Rs.50 per share and invests the
proceeds (Rs.5,00,000) at 5 per cent after taxes. The total profits after taxes will
increase to Rs.75,000. However, the earnings per share will fall to Rs.3.75. This
example clearly indicates that maximizing profits after taxes does not necessarily
serve the best interests of owners.
If we adopt maximizing earnings per share as the financial objective of the
firm, this will also not ensure the maximization of owners‘ economic welfare. It also
suffers from the flaws already mentioned, i.e. it ignores timing and risk of the
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expected benefits. Apart from these problems, maximization of earnings per share
has certain deficiencies as a financial objective. For example
For one thing, it implies that the market value of the company‘s shares is a
function of earnings per share, which may not be true in many instances. If the
market value is not a function of earnings per share, then maximization of the
latter will not necessarily result in the highest possible price for the company‘s
shares. Maximisation of earnings per share further implies that the firm should
make no dividend payments so long as funds can be invested internally at any
positive rate of return, however small. Such a dividend policy may not always be to
the shareholders‘ advantage.
It is, thus, clear that maximizing profits after taxes or earnings per share as
the financial objective fails to maximize the economic welfare of owners. Both
methods do not take account of the timing and uncertainty of the benefits. An
alternative to profit maximization, which solves these problems, is the objective of
wealth-maximisation. This objective is also considered consistent with the survival
goal and with the personal objectives of managers such as recognition, power,
status and personal wealth.
13.3.8.2 Shareholders’ Wealth Maximisation(SWM)
To objective of shareholder‘s wealth maximization(SWM) is an appropriate and
operationally feasible criterion to choose among the alternative financial actions. It
provides an unambiguous measure of what financial management should seek to
maximize in making investment and financing decisions on behalf of
owners(shareholders).
SWM means maximizing the net present value (or wealth) of a course of action
to shareholders. The net present value (NPV) of a course of action is the difference
between the present value of its benefits and the present value of its costs. A
financial action that has a positive NPV creates wealth for shareholders and,
therefore, is desirable. A financial action resulting in negative NPV should be
Rejected since it would destroy shareholders‘ we all. Between a number of mutually
exclusive projects the one with the highest NPV should be adopted. The NPV of a
firm‘s projects add. Therefore, the wealth will be maximized if this criterion is
followed in making financial decisions.
The objective of shareholders‘ wealth maximization takes care of the questions
of the timing and risk of the expected benefits. These problems are handled by
selecting an appropriate rate(the shareholders‘ opportunity cost of capital) for
discounting the expected flow of future benefits. It is important to emphasise that
benefits are measured in terms of cash flows. In investment and financing
decisions, it is the flow of cash which is important, not the accounting profits.
Maximising the shareholders‘ economic welfare is equivalent to maximizing the
utility of their consumption over time. With their wealth maximized, shareholders
can adjust their cash flows in such a way as to optimize their consumption. From
the shareholders‘ point of view, the wealth created by a company through its
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actions is reflected in the market value of the company‘s shares. Therefore the
wealth maximization principle implies that the fundamental objective of a firm is to
maximize the market value of its shares. The value of the company‘s shares is
represented by their market price which, in turn, is a reflection of the firm‘s
financial decisions. The market price serves as the firm‘s performance indicator.
i) Need for a Valuation Approach
SWM requires a valuation model. The financial manager must know or at least
assume the factors that influence the market price of shares, otherwise he or she
would find himself or herself unable to maximize the market value of the company‘s
shares. In practice, innumerable factors influence the price of a share, and also,
these factors change very frequently. Moreover, these factors vary across shares of
different companies. For the purpose of the financial management problem, we can
phrase the crucial questions normatively: How much should a particular share be
worth? Upon what factor or factors should its value depend? Although there is no
simple answer to these questions, it is generally agreed that the value of an asset
depends on its risk and return.
ii) Risk-return Trade-off
The financial decisions of the firm are interrelated and jointly affect the market
value of its shares by influencing return and risk of the firm. The relationship
between return and risk can be simply expressed as follows:
Return = Risk-free rate + Risk premium

Risk-free rate is a compensation for time and risk premium for risk. Higher the
risk of an action, higher will be the required return on that action. A proper balance
between return and risk should be maintained to maximize the market value of a
firm‘s shares. Such balance is called risk-return trade-off, and every financial
decision involves this trade-off. The interrelation between market value, financial
decisions and risk-return trade-off is depicted in Figure. It also gives an overview of
the functions of financial management.
Trade-off
The financial manager, in a bid to maximize owners‘ wealth, should strive to
maximize returns in relation to the given risk; he or she should seek courses of
actions that avoid unnecessary risks. To ensure maximum return, funds flowing in
and out of the firm should be constantly monitored to assure that they are
safeguarded and properly utilized. The financial reporting system must be designed
to provide timely and accurate picture of the firm‘s activities.
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13.3.9 AN OVERVIEW OF FINANCIAL MANAGEMENT

Financial management

Maximization of Share Value

Financial Decisions

Investment Liquidity Financing Dividend

Decisions Management Decisions Decisions

Return Risk

SUMMARY
In this section, the scope of financial management, finance function,
classification of assets and on over view of financial management are given.
KEY WORDS
 Financial assets
 Owners of residue
 Liquidity
 Profit maximization
 Wealth maximisation
 Time value of money
 Risk Return trade off.
REVIEW QUESTIONS
1. Explain the meaning of financial management and its functions.
2. What are the objectives of financial management?
3. Discuss the scope of financial management?
4. Explain the important decisions in financial management?
5. State the importance of financial management.
REFERENCES
1. Dr. S.N. Maheswari, Financial Management, Sultan Chand and Sons, New
Delhi, 2007.
2. I.M.Pandey, Financial Management, Vikas Publications, New Delhi, 2007.
3. P.Saravanavel, Financial Management of Principles & Practice, Danpat Rai &
Sons, Delhi-6, Page 354 to 373.
4. G.Sudharsana Reddy, Financial Management, Himalaya Publishing House,
Mumbai-2004, Page 325 to 355, 534-547.

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LESSON – 14

SOURCES OF LONG-TERM,
SHORT-TERM FINANCE AND FIXED ASSETS MANAGEMENT
14.0 Objectives
14.1 Introduction
14.2 Financing of short-term capital
14.2.1 Trade credit
14.2.2 Accruals
14.2.3 Deferred income
14.2.4 Commercial papers (CPS)
14.2.5 Inter-corporate deposits (ICDS)
14.2.6 Commercial banks
14.2.7 Factoring
14.2.8 Sources of long-term finance
14.3 equity shares
14.3.1 Types of equity shares
14.3.1.1 Sweet equity shares
14.3.1.2 Par-value shares
14.3.1.3 No – par value shares
14.3.2 Preference share capital
14.3.3 Classification of preference shares
14.3.4 Internal financing sources
14.3.5 Sources of term loans
14.4 Fixed assets management
14.4.1 Characteristics of fixed assets
14.4.2 Classification of fixed assets
14.4.3 Importance of fixed assets
14.0 OBJECTIVES
After reading term finance in this lesson you will be able to:
 State meaning of short-term finance.
 Explain the concept of long-term finance.
 List out the sources of short-term finance.
 Enumerate the sources of long-term finance
 Explain the characteristics of fixed assets.
 What are the factors influencing fixed assets?
14.1 INTRODUCTION
Management itself is a broad term and includes financial management,
marketing management, personnel management and production management in its
scope. Financial management is exclusively concerned with raising and utilization
of funds. The different sources of financing viz., Short-term, and long-term sources
are studies under this lesson.
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14.2 FINANCING OF SHORT-TERM CAPITAL
14.2.1 TRADE CREDIT
Trade credit refers to the credit extended by the supplier of goods or services to
his/her customer in the normal course of business. It occupies very important
position in short-term financing, due to the competition. Almost all the traders and
manufacturers are required to extend credit facility (a portion), without which there
is no business. Trade credit is a spontaneous source of finance that arises in the
normal business transactions without specific negotiation, (automatic source of
finance). In order to get this source of finance, the buyer should have acceptable
and dependable credit worthiness and reputation in the market. Trade credit
generally extended in the form open account or bills of exchange. Open account is
the form of trade credit, where supplier sends goods to the buyer for the payment to
be received in future as per terms of the sales invoice. As such trade credit
constitute a very important source of finance, it representing, 25 per cent to 50 per
cent of the total short-term sources for financing working capital requirements.
14.2.2 ACCRUALS
Accrued expenses are those expenses which the company owes to the other,
but not yet due and not yet paid the amount. Accruals represent a liability that a
firm has to pay for the services or goods, has received. It is spontaneous and
interest-free sources of financing. Salaries and wages, interest and taxes are the
major constituents of accruals. Salaries and wages are usually paid on monthly
and weekly base respectively. The amounts of salaries and wages have owed but
not yet paid and shown them as accrued salaries and wages on the balance sheet
at the end of financial year. The longer the time lag in payment of these expenses,
the greater is the amount of funds provided by the employees. Similarly interest
and tax is another accruals, as source of short-term finance. Tax will be paid on
earnings. Income tax is paid to the government, on quarterly basis and some other
taxes may be payable half-yearly or annually. Amount of taxes due as on the date of
the balance sheet but not paid till then and they are showed as accrued taxes on
the balance sheet. Like taxes, interest is paid periodically in the year but the funds
are used continuously by a firm. All other such items of expenses can be used as a
source of short-term finance but shown on the balance sheet.
14.1.3 DEFERRED INCOME
Deferred income is income received in advance by the firm for supply of goods
or services in future period. This income increases the firm's liquidity and
constitute an important source of short-term finance. These payments are not
showed as revenue till the supply of goods or services, but showed in the balance
sheet as income received in advance. Advance payment can be demanded by firms
which are having monopoly power, great demand for its products and services and
if the firm is manufacturing a special product on a special order.
14.2.4 COMMERCIAL PAPERS (CPS)
Commercial paper represents a short-term unsecured promissory note issued
by firms that have a fairly high credit (standing) rating. It was first introduced in
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USA and it is an important money market instruments. In India, Reserve Bank of

India introduced CP on the recommendations of the Vaghul Working Group on
money market. CP is a source of short-term finance to only large firms with sound
financial position.
14.2.5 INTER-CORPORATE DEPOSITS (ICDS)
A deposit made by one firm with another firm is known as inter-corporate
deposit (ICD). Generally, these deposits are usually rnade for a period up to six
months. Such deposits may be of three types:
i. Call Deposits: These deposits are those expected to be payable on call/on just
one day notice. But, in actual practice, the lender has to wait for at least 2 or
3 days to get back the amount. Inter corporate deposits generally have 12 per
cent interest per annum.
ii. Three Months Deposits: These deposits are more popular among companies
for investing the surplus funds. The borrower takes this type of deposits for
meeting short-term cash inadequacy. The interest rate on these types of
deposits is around 14 per cent per annum.
iii. Six-months Deposits: Inter-corporate deposits are made for a maximum period
of six months. These types of deposits are usually given to 'A' category
borrowers only and they carry an interest rate of around 16 per cent per
annum.
14.2.6 COMMERCIAL BANKS
Commercial banks are the major source of working capital finance to
industries and commerce. Granting loan to business is one of their primary
functions. Getting bank loan is not an easy task since the lending bank may ask
number of questions ions about the prospective borrower's financial position and
its plans for the future. At the same time bank will want to monitor borrower's
business progress. But there is a good side to this, that is borrower's share price
tends to rise, because investor know that convincing banks in very difficult.
14.2.7 FACTORING
Banks have been given more freedom of borrowing and lending both internally
and externally and facilitated the freer functioning in lending and investment
operations. From 1994 banks are allowed to enter directly leasing, hire purchasing
and factoring services, instead through their subsidiaries. In other words, Banks
are free to enter or exit in any field depending on their profitability, but subject to
some RBI guidelines.
14.2.8 SOURCES OF LONG-TERM FINANCE
As we know, money (capital) is one of the 7Ms of management. It is also one of
the factors of production, without which we cannot assume any business whether it
is small or medium or big. The amount required by the firm is called as "capital". It
is life-blood of every business. Adequate finance is necessary for formulation,
expansion of business, without which it cannot achieve objectives.
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1) Long-term Sources of Finance
Long-term funds are needed for a period above five years. These funds are
invested on fix assets like plant & machinery, land & buildings, furniture, vehicles
etc., which are the m requirements of a business concern. In other words the funds
are required for meeting the fix capital requirements of the business.
Long-term sources of finances of company may be broadly categorized into
two: (i) Owned Ownership capital, and (ii). Debt capital.
Ownership capital
Ownership capital is that capital rose from the owners of the company or the
company rain finance by issue of ownership securities. The ownership capital again
divided into (a) share capital, and (b) retained earnings. On the other hand, debt
capital is the capital, which raised from outsiders of the company they may be
creditors (individuals or financial institutes), public gives clear view of sources of
long-term funds.
Ownership Securities
Ownership Securities are those securities, which where bought by owners of
the company. Put it simple the person (s) who buy these securities becomes the
owner of the company. Hence, these securities are referred as ownership securities,
also known as capital stock.
Raising long-term funds by issue of shares is the universal form from capital
market. Every company has a statutory right to issue shares (except a company
limited by guarantee) to raise long-term funds.
Meaning of Share
A share is a small unit of capital of a company. In other words, share capital
of a company (planned to raise) divided into number of equal parts that known is
share. Section 2 (46) of the Companies Act, 1956, defines share as ―a share in the
share capital of a company and includes stock, except when a distinction between
stock and share is expressed or implied‖. It is a legal definition of share and the
term ‗share‘. Stock and share have different meanings According to Section 94 (i) (c)
of the Companies Act, 1956 stock means, a share, which is fully paid up. Loard
Justic James Lindley gives a good definition, as ―A share is that proportionate part
of capital to which a member is entitled‖ For example XYZ company has share
capital of Rs.1,00,000 of Rs.10 each. Then the capital is divided into 10,000 shares
(ie., Rs.1,00,000 / Rs.10). Shareholder is a person who buys one or more shares in
the company.
Kinds of Shares
In our country Companies used to raise funds (before Companies Act, 1956) by
issue of three types of shares, i.e., preference shares, equity (ordinary) shares, and
deferred shares. But the Companies Act has limited the type of shares into two -
preference shares, and equity (ordinary) shares.
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14.3 EQUITY SHARES
Equity means 'equal'. Equity share is a share that gives equal right to holders.
Equity shareholders have to share the reward and risk associated with ownership
of company. For example ABC Company has 10,000 equity shareholders and it
earned Rs. 10,000 profit last year and assume it may earn a loss of Rs. 10,000 in
the next year. Here, the shareholder will get Re. 1 as profit from last year and Re. 1
loss in the coming year's loss. It is also called as ordinary share capital. Equity
shareholders are the owners of the company who have control over the working of
the company. They are paid dividend at the rate recommended by Board of
Directors (Bobs). The dividend rate depends on the profits, more profits more
dividends and vice versa. If there are no profits, no dividends will be payable. But
some companies pays dividends even if the company has no profits to maintain
dividends stability. The amount required to pay dividends will be transferred from
general reserve account. The equity shareholders take more risk when compared to
preference shareholders.
14.3.1 TYPES OF EQUITY SHARES
14.3.1.1 Sweet Equity Shares
The Companies (Amendment) Act, 1999. has inserted a new Section 79A, that
allows issue of Sweet Equity shares. Sweet equity share defined as, "equity shares
issued at a discount or for consideration other than cash for providing know-how or
making, available rights in the nature of intellectual property rights or value
additions by what ever name called-. Issue of sweet equity by listed company
should be according to SEBI guidelines. The issue should be authorized by a
special resolution passed by the company in the general meeting. which specifies
the number of shares, price, and consideration if any. However, non-listed company
can issue sweet equity in accordance with prescribed guidelines.
14.3.1.2 Par-value Shares
Unlike bonds, which always have a par value, equity stock may be sold with
par value or without par value. Par value means the nominal value of a share in the
Memorandum of Association (MOA) established for legal purpose. The par value
decided by promoters of first – directors of company such may be issued at par, at
premium, or at a discount price to the public.
14.3.1.3 No – Par Value Shares
These types of shares are without par value. In this arrangement, MOA
specifies the number of shares and not the price. They will be issued to the public
at a stated price decided by the BoD's. Payment of dividend on this type of shares is
so many rupees per share, i.e., Rs. 5 per share or Rs. 6 per share.
In India, Company Law does not allow Indian companies to issue no-par value
of share. But in America and Canada, no-par value shares are more popular.
14.3.2 PREFERENCE SHARE CAPITAL
Preference share capital gives certain privileges to its holders on the equity
shareholders. Preference shareholders have privileges in two ways:
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i. A preferential privilege in payment of a fixed dividend. The fixed dividend may

be in the form of fixed rate or fixed amount per share; and
ii. Preferential right as to repayment of capital in case of liquidation / winding
up of the company.
Preference share capital is a hybrid form of long-term finance, since it has the
features of equity and debentures. Preference share resembles equity in the following
ways:
a) Preference dividends are payable only after tax profits (PAT),
b) Payment of preference dividend depends on the discretion of BOD's, (it
is not an obligatory payment),
c) Preference dividend is not a tax deductable payment,
d) Irredeemable preference shares are long-term in nature (they have no
maturity date). Preference share capital is similar to debenture capital
in the following ways:
1. It carries a fixed rate of dividend.
2. It has prior claim on assets like debenture capital,
3. It normally does not have voting rights,
4. It is redeemable in nature (if it is redeemable preference
share),
5. It does not have right to share residual profits/ assets.
14.3.3 CLASSIFICATION OF PREFERENCE SHARES
Preference shares are may be of several types
1. Cumulative Preference Shares: Cumulative preference shares are those
shares on, which the amount of dividend payable goes on accumulating until it is
fully paid. If the full dividend or partial dividend can not be paid in any year (due to
less profits), the same can be paid out of future profits. Even if the company is not
able to pay the last year's dividend in the next year, the same cumulated for the
future period till the full payment. Preference shares are generally cumulative
unless otherwise expressly stated in the Articles of Association (Ao) or if there are
terms of the issue of those shares.
2. Non-Cumulative Preference Shares: Non-cumulative preference shares are
those shares on which the unpaid dividend does not cumulate to the next year's
dividend. It means in any year, the company fails to earn profit to pay fixed
dividend for the year, the preference shareholders cannot ask (or cumulate) from
the next years‘ profit. Put it in simple the right to claim unpaid dividends will lapse.
14.3.4 INTERNAL FINANCING SOURCES
The internal sources of finance are:
a. Retained earnings / ploughing back of profits, and
b. Depreciation charges.
The following discussion gives clear view about the internal sources of finance.
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a. Retained Earnings / Ploughing Back of Profits
Retained earnings is an important source of internal financing of well-
established companies. Retained earnings are the portion of earnings available to
equity shareholders, which are ploughed back in the company. In other words, a
part of earnings available to equity shareholders that are retained for future
investment. Put in simple, accumulation of profits by a firm for financing
developmental programmes. Hence, the process of accumulating company profits
regularly and their utilisation in the business is known as retained earnings or
ploughing back of profits or internal financing or self-investment. Retained earnings
are part of equity, since they are part of equity, which are sacrificed by equity
shareholders. In this source of finance companies generally retain or plough back
20 per cent to 70 per cent of earnings available to equity shareholders for the
purpose of financing of the growth of the company. This becomes a main source of
long-term finance, when the management capitalizes profits. It is known as
capitalization of profits or issue of bonus shares.
Retained earnings may be used for expansion programmes of company,
replacement of obsolete assets, modernization of plant and equipment, redemption
of preference shares or debentures, loans etc.
b. Depreciation Charges
Depreciation is the 'distribution cost or the basic value of tangible capital
assets, over the estimated useful life of the asset in a systematic and rational
manner. In other words, depreciation is the allocation of capital expenditure to
various period over which the capital expenditure expected to benefit the company.
For example, a machinery costing Rs.1,00,000 has 5 years life period with no scrap
value. If the machine is depreciated based on straight line method of depreciation,
the depreciation charge for a years is Rs.20,000 (Rs.1,00,000/5), which is shown in
profit & loss account debt side and it reduced profit by Rs.20,000. But it is only
book entry and not cash outflow. It is out of pocket cost. There is a lot of debate
among academicians and business executives regarding the treatment of
depreciation as source of finance. What ever may be the arguments either for or
against, but one thing is clearly it is out of pocket cost or non-cash item of expense.
Hence, it is considered as a internal source of finance.
c. Debentures/Bonds
Debenture bonds are an importance source of long-term finance. Raising of
funds by issue of debentures bonds is allowed to public limited Companies, if
Memorandum of Association (MoA) permitted.
Types of Debentures
The following are the different types of debentures:
1. From the redemption point of view, the debentures are sub divided into two:
a) Redeemable debentures and b) Irredeemable debentures
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a) Redeemable Debenture: Redeemable debentures are those debentures which

are to be repaid by the company at the end of specified period or within the
specified period at the option of the company by giving a notice to debenture
holders with the intention to redeem debentures either lump sum or installments.
b) Irredeemable Debenture: Irredeemable debentures that are not redeemable
during the existence (life) of the company. They are repayable either if the company
fails to pay interest on them or at the time of liquidation of the company. These
types of debentures are also known as perpetual debentures.
d) Loan Financing
Apart from the above discussed sources of finance equity shares, preference
shares, retained earnings and debentures, there is another source of finance that in
terms loans. The terms of loan may be medium-term and long-term. Medium term
loans are the loans raised for a period ranging between one to five years and long-
term loans are raised for a period above five years. Short-term loans may be raised
from commercial banks and medium and long-term loans can be raised from
specialised financial institutions.
Term loans are sources of long-term debt. Generally, they are raised for long-
term investments like expansion, modernization, diversifications, etc. These long-
term long financing is also known as project financing.
14.3.5 SOURCES OF TERM LOANS
There are two major sources of term loans in India, (I) Specialised financial
institutions, or Developments banks, and (II) Commercial banks. Even though there
are two sources, but the primary source of term finance is specialized financial
institutions.
14.4 FIXED ASSETS MANAGEMENT
Various methods of evaluating capital expenditure projects have been already
discussed at length in the chapter on 'Capital Budgeting'. In the present chapter an
attempt is made to discuss few important aspects of fixed assets management that
are useful from the point of a management accountant.
14.4.1 CHARACTERISTICS OF FIXED ASSETS
In manufacturing concerns, a large portion "of firm's funds is generally
invested in fixed assets. Inefficient management of fixed assets has led to a large
failure of several business firms in the past years. Hence, a considerable amount of
attention should, also be paid to the aspects of managing the fixed assets.
Effective management of fixed assets involves a clear understanding of the
characteristics of fixed assets, which make them distinct from other assets. By fixed
assets we mean those assets which are used in business repeatedly for earning
profits and which have physical existence. They are also called Block.
(a) III-liquid Assets. Fixed assets cannot, generally, be sold and encashed
without spending considerable time and efforts.
(b) Profit generation, not for sate. Fixed assets, whatever be their nature or the
type of business in which they are employed, have the fundamental characteristic
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that they are held with the objects of earning revenue and nit for the purpose of
sale in the ordinary course of business.
(c) Subject to depreciation. Fixed assets are subject to decrease in value from
many causes, the most important of which are (i) wear and tear (ii) obsolescence,
(iii) depletion and, (iv) amortisation. Thus, fixed assets are a source of wealth and
risk of capital losses.
14.4.2 CLASSIFICATION OF FIXED ASSETS
Fixed assets may be classified as either tangible or intangible 'They may
further be classified as assets with terminable lives and assets whose lives are of
indefinite duration. This results in the following four groups of fixed assets:
(a) Tangible assets - With Terminable life
Buildings;
Equipment;
Improvements to property;
Certain natural resources;
(b) Tangible assets - With Interminable life-land
(c) Intangible assets - With Terminable life
Patents;
Leaseholds;
Copyrights;
(d) Intangible assets - With Interminable life
Goodwill (may have terminable life)
i) Tangible fixed assets. The term "tangible fixed assets"' is used to express
those types of assets which have bodily substance, e.g., land, building machinery,
furniture, vehicles. These assets can further be divided into two parts:
(a) Machinery, furniture, vehicles. These assets have limited life and their costs
are spread over the years of benefit.
(b) Land. This assets is, the only asset is, which has an unlimited term of
existence. The cost of it is not allocated to the years of benefit.
ii) Intangible fixed assets. The term "intangible fixed assets" is used to describe
those assets which lack physical substance. Examples are patents, copyrights,
trade marks, leaseholds, goodwill organisation costs. From the cost allocation point
of view they are categories:
(a) Intangible having a limited term of existence, e.g., patents, copyright. The
costs of these assets are spread over the years of their useful life.
(b) Intangibles not having a limited term of existence, e.g., trade marks,
goodwill. The costs of these assets are not spread over the years of benefit. They
are, of course, keeping in view the concept of conservatism, written off (amortised)
over some years arbitrarily decided.
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14.4.3 IMPORTANCE OF FIXED ASSETS
Fixed assets are those which are of a somewhat fixed or permanent nature and
are used by a business in its normal operations; Fixed assets management and is
important for the following reasons:
(a) There is a risk involved in fixed assets because of their longer life.
(b) Fixed assets have usually a relatively high cost.
(c) Fixed assets create problems of acquisition and replacement. Acquisitions
are additions to fixed assets. The main purpose of acquisitions is to increase
existing capacity. Replacements are the assets which take the place of existing
assets with comparable capacity. Betterments and improvements refer to capital
expenditure which results in the physical change or alteration of an asset.
(d) There is a greater tendency to make use of machines and invest more and
more in fixed assets. The use of efficient machinery is necessary for economies of
scale, particularly in conditions of increasing competition. Because of technological
changes, the investment in fixed assets is likely to increase, Planning for long term
capital expenditure is the most important function of every business because
substantial amounts are involved and the investment of funds is spread over a
considerable period of time, and returns flow back at varying intervals The policy in
planning capital expenditure is not only important for a company and its financial
position, but is also of strategic importance "'Or the total economy.
A. Internal factors
(i) Nature of Business. Different industrial undertakings may have varying fixed
capital requirements because of different nature of business and the technology of
the industry in which a company operates. Concerns engaged in rendering personal
services, merchandise, commerce and trade may need very little fixed investment.
As against this, manufacturing industries, and public utilities have to commit
substantially large amount of funds to acquire fixed assets. Here too fixed capital
requirements in capital intensive industrial projects is much greater in relation to
their labour intensive counterparts.
(ii) Size of Business. Where a business enterprise is being set up to carry on
large scale operations naturally its fixed capital requirements are likely to be high
since most of their production processes are based on automatic machines and
equipment. But in smaller concerns use of automatic machines are not so
economical and useful because these machines are not employed to the optimal level.
(iii) Scope, of Business. Sometimes enterprises are established to engage in
only one phase of production or distribution activity. In a sharper contrast to this,
there are many business firms which are formed to carry on production or
distribution work in its entirety. Obviously; in the former case fixed capital
requirements would be less relative to the latter case.
(v) Extent of Lease. While planning fixed capital requirements an entrepreneur
has to decide in advance as to how many assets would be acquired on lease hold
basis and how many on free hold basis. If larger amount of fixed assets is to be
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acquired on lease basis, naturally less amount of funds will have to be committed
in the enterprise.
(v) Arrangement of Subcontract. In case an entrepreneur has thought out an
arrangement of contracting out some processes of production to others or he has
decided to engage in assembling the parts being manufactured by others, he will
require only those assets that will help in carrying out the production in which the
firm will be engaged. This would consequently minimise fixed capital requirements
of the enterprise.
(vi) Acquisition of Old Equipments. In certain Industrial areas where the rate of
technological change in production method is slow or moderate, old equipment or
plant available at prices that are far below those of new equipment or plant may be
used satisfactorily. Their use can materially reduce the required investment in fixed
assets.
(vii) Acquisition of Accommodation on Rent. The extent to which needed plant
or equipment is available on reasonable rental terms also determines the required
investment in fixed assets. Many retailers and some manufactures whose space
needs are distinctive are able to meet their major building needs through rental.
(viii) Availability of Fixed JWO on Concessional Rates. With the view to fostering
balanced industrial growth and regional development of industries the government
may provide land and other building materials at concessional rates. Plant and
equipment may be made available on instalment purchase system. Such facilities
are very likely to reduce the requirement of fixed assets.
B. External Factors
Since fixed asset investment is a long-term one where amount of risk is
comparatively more, the projector should also consider the following external
factors.
(i) International Conditions. This factor is assuming prominent role in the
decision making process particularly in large concerns carrying on business on
international scale. For example, steel companies expecting war may decide to
commit large funds to expand fixed assets before there is a shortage of material or
before inflation becomes reality. An international crisis may lead some companies
to postpone their expansion plans.
(ii) Secular Trend in the Economy. An in-depth study of long-run trends in the
economy must be undertaken while assessing requirements for fixed assets. If the
future of the economy is. anticipated to be bright, it gives green signal to business
entrepreneur to carry out all sorts of expansions of the firms. In that case large
amount of funds has to be committed right now in fixed assets so a-, to be ready to
reap benefits when opportunities.
(iii) Population Trends. If the firm has a national market, national population
trend must be evaluated while forecasting for fixed asset needs. In India, the
population is increasing at a high rate. Automobile manufacturers find this a factor
that encourages them to expand. The age composition of the population may be
important for certain business like furniture industry and the optical industry.
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(iv) Consumer's Preferences. Financial planning must be geared to acquiring

fixed assets that will provide goods or services that consumers will accept.
(v) Competitive Factors. Competitive factors are a prime element in the decision
making process on planning future fixed assets needs. If company 'A' shifts to
automation, Company 'B' engaged in the same line of activity will follow the need of
the innovator.
(vi) Shift in Technology. Shift in technology should also be considered while
estimating fixed asset requirements.
SUMMARY
In this part the meaning and importance of longterm and short-term finance is
explained. The sources of long-term and short-term finance are also discussed in
detail. The fixed assets meaning, characteristic, classification of fixed assets and
factors influencing fixed assets are clearly explained.
KEY WORDS
 Ownership securities
 Sweet equity shares
 Retained earnings
 Accruals
 Deferred income
 Commercial papers
 Inter corporate deposits
 Factoring
 Ill liquid assets
 Consumer preference
REVIEW QUESTIONS
1. What is the purpose of short-term finance?
2. Explain the sources of short-term finance?
3. What do you mean by long-term finance.
4. State and explain the sources of long-term fiancé?
5. What are the characteristics of fixed assets?
6. Explain the classification of fixed assets?
7. State the factors which influence the fixed assets.
REFERENCES
 Dr.S.N. Maheswari, Financial Management, Sultan Chand and Sons, New
Delhi, 2007.
 I.M. Pandey, Financial Management, Vikas Publications, New Delhi, 2007.
 P. Saravanavel, Financial Management of Principles & Practice, Danpat Rai &
Sons, Delhi-6, Page 354 to 373.
 G. Sudharsana Reddy, Financial Management, Himalaya Publishing House,
Mumbai-2004, Page 325 to 355, 534-547.

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LESSON – 15

MANAGEMENT OF WORKING CAPITAL, CASH AND RECEIVABLES

15.0 Objectives
15.1 Introduction
15.2 Types of capital
15.2.1 Concepts of Working Capital
15.2.2 Classification (or) Kinds of Working Capital
15.2.3 Importance or Advantages of Adequate Working Capital
15.2.4 Excess (or) Inadequate Working Capital
15.2.4.1 Disadvantages of Redundant Or Excessive Working Capital
15.2.4.2 Disadvantages (or) Dangers of Inadequate Working Capital
15.2.5 Need (or) Objectives of Working Capital
15.2.6 Factors Determining the Working Capital Requirements
15.2.7 Management of Working Capital
15.3 Management of cash
15.3.1 Nature of cash
15.3.2 Motives for holding cash
15.3.3 Aspects of cash management
15.3.4 Managing cash flows
15.3.5 Methods of accelerating cash inflows
15.3.6 Method of slowing cash outflows
15.3.7 Cash budget
15.4 Receivables management
15.4.1 Meaning and objectives of receivables management
15.4.2 Costs of maintaining receivables
15.4.3 Factors influencing the size of receivables
15.4.4 Dimensions of receivables management
15.0 OBJECTIVES
After through reading of this lesson you will be able to:
 Explain the concept of working capital?
 Write the classification of working capital?
 State the disadvantages of excessive working capital?
 Mention the dangers of inadequate working capital?
 Explain the factors determing the working capital?
 State the motives of holding cash.
 Explain the methods controlling cash flows.
 Write out the different cost of maintaining receivables.
 Explain the factors influencing the size of receivables.
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15.2 TYPES OF CAPITAL
Capital required for a business can be classified under two main categories
viz.,
i. Fixed capital, and
ii. Working capital
Every business needs funds for two purposes for its establishment and to
carry out its day-to-day operations long term funds are required to create
production facilities through purchase of fixed assets such as plant and machinery,
land, building, etc.
15.2.1 MEANING OF WORKING CAPITAL
Investment in these assets represent that part of firm‘s capital which is
blocked on a permanent or fixed basis and is called fixed capital. Funds are also
need for short term purposes for the purchase of raw materials, payment of wages
and other day day-to-day expenses, etc. These funds are known as working capital.
In simple words, working capital refers to that part of the firm‘s capital which is
required for financing short term or current assets such as cash, marketable
securities, debtors and inventories. Funds, thus, invested in current assets keep
revolving fast and are being constantly converted in to cash and this cash flows out
again in exchange for other current assets. Hence, it is also known as revolving or
circulating capital or short term capital.
In the words of Shubin, ―Working capital is the amount of funds necessary to
cover the cost of operating the enterprise.‖
According to Genestendberg, ―Circulating capital means current assets of a
company that are changed in the ordinary course of business from one form to
another, as for example, form cash to inventories, Inventories to receivables,
receivables in to cash.‖
15.2.2 CONCEPTS OF WORKING CAPITAL
There are two concepts of working capital:
i) Gross working capital
ii) Net working capital
In the broad sense, the tem working capital refers to the gross working capital
and represents the amount of funds invested in current assets. Thus, the gross
working capital is the capital invested in total current assets of the enterprise.
Current assets are those assets which in the ordinary course of business can be
converted into cash with in a short period of normally one accounting year.
Examples of current assets are
i) Constituents of Current assets
Cash in hand and bank balances, Bills Receivables, Sundry debtors, Short-
term loans and advances, Inventories of stocks, as:
(a) Raw materials,
(b) Work-in-process
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(c) Stores and Spares

(d) Finished goods,
Temporary Investments of surplus funds, prepaid expenses and accrued
incomes.
In a narrow sense, the term working capital refers to the net working capital.
Net working capital is the excess of currents assets over currents liabilities, or say:
Net working capital = Current assets – Current liabilities.
Net working capital may be positive or negative. When the current assets
exceed the current liabilities the working capital is positive and the negative
working capital results when the current liabilities are more than the current
assets. Current liabilities are those liabilities which are intended to be paid in the
ordinary course of business with in a short period of normally one accounting year
out of the current assets.
ii) Constituents of current liabilities
Bills payable, Sundry creditors or accounts payable, accrued or outstanding
expenses, short term loans, advances and deposits, dividends payable, bank
overdraft, provision for taxation, etc.,
The gross working capital concept is financial or going concern concept where
as net working capital is an accounting concept of working capital. These two
concepts of working capital are not exclusive, rather both have their own merits.
The gross concept is sometimes preferred to the net concept of working capital for
the following reasons:
 It enables the enterprise to provide correct amount of working capital at the
right time.
 Every management is more interested in the total current assets with which
it has operate than the sources from where it is available.
 The gross concept takes into consideration the fact that every increase in the
funds of the enterprise would increase its working capital.
 The gross concept of working capital is more useful in determining the rate of
return on investments in working capital.
The net working capital concept, however, is also important for the following
reasons.
 It is a qualitative concept which indicates the firm‘s ability to meet its
operating expenses and short-term liabilities.
 It indicates the margin of protection available to the short-term creditors, i.e.,
the excess of current assets over current liabilities.
 It is an indicator of the financial soundness of an enterprise.
 It suggests the need for financing a part of the working capital requirements
out of permanent sources of funds.
To conclude, it may be said that both, gross and net, concepts of working
capital are important aspects of the working capital management. The net concept
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of working capital may be suitable only for propritetory of the form of organizations
such as Sole-trader or Partnership firms. But the gross concept is very suitable
partnership firms. But the gross concept is very suitable to the company form of
organizations where there is a divorce between ownership, management and
control.
15.2.3 CLASSIFICATION (OR) KINDS OF WORKING CAPITAL
Working capital may be classified in two ways:
1. On the basis of concept
2. On the basis of time

KINDS OF WORKING CAPITAL

ON THE BASIS OF CONCEPT ON THE BASIS OF TIME

GROSS NET PERMANENT OR TEMPORARY OR

WORKING WORKING FIXED WORKING VARIABLE WORKING
CAPITAL CAPITAL CAPITAL CAPITAL

REGULAR RESERVE SEASONAL SPECIAL

WORKING WORKING WORKING WORKING
CAPITAL CAPITAL CAPITAL CAPITAL

On the basis of concept, working capital is classified as gross working capital

and net working capital. This classification is important from the point of view of
the financial manager. On the basis of time, working capital may be classified as:
1. Permanent or fixed working capital
2. Temporary or variable working capital
i) Permanent (or) Fixed Working Capital
Permanent or fixed working capital is the minimum amount which is required
to ensure effective utilization of fixed facilities and for maintaining the circulation of
current assets. There is always a minimum level of current assets which is
continuously required by the enterprises to carry out its normal business
operation. For example, every firm has to maintain a minimum level of raw
materials, work-in-process, finished goods and cash balance. This minimum level of
current assets is called permanent or fixed working capital as this part of capital is
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permanently blocked in current assets. As the business grows, the requirements of

permanent working capital also increase due to the increase in current assets. The
permanent working capital can further be classified as regular to ensure circulation
of current assets from cash to inventories, from inventories to receivables and from
receivables to cash and so on. Reserve working capital is the excess amount over
the requirement for regular working capital which may be provided for
contingencies that may arise at unstated periods such as strikes, rise in prices,
depression etc.
ii) Temporary (or) Variable Working capital
Temporary or variable working capital is the amount of working capital which
is to required to meet the seasonal demands and some special exigencies. Variable
working capital can be further classified as seasonal working capital and special
working capital. Most of the enterprises have to provide additional working capital
to meet the seasonal and special needs. The capital required to meet the special
needs of the enterprise is called seasonal working capital. Special working capital is
that part of working capital which is required to meet special exigencies such as
launching of extensive marketing campaigns for conducting research, etc.,
15.2.3 IMPORTANCE OR ADVANTAGES OF ADEQUATE WORKING CAPITAL
Working capital is the life blood and nerve centre of a business. Just as
circulation of blood is essential in the human body for maintaining life, working
capital is very essential to maintain the smooth running of a business. No business
can run successfully without an adequate amount of working capital. The main
advantages of maintaining adequate amount of working capital are as follows:
1. Solvency of the business
Adequate working capital helps in maintaining solvency of the business by
providing uninterrupted flow of production
2. Goodwill
Sufficient working capital enables a business concern to make prompt
payments and hence helps in creating and maintaining goodwill.
3. Easy Loans
A concern having adequate working capital, high solvency and good credit
standing can arrange loans from banks and others on easy and favourable terms.
4. Cash Discounts
Adequate working capital also enables a concern to avail cash discount on the
purchase and hence it reduces costs.
5. Regular supply of raw materials
Sufficient working capital ensures a concern ensures regular supply of raw
materials and continous costs.
6. Regular payment of salaries
Wages and other day-to-day commitments. A company which has ample
working capital can make regular payment of salaries, wages and other day-to-day
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commitments which raises the morale of its employees, increase their efficiency,
reduced wastages and costs and enhances production and profits.
7. Exploitation of favourable market conditions
Only concerns with adequate working capital can exploit favourable market
conditions such as purchasing its requirements in bulk when the prices are lower
and by holding its inventories for higher prices.
8. Ability to face crisis
Adequate working capital enables a concern to face business crisis in
emergencies such as depression because during such periods generally, thee is
much pressure on working capital.
9. Quick and regular return on investments:
Every investor wants a quick and regular return on his investments.
Sufficiency of working capital enables a concern to pay quick and regular dividend
to its investors as there may not be much pressure to plough back profits. This
gains the confidence of its investors and created a favourable market to raise
additional funds in the future.
10. High Morale
Adequacy of working capital creates an environment of security, confidence,
high morale and creates over all efficiency in a business.
15.2.4 EXCESS (OR) INADEQUATE WORKING CAPITAL
Every business concern should have adequate working capital to run its
business operations. It should have neither redundant or excess working capital
nor inadequate of working capital. Both excess as well as short working capital
positions are bad for any business. However out of the two, it is the inadequacy of
working capital which is more dangerous from the point of view of the firm.
15.2.4.1 Disadvantages of Redundant or Excessive working capital:
1. Excessive working capital means idle funds which earn no profits for the
business and hence the business cannot earn a proper rate of return on its
investments.
2. When there is a redundant working capital, it may lead to unnecessary
purchasing and accumulation of inventories causing more chances of theft,
waste and losses.
3. Excessive working capital implies excessive debtors and defective credit policy
which may cause higher incidence of bad debts.
4. It may result into overall inefficiency in the organization.
5. When there is excessive working capital, relations with banks and other
financial institutions may not be maintained.
6. Due to low rate of return on investments, the value of shares may also fall.
7. The redundant working capital gives rise to speculative transactions
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15.2.4.2 Disadvantages (or) Dangers of inadequate working capital

1. A concern which has inadequate working capital cannot pay its short term
liabilities in time. Thus it will lose its reputation and shall not be able to get
good credit facilities.
2. It cannot buy its requirements in bulk and cannot avail of discounts, etc.
3. It becomes difficult for the firm to exploit favourable market conditions and
undertake profitable projects due to lack of working capital.
4. The firm cannot pay day-to-day expenses of its operations and it creates
inefficiencies, increases costs and reduces the profits of the business.
5. It becomes impossible to utilize efficiently the fixed assets due to non
availability of liquid funds.
6. The rate of return on investments also falls with the shortage of working
capital.
15.2.5 NEED (OR) OBJECTIVES OF WORKING CAPITAL
The need for working capital cannot be over emphasized. Every business needs
some amount of working capital. The need for working capital due to the time gap
between production and realization of cash from sales. There is an operating cycle
involved in the sales and realization of cash. There are time gaps in purchase of raw
materials and production; production and sales; and sales realization of cash.
Thus, working capital is needed for the following purposes:
1. For the purchase of raw materials, components and spares
2. To pay wages and salaries
3. To incur day-to-day expenses and overhead costs such as fuel, power and
office expenses etc.
4. To meet the selling costs as packing, advertising etc.
5. To provide credit facilities to the customers.
6. To maintain the inventories for raw materials, work in progress, stores and
finished stock
15.2.6 FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS
The working capital requirements of a concern depend upon a large number of
factors such as nature and size of business, the character of their operation, the
length of production cycles, the rate of stock turnover and the state of economic
situation. It is not possible to rank them because all such factors are of different
importance and the influence of individual factors changes for a firm over time.
However, the following are important factors generally influencing the working
capital requirements.
1. Nature or character of Business
The working capital requirements of a firm basically depend upon the nature
of its business. Public utility undertakings like electricity, Water supply and railway
need very limited working capital because they offer cash sales only and supply
services, not products, and as such no funds are tied up in inventories and
receivables. On the other hand trading and financial firms require less investment
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in fixed assets but have to invest large amounts in current assets like inventories,
receivables and cash; as such they need large amount of working capital. Generally
speaking it may be said that public utility undertakings require small amount of
working capital, trading and financial firms require relatively very large amount,
whereas manufacturing undertakings require sizable working capital between these
two extremes.
2. Size of business/scale of operations
The working capital requirements of a concern are directly influenced by the
size of its business which may be measured in terms of scale of operations. Greater
the size of a business unit, generally larger will be requirements of working capital.
However, in some cases even a smaller concern may need working capital due to
high overhead charges inefficient use of available resources and other economic
disadvantages of small size.
3. Production policy
In certain industries the demand is subject to wise fluctuations due to
seasonal variations. The requirements of working capital, in such cases, depend
upon the production policy. The production could be kept either steady by
accumulating inventories during slack periods with a view to meet high demand
during the peak season or the production could be curtailed during the slack
season and increased during the peak season. If the policy is to keep production
steady by accumulating inventories it will require higher working capital.
4. Manufacturing process/Length of production cycle
In manufacturing business, the requirements of working capital increases in
direct proportion to length of manufacturing process. Longer the process period of
manufacture, larger is the amount of the working capital required. The longer the
manufacturing time, the raw materials and other suppliers have to be carried for a
longer period in the process with progressive increment of labour and services costs
before the finished product is finally obtained. Therefore, if there are alternative
processes of production, the process with the shortest production period should be
chosen.
5. Working capital cycles
In a manufacturing concern, the working capital cycles starts with the
purchase of raw material and ends with the realization of cash from the sale of
finished products. This cycle involves purchase of raw materials and stores, its
conversion into stocks of finished stock through work-in-progress with the
progressive increment of labour and service costs, conversion of finished stock into
sales, debtors and receivables and ultimately realization of cash and this cycle
continues again from cash to purchase of raw material and so on. The speed with
which the working capital completes one cycle determine the requirements of
working capital -longer the period of the cycle larger is the requirement of working
capital.
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6. Rate of stock turnover
There is a high degree of inverse co-relationship between the quantum of
working capital and the velocity or speed with which the sale are effected. A firm
having a high rate of stock turnover will need lower amount of working capital as
compared to a firm having a low rate of turnover.
7. Credit policy
The credit policy of a concern in its dealings with debtors and creditors
influence considerably the requirements of working capital. A concern that
purchase its requirements on credit and sells its products/services on cash
requires lesser amount of working capital. On the other hand concern buying its
requirements for cash and allowing credit to its customers, shall need larger
amount of working capital as very huge amount of funds are bound to be tied up in
debtors or bills receivables.
8. Business Cycles
Business cycle refers to alternate expansion and contraction in general
business activity. In a period of boom i.e., when the business is prosperous, there is
a need for larger amount of working capital due to increase in sales, rise in prices,
optimistic expansion of business, etc., on the contrary in the times of depression
i.e., when there is a down swing of the cycle, the business contracts, sales decline,
difficulties are faced in collections from debtors and firms may have a large amount
of working capital lying idle.
9. Rate of growth of business
The working capital requirements of a concern increase with the growth and
expansion of its business activities. Although, it is difficult to determine the
relationship between the growth in the volume of business and the growth in the
working capital of a business, yet it may be concluded that for normal rate of
expansion in the volume of business, we may retained profits to provide for more
working capital but in fast growing concerns, we shall require larger amount of
working capital.
10. Earning capacity and dividend policy
Some firms have more earning capacity than others due to quality of their
products, monopoly conditions, etc. Such firms with high earning capacity may
generate cash profits from operations and contribute to their working capital. The
dividend policy of a concern also influences the requirements of its working capital.
A firm that maintains a steady high rate of cash dividend irrespective of its
generation of profits needs more working capital than the firm that retains larger
part of its profits and does not pay so high rate of cash dividend.
11. Price level changes
Changes in the price level also affect the working capital requirements.
Generally, the rising prices will require the firm to maintain larger amount of
working capital as more funds will be required to maintain the same current assets.
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The effect of rising prices may be different for different firms. Some firms may be
affected much while some others may not be affected at all by the rise in prices.
12. Other factors
Certain other factors such as operating efficiency, management ability,
irregularities of supply, import policy, asset structure, importance of labour,
banking facilities, etc., also influence the requirements of working capital.
15.2.7 MANAGEMENT OF WORKING CAPITAL
The basic goal of working capital management is to manage the current assets
and current liabilities of firm in such a way that a satisfactory level of working
capital in maintained, i.e., it is neither inadequate nor excessive. This is so because
both inadequate as well as excessive working capital positions are bad for any
business. Inadequacy of working capital may lead the firm to insolvency and
excessive working capital implies idle funds which earn no profits for the business.
Working capital management policies of a firm have a great effect on its
profitability, liquidity and structural health of the organization. In this context,
working capital management is three dimensional in nature:
1. Dimension I is concerned with the formulation of policies with regard to
profitability, risk and liquidity.
2. Dimension II is concerned with the decision about the composition and level
of current assets.
3. Dimension III is concerned with the decisions about the composition and level
of current liabilities.
15.3 MANAGEMENT OF CASH
Cash is one of the current assets of a business. It is needed at all times to
keep the business going. A business concern should always keep sufficient cash for
meeting its obligations. Any shortage of cash will hamper the operations of a
concern and any excess of it will be unproductive. Cash is the most unproductive of
all the assets. While fixed assets like machinery, plant, etc., and current assets
such as inventory will help the business in increasing its earning capacity, cash in
hand will not add anything to the concern. It is in this context that cash
management has assumed much importance.
15.3.1 NATURE OF CASH
For some persons, cash means only money in the form of currency (cash in
hand). For other persons, cash means both cash in hand and cash at bank. Some
even include near cash assets in it. They take marketable securities too as part of
cash. These are the securities which can easily be converted into cash. These
viewpoints reflect the degree of freedom of the persons using the cash. Whether a
persons wants to use it immediately or can wait for a time to use it depends upon
the needs of the concerned person.
A business has to keep required cash for meeting various needs. The assets
acquired by cash again help the business in producing cash. The goods
manufactured or services produced are sold to acquire cash. A firm will have to
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maintain a critical level of cash. If at a time it does not have sufficient cash with it,
it will have to borrow from the market for reaching the required level. There
remains a gap between cash inflows and cash outflows. Sometimes cash receipts
are more than the payments or it may be vice-versa at another time. A financial
manager tries to synchronise the cash inflows and cash outflows. But this situation
is seldom found in the real world. But this situation is seldom found in the real
world. Perfect synchronization of receipts and payments of cash is only an ideal
situation.
15.3.2 MOTIVES FOR HOLDING CASH
The firm‘s needs for cash may be attributed to the following needs:
Transactions motive, Precautionary motive and speculative mative.
1. Transaction Motive
A firm needs cash for making transaction in the day to day operations. The
cash is needed to make purchases, pay expenses, taxes, dividend etc. The cash
needs arise due to the fact that there is no complete synchronization between cash
receipts and payments. Sometimes cash receipts exceed cash payments or vice
versa. The transaction needs of cash can be anticipated because the expected
payments in near future can be estimated. The receipts in future may also be
anticipated but the things do not happen as desired. If more cash is needed for
payments than receipts, it may be raised through bank overdraft. On the other
hand if there are more cash receipts than payments, it may be spent on marketable
securities. The maturity of securities may be adjusted to the payments in future
such as interest payment, dividend payment, etc.
2. Precautionary motive
A firm is required to keep cash for meeting various contingencies. Though cash
inflows and cash outflows are anticipated but there may be variations in these
estimates. For example, a debtors who was to pay after 7 days may inform of his
inability to pay; on the other hand a supplier who used to give credit for 15 days
may not have the stock to supply or he may not be in a position to give credit at
present. In these situations cash receipts will be less then expected and cash
payments will be more as purchase may have to be made for cash instead of credit.
Such contingencies often arise in a business. A firm should keep some cash for
such contingencies or it should be in a positions to raise finances at a short period.
3. Speculative motive
The speculative motive relates to holding of cash for investing in profitable
opportunities as and when they arise. Such opportunities do not come in a regular
manner. These opportunities cannot be scientifically predicated but only
conjectures can be made about their occurrence. For example, the prices of share
and securities may be low at a time with an expectation that these will go up
shortly. The prices of raw materials may fall temporarily and a firm may like to
make purchase at these prices. Such opportunities can be availed of if a firm has
cash balance with it.
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15.3.3.ASPECTS OF CASH MANAGEMENT
Cash management has assumed importance because it is the most significant
of all the current assets. It is required to meet business obligations and it is
unproductive when not used.
Cash management deals with the following:
i. Cash inflows and outflows
ii. Cash flows within the firm
iii. Cash balance held by the firm at a point of time.
Cash management needs strategies to deal with various facts of cash.
Following are some of its facts:
a) Cash planning
Cash planning is a technique to plan and control the use of cash. A projected
cash flow statement may be prepared, based on the present business operations
and anticipated future activities. The cash inflows from various sources may be
anticipated and cash outflows will determine to possible uses of cash
b) Cash forecasts and Budgeting
A cash budget is the most important device for the control of receipts and
payments of cash. A cash budget is an estimate of cash receipts and disbursement
during a future period of time. It is an analysis of flow of cash in a business over a
future, short of long period of time. It is a forecast of expected cash intake and
outlay.
The short-term forecasts can be made with the help of cash flow projections.
The finance manager will make estimates of likely receipts in the near future and
the expected disbursements in that period. Though it is not possible to make exact
forecasts even then estimates of cash flows will enable the planners to make
arrangement for cash flows will enable the planners to make arrangement for cash
needs. It may so happen that expected cash receipts may fall short or payments
may exceed estimates. A financial manager should keep in mind the sources from
where he will meet short-term needs. He should also plan for productive use of
surplus cash for short periods. The long-term cash forecasts are also essential for
proper cash planning. The estimates may be for three, four, five or more years. Lon-
term forecasts indicate company‘s future financial needs for working capital, capital
projects, etc. Both short-term and long-term cash forecasts may be made with the
help of following methods:
i. Receipts and Disbursements method
ii. Adjusted net income method
i) Receipts and Disbursements Method:
In this method the receipts and payments of cash are estimated. The cash
receipts may be from cash sales, collections from debtors, sale of fixed assets,
receipts of dividend or other incomes of all the items; it is difficult to forecast sales.
The sales may be on cash as well as credit basis. Cash sales will bring receipts at
the time of sale while credit sales will bring receipts at the time of sale while credit
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sales will bring cash later on. The collections from debtors (credit sales) will depend
upon the credit policy of the firm. Any fluctuation in sales will disturb the receipts
of cash. Payments may be made for cash purchases, to creditors for goods,
purchase of fixed assets, for meeting operating expenses such as wage bill, rent,
rates, taxes or other usual expenses, dividend to shareholders etc. The receipts and
disbursements are to be equaled over a short as well as long periods. Any shortfall
in receipts will have to be met from banks or other sources. Similarly, surplus cash
may be invested in risk free marketable securities.
ii) Adjusted Net Income Method
This method may also be known as sources and uses approach. It generally
has three sections: sources of cash, uses of cash and adjusted cash balance. The
adjusted net income method helps in projecting the company‘s need for cash at
some future date and to see whether the company will be able to generate sufficient
cash. If not, then it will have to decide about borrowing or issuing shares, etc. In
preparing its statement the items like net income, depreciation, dividends, taxes,
etc. can easily be determined from company‘s annual operating budget. The
estimation of working capital movement becomes difficult because items like
receivables and inventories are influenced by factors such as fluctuations in raw
material costs, changing demand for company‘s products and likely delays in
collections.
15.3.4 MANAGING CASH FLOWS
After estimating the cash flows, efforts should be made to adhere to the
estimates of receipts and payments of cash. Cash management will be successful
only if cash collections are accelerated and cash disbursements, as far as possible,
are delayed. The following methods of cash management will help:
15.3.5 METHODS OF ACCELERATING CASH INFLOWS
1. Prompt payment by customers
In order to accelerate cash inflows, the collections from customers should be
prompt. This will be possible by prompt billing. The customers should be promptly
informed about the amount payable and the time by which it should be paid. It will
be better if self addressed envelope in sent along with the bill and quick reply is
requested. Another method for prompting customers to pay earlier is allow them a
cash discount. The availability of discount is a good saving for the customer and in
an anxiety to earn it they make quick payments.
2. Quick Conversion of payment into cash:
Cash inflows can be accelerated by improving cash collecting process. Once
the customer writes a cheque in favour of the concern the collection can be
quickened by its early collection. There is a time gap between the cheque sent by
the customer and the amount collected against it. This is due to many factors,
i. Mailing time, i.e., time taken by post office for transferring cheque from
customer to the firm, referred to as postal float;
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ii. Time taken in processing the cheque within the organization and sending it to
bank for collection, it is called lethargy and
iii. Collection time with in the bank i.e., time taken by the bank in collecting the
payment from the customer‘s bank, called bank float. The postal float,
lethargy and bank float are collectively referred to as deposit float. The term
deposit float refers to the cheques written by the customers but the amount
not yet usable by the firm. An efficient cash management will be possible only
if the time taken in deposit float is reduced and make the money available for
use. This can be done by decentralizing collections.
3. Decentralised Collections
A big firm operating over wide geographical area can accelerate collections by
using the system of decentralized collections. A number of collecting centers are
opened in different areas instead of collecting receipts at one place. The idea of
opening different collecting centers is to reduce the mailing time from customer‘s
dispatch of cheque and its receipt in the firm and then reducing the time in
collecting these cheques. On the receipt of the cheque it is sent for collection. Since
the party may have issued the cheque on a local bank, it will not take much time in
collecting it. The amount so collected will be sent in the central office at the earliest.
Decentralised collection system saves mailing and processing time and, thus,
reduces the financial requirements.
4. Lock Box system
Lock box system is another technique of reducing mailing, processing and
collecting time. Under this system the firm selects some collecting centre at
different places. The places are selected on the basic of number of consumers and
the remittances to be received from a particular place. The firm hires a post box in
a post office and the parties are asked to send the cheque on that post box number.
A local bank is authorized to operate the post box. The bank will collect the post a
number of times in a day and start the collection process of cheques. The amount
so collected is credited to the firm‘s account. The bank will prepare a detailed
account of cheques received which will be used by the firm for processing purpose.
This system of collecting cheques expedites the collection process and avoids delays
due to mailing and processing time at the accounting department. By transferring
clerical function to the bank, the firm may reduce its costs, improve internal control
and reduce the possibility of fraud.
15.3.6 METHOD OF SLOWING CASH OUTFLOWS
A company can keep cash by effectively controlling disbursements. The
objective of controlling cash outflows is to slow down the payment as far as
possible. Following methods can be used to delay disbursements.
1. Paying on Last Date
The disbursements can be delayed on making payments on the last due date
only. If the credit is for 10 days then payment should be made on 10th day only. It
can help in using the money for short periods and the firm can make use of cash
discount also.
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2. Payments through Drafts
A company can delay payments by issuing drafts to the suppliers instead of
giving cheques. When a cheque is issued then the company will have to keep a
balance in its account so that the cheque is paid whenever it comes. On the other
hand a draft is payable only on presentation to the issuer. The receiver will give the
draft to its bank for presenting it to the buyer‘s bank. It takes a number of days
before it is actually paid. The company can economise large resources by using this
method.
3. Adjusting Payroll Funds
Some economy can be exercised on payroll funds also. It can be done by
reducing the frequency of payments. If the payments are made weekly then this
period can be extended to a month. Secondly, finance manager can plan the issuing
of salary cheques and their disbursements. If the cheques are issued on Saturday
then only a few cheques may be presented for payments, even on Monday all
cheques may not be presented. On the basis of his past experience finance manager
can deposit the money in bank because it may be clear to him about the average
time taken by employees in encashing their pay cheques.
4. Centralisation of Payments
The payments should be centralized and payments should be made through
drafts or cheques. When cheques are issued from the main office then it will take
time for the cheques to be cleared through post. The benefit of cheque collecting
time is availed.
5. Making use of float
Float is a difference between the balance shown in company‘s cash book (Bank
column) and balance in pass book of the bank. Whenever a cheque is issued, the
balance at bank in cash book is reduced. The party to whom the cheque is issued
may not present it for payment immediately. If the party is at some other station
then cheque. Is issued may not present it for payment immediately if the party is at
some other station then cheque will come through post and it may take a number
of days before it is presented. Untill the time, the cheques are not presented to
bank for payment there will be a balance in the bank. The company can make use
of this float if it is able to estimate it correctly
15.3.7 CASH BUDGET
A cash budent is an estimate of cash receipts and disbursements of cash
during a future period of time. In the words of soloman Ezra, a cash budget is ―an
analysis of flow of cash in a business over a future, short or long period of time. It
is a forecast of expected cash intake and outlay.‖ It is a device to plan and control
the use of cash. The cash budget pin points the period when there is likely to be
excess or shortage of cash. Thus, a firm by preparing a cash budget can plan the
use of excess cash and make arrangements for the necessary cash as and when
required. The cash budget should be co-ordinated with other activities of the
business. The functional budgets may be adjusted according to the cash budget.
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The available funds should be fruitfully used and the concern should not suffer for
want of funds.
15.4 RECEIVABLES MANAGEMENT
15.4.1 MEANING AND OBJECTIVES OF RECEIVABLES MANAGEMENT
Receivables management is the process of making decisions relating to
investment in trade debtors. We have already that certain investment in receivables
is necessary to increase the sales and the profits of a firm. But at the same time
investment in this asset involves cost considerations also. Further, there is always
a risk of bad debts too. Thus, the objective of receivables management is to take a
sound decision as regards investment in debtors.
Receivables result from credit sales. A concern is required to allow credit sales
in order to expand its sales volume. It is not always possible to sell goods on cash
basis only. Sometimes, others concerns in that line might have established a
practice of selling goods on credit basis. Under these circumstances, it is not
possible to avoid credit sales without adversely affecting sales. The increase in sales
is also essential to increase profitability. After a certain level of sales the increase in
sales will not proportionately increase production costs. The increase in sales will
bring in more profits.
Thus, receivables constitute a significant portion of current assets of a firm.
But, for investment in receivables, a firm has to incur certain costs. Further, there
is a risk of bad debts also. It is therefore, very necessary to have a proper control
and management of receivables.
Receivables represent amounts owned to the firm as a result of sale of goods or
services in the ordinary course of business. These are claim of the firm against its
customers and form part of its current assets. Receivables are also known as
accounts receivables, trade receivables, customer receivables or book debts.
15.4.2 COSTS OF MAINTAINING RECEIVABLES
The allowing of credit to customers means giving of funds for the customer‘s
use. The concern incurs the following costs on maintaining receivables;
1. Cost of Financing Receivables
When goods and services are provided on credit then concern‘s capital is
allowed to be used by the customers. The receivables are financed from the funds
supplied by shareholders for long term financing and through retained earnings.
The concern incurs some cost for collecting funds which finance receivables.
2. Cost of collection
Proper collection of receivables is essential for receivables management. The
customers who do not pay the money during a stipulated credit period are sent
remainders for early payments. Some persons may have to be sent for collecting
these amounts. In some cases legal recourse may have to be taken for collecting
receivables. All these costs are known as collection costs which a concern is
generally required to incur.
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3. Bad Debts
Some customers may fail to pay the amounts due towards them. The amounts
which the customers fail to pay are known as bad debts. Though a concern may be
able to reduce bad debts through efficient collection machinery but one cannot
altogether rule out this cost.
15.4.3 FACTORS INFLUENCING THE SIZE OF RECEIVABLES
Besides sales, a number of other factors also influence the size of receivables.
The following factors directly and indirectly the size of receivables.
1. Size of credit sales
The volume of credit sales is the first factor which increases or decreases the
size of receivables. If a concern sells only on cash basis, as in the case of Bata Shoe
Company, then there will be no receivables. The higher the part of credit sales out
of total sales, figures of receivables will also be more or vice versa.
2. Credit Policies
A firm with conservative credit policy will have a low size of receivable while a
firm with liberal credit policy will be increasing this figure. The vigour with which
the concern collects the receivables also affects its receivables. If collections are
prompt then even if credit is liberally extended the size of receivables will remain
under control. In case receivables remain outstanding for a longer period, there is
always a possibility of bad debts.
3. Terms of trade
The size of receivables also depends upon the terms of trade. The period of
credit allowed and rates of discount given are linked with receivables. If credit
period allowed is more then receivable will also be more. Sometimes trade polices of
competitors have to be followed otherwise it becomes difficult to expand the sales.
The trade terms once followed cannot be changed without adversely affecting sales
opportunities.
4. Expansion plans
When a concern wants to expand its activities, it will have to enter new
markets. To attract customer, it will give incentives in the form of credit facilities.
The period of credit can be reduced when the firm is able to get permanent
customers. In the early stages of expansion more credit becomes essential and size
of receivables will be more.
5. Relation with profit
The credit policy is followed with a view to increase sales. When sales
increases beyond a certain level the additional costs incurred are less than the
increase in revenues. It will be beneficial to increase sales beyond a points because
it will bring more profits. The increase in profits will be followed by an increase in
the size of receivables or vice-versa.
6. Credit Collection Efforts
The collection of credit should be streamlined. The customers should be sent
periodical reminders if they fail to pay in time. On the other hand, if adequate
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attention is not paid towards credit collection then the concern can land itself in a
serious financial problem. An efficient credit collection machinery will reduce the
size of receivables. If these efforts are slower then outstanding amounts will be
more.
7. Habits of customers
The paying habits of customers also have a bearing on the size of receivables.
The customers may be in the habit of delaying payments even though they are
financially sound. The concern should remain in touch with such customers and
should make them realize the urgency of their needs.
15.4.3 DIMENSIONS OF RECEIVABLES MANAGEMENT
Receivables management involves the careful consideration of the following
aspects:
1. Formating of credit policy.
2. Executing the credit policy.
3. Formulating and executing collection policy.
1. Formating of credit policy.
For efficient management of receivables, a concern must adopt a credit policy.
A credit policy is related to decisions such as credit standards, length of credit
period, cash discount and discount period, etc.
(a) Quality of Trade Accounts or Credit Standards
The volume of sales will be influenced by the credit policy of a concern. By
liberalizing credit policy the volume of sales can be increased resulting into
increased profit. The increased volume of sales is associated with certain risk of bad
debts and delayed receipts. The increase in number of customers will increase the
clerical work of maintaining the additional accounts and collecting of information
about the credit-worthless of customers. There may be more bad debts losses due
to extension of credit to less worthy customers. These customers may also take
more time than normally allowed in making the payments resulting into tying up of
additional capital in receivables. On the other hand, extending credit to only credit
worthy customers will save costs like bad debt losses, collection costs, investigation
costs, etc. The restriction of credit to such customers only will certainly reduce
sales volume, thus resulting in reduced profits.
(b) Length of Credit Period
Credit terms or length of credit period means the period allowed to the
customers for making the payment. The customers paying well in time may also be
allowed certain cash discount. There is no binding on fixing the terms of credit. A
concern fixes its own terms of credit depending upon its customers and the volume
of sales. The customs of industry act as constraints on credit terms of individual
concerns. The competitive pressure from other firms compels to follow similar credit
terms, otherwise customers may feel inclined to purchase from a firm which allows
more days for paying credit purchases. Sometimes more credit time is allowed to
increase sales to existing customers and also to attract new customers. The length
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of credit period and quantum of discount allowed determine the magnitude of

investment in receivables.
(c) Cash Discount
Cash discount is allowed to expedite the collection of receivables. The funds
tied up in receivables are released. The concern will be to use the additional funds
received from expedited collections due to cash discount. The discount allowed
involves cost. The financial manager should compare the earning resulting from
released funds and the cost of discount. The discount should be allowed only if its
cost is less than the earnings from additional funds. If the funds cannot be
profitably employed then discount should not be allowed.
(d) Discount Period
The collection of receivables is influenced by the period allowed for availing the
discount. The additional period allowed for this facility may prompt some more
customers to avail discount and make payments. This will mean additional funds
released from receivables which may be alternatively used. At the same time the
extending of discount period will result in late collection of funds because those
who were getting discount and making payment as per earlier schedule will also
delay their payments.
2. Executing Credit Policy
After formulating the credit policy, its proper execution is very important. The
evaluation of credit applications and finding out the credit worthiness of customers
should be undertaken.
(a) Collecting credit Information:
This first step in implementing credit policy will be to gather credit information
about the customers. This information should be adequate enough so that proper
analysis about the financial position of the customers is possible. This type of
investigation can be undertaken only upto a certain limit because it will involve
cost. The cost incurred in collecting this information and the benefit from reduced
bad debt losses will be compared. The credit information will certainly help in
improving the quality of receivables but the cost of collecting information should
not increase the reduction of bad debts losses.
(b) Credit analysis
After gathering the required information, the finance manager should analyse
it to find out the credit worthiness of potential customers and also to see whether
they satisfy the standards of the concern or not. The credit analysis will determine
the degree of risk associated with the account, the capacity of the customer to
borrow and his ability and willingness to pay.
(c) Credit Decision
After analyzing the creditworthiness of the customer, the finance manager has
to take a decision whether the credit is to be extended and if yes then upto what
level. He will match the creditworthiness of the customer with the credit standards
of the company. If customer‘s creditworthiness is above the credit standards then
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there is no problem in taking a decision. It is only in the marginal cases that such
decisions are difficult to be made. In such cases the benefit of extending the credit
should be compared to the likely bad debts losses and then a decision should be
taken. In case the customers are below the company‘s credit standards then they
should not be outrightly refused. Rather they should be offered to pay on delivery of
goods, invoices may be sent through bank and released after collecting dues or
some third party guarantee may be insisted. Such a course may helping in
retaining the customers at present and their dealings may help in reviewing their
requests at a later date.
(d) Financing Investments in Receivables and Factoring
Accounts receivables block a part of working capital efforts should be made
that funds are not tied up in receivables for longer periods. The finance manager
should make efforts to get receivables financed so that working capital needs are
met in time. The banks allow raising of loans against security of receivables.
Generally, banks supply between 60 to 80 per cent of the amount of the amount of
loan. The banks will accept receivables of dependable parties only. Another method
of getting funds against receivables is their outright sale to the bank. The bank will
credit the amount to the party after deducting discount and will collect the money
from the customers later. Here too, the bank will insist on quality receivable only.
Besides banks, there may be other agencies which can buy receivables and pay
cash for them. This facility is known as factoring.
3. Formulating and Executing Collection Policy
The collection of amounts due to the customers is very important. The concern
should devise procedures to be followed when accounts become due after the expiry
of credit period. The collection policy be termed as strick and lenient. A strict policy
of collection will involve more efforts on collection. Such a policy has both plus and
negative effects. This policy will enable early collection of dues and will reduce bad
debt losses.
SUMMARY
In the above pages the concept of working capital is explained, classification of
working capital, disadvantages of excessive working capital, dangers of inadequate
working capital and factors influencing working capital are discussed.
In the second part, the different motives of holding cash, methods of
controlling cash flows costs of maintaining receivables and the factors influencing
receivables are explained.
KEY WORDS
 Gross working capital
 Net working capital
 Working capital cycle
 Motive for holding cash
 Lock Box system
 Float
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REVIEW QUESTIONS
1. Explain the concept of working capital
2. Which are the factors that influence working capital?
3. What are the objectives of working capital.
4. What are the motives for holding cash?
5. State the different methods of controlling cash flow.
6. What are the different costs involved in maintaining receivables?
7. Explain the factors influencing the management of receivables.
REFERENCES
1. Dr. S.N. Maheswari, Financial Management, Sultan Chand and Sons, New
Delhi, 2007.
2. I.M. Pandey, Financial Management, Vikas Publications, New Delhi, 2007.
3. P. Saravanavel, Financial Management of Principles & Practice, Danpat Rai &
Sons, Delhi-6, Page 354 to 373.
4. G. Sudharsana Reddy, Financial Management, Himalaya Publishing House,
Mumbai-2004, Page 325 to 355, 534-547.

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LESSON – 16

CAPITAL STRUCTRUE AND FINANCIAL PLANNING AND CONTROL

Structure
16.0 Objectives
16.1 Introduction
16.2 Capital structure
16.2.1 Definition
16.2.1.1 Capitalization
16.2.1.2 Capital structure
16.2.1.3 Financial structure
16.2.2 Importance of capital structure (financial Leverage, trading on
equity and the optimal capital structure)
16.2.3 Optimal capital structure
16.2.4 Essential features of a sound capital mix
16.2.5 Factors determining capital structure
16.2.6 Capital structure and the value of the Firm
16.3 Financial planning
16.3.1 Meaning and definition
16.3.2 Objectives of financial plan
16.3.3 Characteristics of a sound financial plan
16.3.4 Process of financial planning
16.3.5 Long-term (strategic) financial plans
16.3.6 Short-term (operating) financial plans
16.3.7 Factors affecting financial plan
16.3.8 Limitations of financial plan
16.0 OBJECTIVES
After reading through this lesson you will be able to:
 Explain the concept of capital structure.
 Discuss the theories of capital structure
 Write the essential features of sound capital mix
 List the factors determining capital structure
 Define financial planning.
 State the objectives of financial plan.
 Explain the characteristics of a sound financial plan.
 List out the factors affecting financial plan.
16.1 INTRODUCTION
Once the capital investment decision on assets is made, a firm has to decide
the way in which the capital project will be financed. The assets of the company can
be financed either by increasing the owner‘s claim or creditor‘s claim. Should a firm
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employ equity or debt or both? What are the implications of the debt-equity mix?
Which is an appropriate mix of debt and equity? These questions will be answered
while discussing financial structure in detail.
16.2 CAPITAL STRUCTURE
There are two major source of finance for an industry namely Viz., owned and
borrowed. The proportion of using these two sources simultaneously in an unit is
named as capital structure. The proportion between these two sources is a matter
of financial decision. The combined use of these two sources is also said to be
financial leverage.The object of using the two sources of finance is to employ the
cheapest possible borrowed funds, so as to give a higher rate of return to owned
funds. Besides, for borrowed funds interest is paid. The interest is charged to Profit
and loss account. As such it reduces the corporate tax border.
16.2.1 DEFINITION
16.2.1.1 Capitalization
It refers to the total amount of long term securities issued by a company. It is
related to the quantitative aspect of financial planning.
16.2.1.2 Capital Structure
It is related to the qualitative aspect of financial planning. For raising long-
term finance, a company can issue three types of securities equity shares,
preference shares and debenture. Capital structure refers to the different kinds of
securities that are going to be issued and their proportion is making up
capitalization.
16.1.1.3 Financial Structure
It means entire liability side of balance sheet. i.e., it includes long term and
short term liabilities. In other words of Nemmers and Grunewald ―Financial
structure refers to all the financial resources marshaled by the firm, short as well
as long term, and all forms of debt as well as equity‖.
16.2.2 IMPORTANCE OF CAPITAL STRUCTURE (FINANCIAL LEVERAGE, TRADING ON
EQUITY AND THE OPTIMAL CAPITAL STRUCTURE)
The term capital structure refers to the relationship between various long term
forms of financing such as debentures, preference shares and equity shares. As a
general rule there should be a proper mix of debt and equity in financing the firm‘s
assets. ―The use of long term fixed interest bearing debt and preference share
capital is called financial leverage‖. When such leverage is aimed to increase the
return on equity share capital it is called trading on equity. It is true that capital
structure cannot affect the total e4arnings of a firm but it can affect the share of
earnings for equity shareholders. This can be explained with the help of the
following examples.
16.2.3 OPTIMAL CAPITAL STRUCTURE
As discussed above the capital structure decision can influence the earnings of
the equity shareholders and thereby the value of the firms, through trading on
equity or leverage. Then what is the least combination of debt and equity. The
optimal capital structure may be defined as ―That capital structure or combination
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of debt and equity that leads to the maximum value of the firm‖ It also implies the
minimum cost of capital.
Definition - Solomans Era
Optimal capital structure ―maximizes the value of the company and hence the
wealth of its owners and minimizes the company‘s cost of capital‖.
Capital structure planning which aims at the maximization of profit and the
wealth of the shareholders ensures the maximum value of a firm or the minimum
cost of capital. It is very important for the financial manager to determine the
proper mix of debt and equity for his firm. In principle, every firm aims at achieving
the optimal capital structure but in practice it is very difficult to design the optimal
structure. The management of a firm should try to reach as near as possible of the
optimum point of debt and equity mix.
16.2.4 ESSENTIAL FEATURES OF A SOUND CAPITAL MIX
A sound or an appropriate capital structure should have the following
essential features:
a) Maximum possible use of leverage
b) The capital structure should be flexible
c) To avoid undue financial/business risk with the increase of debt.
d) The use of debt should be within the capacity of the firm.
e) The use of debt should be within the capacity of a firm. The firm should be
in a position to meet its obligations in paying the loans and interest charges
as and when due.
f) It must avoid undue restrictions in agreement of debt.
There is hard and fast rule for the fixation of optimal capital structure. It
depends upon so many factors like availability of loanable funds, cost of borrowed
capital, nature of capital market etc. Optimal capital structure for one company
may not suit another company. Decision has to be taken by taking into account
each separately.
16.2.5 FACTORS DETERMINING CAPITAL STRUCTURE
The capital structure of a concern depends upon a large number of factors
they are as follows;
Financial Leverage or Trading on Equity
The use of long term debt increases the EPS if the firm yields a higher return
than the cost of the debt. The EPS also increase with the use of preference share
capital. The leverage impact of debt is much more because the interest payable on
them is deductible before tax. But incase of preference dividend it is payable after
tax and not a charge on the profit and loss account. The leverage can also act
adversely if the cost of debt is much more than the expected rate of earnings of the
firm. So the leverage or trading on equity limits the capital structure.
2. Growth and Stability of Sales
The capital structure of the firm is highly influenced by the growth and
stability of sales. Stability of sales ensures that the firm will not face any difficulty
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in meeting its fixed commitments of interest and repayment of debt. Usually,

greater the rate of growth of sales, greater can be the use of debt in the financing of
a firm. On the other hand, if the sales of a firm are highly fluctuating or declining, it
should not employ as far as possible debt financing in its capital structure.
3. COST OF CAPITAL
Every rupees invested in a firm has a cost. Cost of capital refers to the
minimum return expected by its suppliers. The capital structure should provide for
the minimum cost of capital. Usually, debt is a cheaper source of finance compared
to preference and equity capital due to (i) Fixed rate of interest on debt (ii) Legal
obligations to pay interest (iii) Repayment of loan and priority at the time of winding
up of the company. Preference capital is also cheaper than equity because of lesser
risk involved and fixed rate of dividend payable to preference shareholders. But
debt is still a cheaper source of finance than even preference capital because of tax
advantage due to deductibility of interest. While formulating a capital structure an
effort must be made to minimize the overall cost of capital.
4. Cash Flow Ability to Service Debt
A firm, which will be able to generate larger and stable cash inflows, can
employ more debt in its capital structure as compared to the one, Which has
unstable and lesser ability to generate cash inflows. Fixed charges coverage ratio
and interest coverage ratio may be calculated for this purpose.
5. Nature And Size Of Firm
Nature and size of a firm also influence its capital structure. Public utility
concern may employ more of debt because of stability and regularity of their
earnings. On the other hand, a concern, which cannot provide stable earnings due
to nature of business, will have rely mainly upon equity capital. Similarly, small
companies have to depend mainly upon owner capital as it is very difficult for them
to raise long term loans at a reasonable rate of interest. While a large company can
arrange long term loans on reasonable terms and also can issue equity preference
shares at case to the public.
6. Control
In case, the funds are raised through the issue of equity shares, the control of
the existing equity shareholders is diluted. Hence, they must raise the additional
funds by way of fixed interest bearing debts. Preference shareholders and
debenture holders do not have the voting right. So, from the point of view of control,
debt financing is recommended.
7. Flexibility
A firm should arrange its capital structure in such a manner that it can
substitute one form of financing by another. Redeemable preference shares and
convertible preference debenture may be preferred on account of flexibility.
Preference shares and debentures, which can be redeemed at the discretion of the
firm, offer the highest flexibility in the capital structure.
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8. Requirements of Investors
The requirement of investor is another factor that influences the capital
structure of a firm. It is necessary to meet the requirements of both institutional as
well as private investors when debt financing is used. Investors are generally
classified under three kinds. i.e., bold investors, cautious investors and less
cautious investors. Bold investors are willing to take all type of risk as they are
enterprising in nature and prefer capital gains and control and hence equity shares
capital is best to suit them. Investors who are over cautious and conservative prefer
safety of investment and stability in returns and hence debentures would satisfy
such over cautious investors. Investors who are less cautious in approach will
prefer preference share capital, which provides stability in returns.
9. Capital Market Condition
Capital market conditions do not remain same for ever. Sometimes there may
be depression while at other same times there may be boom in the market. The
choice of the securities is also influenced by the market conditions. If the share
market is depressed and there are pessimistic business conditions, the company
should not issue equity shares, as investors prefer safety. But in case there is a
boom period, it would be advisable to issue equity shares.
10. Assets Structure
The liquidity and the composition of assets should also be kept in the mind
while selecting the capital structure. If fixed assets constitute a major position of
the total assets of the company, it may be possible for the company to raise more
long term debts.
11. Purpose of Financing
If funds are required for a productive purpose, debt financing is suitable and
the company should issue debentures as interest can be paid out of the profits
generated from the investment. However, if the funds are required for unproductive
purpose or general development on permanent basis, we should prefer equity
capital.
12. Period of Finance
The period for which the finances required is also an important factor to be
kept in mind while selecting the appropriate capital mix. If the finances are
required for a limited period of say seven years, debentures should be preferred to
shares. Redeemable preference shares may also be used for limited period finance.
However, in case funds are needed on permanent basis, equity share capital is
more appropriate.
13. Costs of Flotation
Although not very significant, yet costs of floating various kinds of securities
should also be considered while raising funds.
14. Personal Consideration
The personal consideration and the abilities of the management will have the
final say on the capital structure of a firm. Management‘s that are experienced and
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are very enterprising hesitate ton use more of debt in their financing as compared
to the less experienced and conservative management.
15. Corporate Tax Rate
High rate of corporate taxes on profits compel the companies to prefer debt
financing because interest is allowed to be deducted while computing taxable
profits.
16. Legal Requirements
The Government has also issued certain guidelines for the issue of shares and
debentures. The legal restrictions are very significant as these lay down a frame
work within which capital structure decision has to be made. For example, the
controller of capital issues grants his consent for capital issue when (i) The debt
equity ratio does not exceed 2:1 (for capital intensive project a higher debt equity
may be allowed) (ii) The ratio of preference share capital to equity share capital does
not exceed 1:3 and (iii) Promoters hold at least 25% of the equity capital.
16.2.6 CAPITAL STRUCTURE AND THE VALUE OF THE FIRM
Whether capital structure decision of a firm will affect the value of the firm or
not is debatable issue. To decide whether the capital structure affects the value of
the firm or not, we have to take into account the various theories which are
associated with capital structure. They are as follows:
1. Net income approach
2. Net operating income approach
3. Modigliani miller approach
4. Traditional approach
i. Net Income Approach
According to this approach, the cost of debt capital [Kd] and the cost of equity
capital [Ke] remains unchanged when there is a change in the capital structure. The
cost of debt capital and the cost of equity capital remains unchanged under the
assumption that the average cost of capital [Ko] is measured by using the following
formula:
Ko = Kd [ B/B+S] + Ke[ S/B+S]
Where
Ko = Average cost of capital Kd = Cost of debt capital
Ke = Cost of equity capital B = Market value of debt
S = Market value of equity
ii. Net Operating Income Approach
According to net income approach, the overall capitalization rate [Ko] and cost
of debt [Kd] remains constant for all degrees of leverage. The net operating income
approach was advocated by David Durand. He argued that the market value of the
firm depends on its net operating income and business risk. Therefore, any change
in the degree of leverage will not affect the value of the firm. Any change in the
degree of leverage will affect the distribution of income between debt and equity and
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the value of the firm will not be affected by capital structure decision. According to
Net operating income approach:
Ko = Kd [ B/B+S] + Ke[ S/B+S]
iii. Modigliani Miller Approach
F. Modigliani and M.H. Miller in their article ―The cost of capital, Corporation
Finance and The Theory of Investment in the American Economic review in 1958
have restarted the net operating income approach in terms of three basis
propositions. Before discussing the propositions MM assume the following:
i. Capital market are perfect with freely available information.
ii. The behaviour of investor is rational
iii. Firm can be grouped into ―Equivalent risk classes‖
iv. There is no corporate income tax
v. Investors have homogeneous expectations
Proposition – I
The total market value of the firm is equal to its expected operating income
divided by the discount rate appropriate to its risk class. It is independent of the
degree of leverage.
V = S+B = O/Ko
Where O = Operating income
Proposition – II
The expected yield on equity [Ke] is equal to average to cost of capital [Ko] plus
a premium. This premium is equal to the debt equity ratio times the difference
between [Ko] and [Kd].
Ke = Ko + [ (Ko - Ko) (B/S) ]
Proposition – III
The cut off rate for investment decision making for a firm in a given risk class
is not affected by the manner in which the investment is financed.
Proof of MM approach
MM hypothesis regarding capital structure and the value of the firm have been
stated in three propositions. According to the first proposition value of the firm is
independent of the capital structure decision. To prove their argument they used to
arbitrage mechanism. Let us take the case of two firm B and Q in the same risk
class with different financial leverage. Suppose the value of the firm B is less than
the market value of the firm Q. B is an un levered firm and Q a levered firm. The
investors will use personal leverage in the same sense they will borrow from their
personal account and invest in equity shares or securities. What they get extra
value from their investment from a levered firm will adjusted by the interest paid by
them. Finally the value of the firm p will be equal to the value of the firm Q.
Critism levelled against MM hypothesis
1. The assumption of no corporate income tax is unrealized. These are all the
days where no return from firms on the investment made in securities goes without
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tax. There are several tax free-bonds issued by Government agencies but the
agencies pay corporate tax.
2. The rational behaviour among investor cannot be an universal fact. The
investor depends upon their attitude in between risk and return.
3. The assumptions of perfect market cannot always hold good. The
transference and disclosure of information are being them in accordance with law
and not with the intention of informing the investors.
IV. Traditional Approach
According to traditional approach, the value of the firm will not be affected by
the capital structure decision. The traditional approach is based upon the following
assumptions:
a]. The Cost of debt capital [Kd] remains constant up to a particular stage.
b]. The Cost of equity capital [Ke] remains more or less constant and will go up
slowly when degree of leverage is used.
c]. The average cost of capital will have the same effect as that of Kd and Ke
According to this theory, there is optimal capital structure which minimizes
the cost of capital. At the optimal capital structure the real marginal cost of debt
and equity is the same.
16.3 FINANCIAL PLANNING
16.3.1 MEANING AND DEFINITION
Financial plan may be defined as the plan, which estimates the amount of
funds required, proportion of debt-equity, and the policies for administration of
financial plan.
Financial plan is a statement estimating the amount of capital required,
determination of finance mix and formulation of policies for effective administration
of financial plan. Financial plan states:
1. The amount of capital required to be raised,
2. The proportion of debt in total capital and its form, and
3. Policies bearing on the administration of capital.
Coben and Robbins, opinion that financial plan should:
1. Determine the financial resources required to meet the company's operating
programme;
2. Forecast the extent to, which these requirements will be met by internal
generation of funds and to what extent they will be met from external sources;
3. Develop the best plans to obtain the required external plans;
4. Establish and maintain a system of financial controls governing the allocation
and use of funds.
5. Formulate programmes to provide the most effective profit-volume-cost
relationship;
6. Analyse the financial results of operations;
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7. Report the facts to the top management and make recommendations on

future operations of the firm.
From the above we can conclude that financial plan is an advance
programming of all the plans of financial management and integration and
co-ordination of all these plans with other function of a company.
The meaning of financial planning may be well understood with the following
definitions:
"The financial plan of a corporation has two fold aspects: it refers not to the
capital structure of the corporation, but also to the financial policies which the
corporation has adopted or intends to adopt" - Bourneville, J.H.
"Financial planning pertains only to the function of finance and includes the
determination of the firm's financial objectives formulating and promulgating
financial policies and developing financial procedures" – Walker and Boughn.
The above definition is highlighted the main aspects of financial planning, they
are;
a) determining of financial objectives;
b) formulation of financial policies; and
c) development of financial procedures.
16.3.2 OBJECTIVES OF FINANCIAL PLAN
Financial plan has the following prime objectives:
1. Ensure Availability of Sufficient Funds: It ensures availability of sufficient
funds to invest in feasible projects, there by achieving company goals;
2. Balances Risk and Costs: While raising the required funds there is a need to
balance risk and costs to protect the investor;
3. Simplicity: Here simplicity means firm should issue few securities, since
issue of variety of securities complicate;
4. Flexibility: Flexibility means the plan should allow to adjust the financial
plan according to the changing business environment.
5. Liquidity: Liquidity means the ability of an enterprise to honour the
currently maturing obligations. Hence, financial plan should be able to provide
funds not only when it is running under profits, but also in the periods of
depression or abnormal business period.
6. Optimum Use: Financial plan should ensure sufficient funds only for
genuine needs. Plan should not allow the firm to suffer shortage of cash or should
have excess of funds than need, which will be a waste. Put it simple the funds
should be raised according to the needs and should be utilized properly.
7. Economy: The main objective of financial manager is to raise funds at least
cost, the same is the case in financial plan. Plan should help the firm in raising
funds at minimum cost. It should not impose disproportionate burden on the firm,
and the plan should ensure optimum debt-equity mix.
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16.3.3 CHARACTERISTICS OF A SOUND FINANCIAL PLAN
Success or failure of an enterprise depends upon the financial plan. All
financial plans may not be helpful to the firm to succeed, but a sound financial
plan definitely help in succeeding a firm. What is sound financial plan ? A sound
financial plan is a financial plan, which considers the principles of corporation
finance. The principles are simplicity, foresight, flexibility, liquidity, economy,
contingencies and optimum use.
1. Simplicity: Here, 'simplicity' means that the financial plan should be easily
understandable by a layman. It should be free from complications and / or
suspicion –arising statements. This is possible only when there are few types of
securities, since more type of securities lead to suspicion in the minds of the
investors. Hence, simplicity principle should be kept in mind while preparing
financial plan.
2. Foresight: Financial plan should be prepared only after taking into
consideration of `today' and 'future' needs for funds. It may be difficult to forecast
the exact funds required over a future period, due to change in business
environment, financial plan should be prepared after assuming some changes in
environment. A plan, which prepared with some foresight definitely helpful to the
firm to meet the requirements of the firm. (It is almost long-term view principle
base).
3. Flexibility: Financial plan of a corporation must be flexible enough, to meet
the changing capital requirements of corporation. It should be prepared in such a
way that it should allow to raise additional needed funds and to reduce the capital
whenever needed. Issue of equity shares, preference shares, and bonds can raise
additional funds, but reduction of capital is possible only when there are
redeemable preference shares or debentures or loans from financial institutions.
4. Liquidity: A firm can have liquidity only when a reasonable amount of
current assets kept in the form of liquidity cash. Adequate liquidity also gives
flexibility to the financial plan. Liquidity ensures the credit worthiness and goodwill
to the firm. Hence, proper financial plan helps to the company.
5. Economy: The cost of (capital) procurement of funds should be kept in
mind while formulating a financial plan. Economy means funds should be raised at
minimum cost. Cost minimization depends on the selection of various sources of
finance and optimum mix of debt-equity.
6. Contingencies: Contingencies should be provided by making a provision.
Contingencies are unexpected things. But provision for anticipated contingencies
does not earn sufficient return that is equal to cost of source of funds. But planner
should forecast what kind of contingencies the firm is likely to be faced and how
they can be provided for either retention of profits (internal source) of external
source.
7. Optimum Risk: Just raising of required funds at minimum cost does not help
firm to maximize wealth of shareholders. But there is need to utilise the raised
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funds properly, then only there is meaning for financial plan. Funds should be
provided for the genuine needs of the firm. Firm should neither have excess funds
nor insufficient funds. No doubt excess funds do not earn anything, but wasteful
use of capital is worst than the other. Hence, financial planer should maintain a
proper balance between the long-term and short-term funds, which would offset an
excess or shortage of funds.
Then how to prepare sound financial plan? The following discussion gives the
process of Financial Plan.
16.3.4 PROCESS OF FINANCIAL PLANNING
The financial planning process can be broken down into six steps (3)
1. Projection of Financial Statements: Financial statements are profit & loss
account and balance sheet. Projection of financial statement is very much needed,
since it help analyse the effects of the operating plan on projected profits and
various financial plans. The same projections can also ensure the proper
monitoring of the implemented financial plan. Success of a firm depends on the
ability to identify the deviation from financial plan.
2. Determinations of Funds Needed: Anticipation of funds needed to invest on
fixed assets (Plant & Machinery and equipment) as well as current assets
(inventories and receivables) for R & D programmes and for major promotional
campaigns.
3. Forecast the Availability of Funds: The required funds may be generated from
two sources, internal and external sources. This step involves estimation of funds
to be generated internally, which automatically identifies the amount of funds to be
raised from outside.
4. Establish and Maintain Systems of Controls: Planning and control are the
twins of management. Control system is necessary to see the proper and effective
utilisation of funds within the firm. It makes that the basic financial plan is carried
out properly.
5. Develop Procedures: Developing procedures ensure consistency of actions.
Procedures should be developed for adjusting the basic plan if the economic
forecasts upon which the plan was based do not materialise. For example, if the
economy turns out to be stronger than was forecasted, then the procedures will
help. This step is really a "feedback loop" which triggers modifications to the
financial plan.
6. Establish Performance-Based Management Compensation System: It is very
much needed to reward managers for doing what stockholders want them to do i.e.,
maximization of share prices.
Financial planning process begins with long-term (strategic) financial plans,
which in turn guide the formulation of short-term, (operating plans) and budgets.
Generally, the short-term plans and budgets implement the firm's long-term
strategic objectives. In detail discussion of long-term (strategic) financial plans is
 236

out of scope of this book but a few preliminary comments on long-term financial
plan are in order. Preparation of short-term (operating) financial plan is discussed
in cash management chapter.
16.3.5 LONG-TERM (STRATEGIC) FINANCIAL PLANS
Long-term financial plans layout a company's planned financial actions and
the anticipated impact of those actions over periods ranging from 2 to 10 years.
Generally, companies that are subject to high degree of operating uncertainty
relatively short production cycles, or both tend to use shorter planning horizons.
These strategic plans are part of an integrated strategy that along with other
function of organisation. Long-term financial plans consider the proposed outlays of
fixed assets, R & D, product development actions, capital structure and sources of
financing. Termination of products, projects, repayment of debts also includes in
long-term financial planning. These plans tend to be supported by a series of
annual budgets and profit plans.
16.3.6 SHORT-TERM (OPERATING) FINANCIAL PLANS
Short-term plans generally cover a period of 1 to 2 years. These plans include
the sales forecast and various forms of operating and financing data. The result of
short-term financial plans are operating budgets, cash budget and proforma
financial statements.
Generally short-term financial planning process begins with the sales forecast,
which helps to develop production plans. In turn the production plans, the firm can
estimate direct labour requirements, factory overhead out lays and operating
expenses. Then the next step is to prepare proforma income statement and cash
budget can be prepared, which in turn helps to prepare proforma balance sheet.
16.3.7 FACTORS AFFECTING FINANCIAL PLAN
Planning is the prime function of management, so as to financial planning. As
we have seen in above that the main aims of preparation of financial plan are:
procurement of needed funds at minimum cost and establishment of effective
coordination between costs and risks. A sound financial plan is the one, which take
into account the short term and long-term financial needs of a firm and the mix of
various securities or means for raising the required funds. The following are the
most important factors that must be considered in formulation of financial plan.
1. Nature of the Industry: Consideration of nature of industry is very important
in financial planning. Here, nature of industry refers whether the industry is capital
intensive or labour intensive. The nature of industry helps to decide the (amount)
quantum of capital and the sources of procurement. Generally labour intensive
industries require a less amount of capital in comparison to the capital-intensive
industry. For example, banks are labour intensive whereas paper, cement, textile
industries are capital-intensive industries that require more capital when compared
to the banking industry. Apart from the above stated nature, there is a need to
consider the stability and regularity of earnings. Raising funds from capital market
is very easy for an industry, which have stability and regularity in its earnings
when compared to the other industries, where the earnings are not stable.
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2. Status of the Company in Industry: Status of the company is one, which is

considered by the investors while investing in equities or debentures. Hence, a
financial manager need to assess his / her company's status in terms of size, age
and goodwill, area of operation and the promoters and management's goodwill,
because these affect financial planning. A company, which is having goodwill in the
market or public may be able to raise funds easily (by issue of equity or debentures
or public deposits) when compared to other firms that are new. New firms may
prefer to raise funds from financial institutes since they cannot sell equity or
debentures or public deposits to the public.
3. Evaluation of Alternative Sources of Finance: Procurement of needed funds at
minimum cost is possible only when there is debt and equity combination. For
determination of optimum debt-equity or finance mix, financial manager need to
evaluate various sources of manage in the light of cost, availability, contractual
conditions (debt case), limitations etc., before going to formulate the financial
planning.
4. Attitude of Management towards Control: Management's attitude towards
control is another factors that should be considered while formulating a financial
plan. Any firm or management that is interested to retain the control, they would
not like to raise funds by issue of equity shares to the public, if at all they issue
they would purchase a majority of the issue to hold control. Additional funds that
may be required for modernization or expansion may be raised by debt source of
funds if its capital structure permits otherwise by retentions of profits is always
preferred.
5. Magnitude of External Capital Requirements: A financial manager need to
formulate financial plan after taking into account short-term and long-term
financial needs of the firm. Put it simple financial manager need to consider the
working capital and fixed capital requirements, while formulating a financial plan.
Funds for long-term financial requirements should be raised by means of long-term
sources, equity, irredeemable preference shares, debentures, but the preferable
source is internal that is ploughing back of profits, reserve and surpluses etc. On
the other hand, short-term finances may be obtained from external sources of
finance, like redeemable preference shares or debentures or short-term loans from
financial institutions.
6. Capital Structure: Construction of capital structure is a part of financial
structure. Capital structure should be determined with combination of debt and
equity, but financial manager should try to minimize fixed charge. This is possible
only when the firm is able to raise longterm finances by means of equity source.
7. Flexibility: Flexibility is the main principle of financial plan. It should be
flexible enough to adjust according to the needs of the changing conditions. It
should allow to raise and to repay whenever the need to be, without difficulty and
delay, which is possible only by determination of capital structure. A firm should
arrange its capital structure in such a manner that it can substitute one form of
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financing by another. Flexibility is possible only when the firm uses redeemable
preference shares and redeemable debentures or convertible debentures. These
help to reduce the capital whenever the firm need to be and the convertible
debentures help in increase capital when firm feels need to have funds for long-
term needs.
8. Government Policy: Government policies, financial controls and other
statutory provisions should also be taken into consideration while formulation of a
firm's financial plan. For example, in India, a firm needs to obtain the approval of
controller of capital issues for raising funds by issue of shares and debentures to
the public, but the approval will be given only when the mix of securities is an ideal
one.
The above discussed are the few factors that affect financial planning of a firm.
16.3.8 LIMITATIONS OF FINANCIAL PLAN
The above-discussed factors must be taken into consideration while
formulating optimum financial plan of a firm, but it is subject to certain limitations.
The following are the some of the limitations of financial planning.
1. Difficult in Accurate Forecasting: Financial plans are formulated by taking
into account it expected circumstances in the future. But future is uncertain and
nothing can be said about exactly, if the expectancy about future circumstances
were wrong, then the financial ph would not be effective. Hence, the reliability of
financial planning is uncertain. But the limitation may be overcome by periodical
review of financial plan.
2. Absence of Co-Ordination: Financial function may be the most vital of all
other functions, b efficiency of finance function depends on the co-ordination of
other departments with finance function. Determination of financial needs depends
on personnel requirements, production polio marketing possibilities and research &
development policies. Formulation of optimum financial plan may be possible only
when there is proper coordination among all functions. But general there is a lack
of co-ordination among the functions of a firm.
3. Rigidity: Generally financial plans are rigid in nature. Rigidity means that
the financial plan may not allow to change, if at all it (allows) has flexibility in
nature, but managers may not like change. It is not ready even to make the
changes that are necessary for smooth running of the fir? There area good number
of reasons that may make financial plan rigid. For example, commitment of
investment on large projects, and assets arrangement for raw materials are also
made a managers are not psychologically prepared.
4. Rapid Technological Changes in Industry and Customer Preferences: Rapid
technological changes in the industry like, automated machinery, improved or new
manufacturing process, new marketing mechanism and consumer preferences
demand change in financial plan. Because adoption new technology or purchase of
new machine needs funds. Technological changes are unexpected; hence, it is very
difficult to adjust financial plan for adoption of the fast changing technological
 239

environment. But adoption changes in technology, or changing manufacturing

process or consumer preferences is much In the globalised economy. So, it is a
limitation of financial plan.
SUMMARY
In the first part, the concept of capital structure, the theories of capital
structure, essential features of a sound capital structure, the factors determining
the capital structure are discussed in detail.
In the second part, meaning and definitions of financial planning, objectives
and need for financial plan, characteristics of a sound financial plan and the
factors affecting the financial plan are explained.
KEY WORDS
 Capital structure
 Capitalisation
 Optimum capital structure
 Solomon‘s Era
 Cost of flotation
REVIEW QUESTIONS
1. Explain the concept ‗capital structure‘.
2. What are the assumption of mm theory. Write your criticism against mm
theory.
3. What are the essential features of a sound capital mix.
4. List out the factors that determine the capital structure of a company.
5. What do you mean by financial planning?
6. Explain the characteristics of a sound financial plan.
7. Explain the factors that affecting the financial plan.
REFERENCES
1. Dr. S. N. Maheswari, Financial Management, Sultan Chand and Sons, New
Delhi, 2007.
2. I.M.Pandey, Financial Management, Vikas Publications, New Delhi, 2007.
3. P.Saravanavel, Financial Management of Principles & Practice, Danpat Rai &
Sons, Delhi-6, Page 354 to 373.
4. G.Sudharsana Reddy, Financial Management, Himalaya Publishing House,
Mumbai-2004, Page 325 to 355, 534-547.

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LESSON – 17

ECOLOGY AND ECOSYSTEM

17. 0 Objectives
17.1 Introduction
17.2 Ecology
17.2.1 Meaning
17.2.2 Definition
17.2.3 Ecology and its divisions
17.2.4 Different fields of ecology
17.2.5 Plant ecology and other branches of science
17.2.6 Application of plant ecology
17.3 Ecosystem
17.3.1 Introduction
17.3.2 Meaning and types
17.3.3 Aquatic ecosystem
17.3.4 Terrestrial ecosystem
17.3.5 Structure of ecosystem
17. 0 OBJECTIVES
After reading this lesson you will be able to:
 Write the meaning of Ecology
 Define the concept of ecology
 Explain the divisions of ecology
 State the different fields of ecology
 Define eco system
 Explain the structure of Eco system
 Write about the classification of eco system
17.1 INTRODUCTION
Ecology is concerned with the study of organisms in various habitats, viz land,
oceans, freshwater and air. Ecology can also be defined as the study of the
structure and function of nature. For all practical purposes, we can consider
ecology as the study of organisms and their environment. Ecology proceeds at three
level:
1. The individual organisms
2. The population
3. The community
At the level of the organism, ecology deals with how individuals are affected by
and how they effect their environment.
Eco system is the fundamental concept of ecology. It is the basic functional
unit in ecology. The eco system emphasises relationships and interdependence. Eco
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system supports all life and without the resources and services provided by the eco
systems, human life would not be possible.
An eco system is not a static system. Changes takes place in the physical
environment due to the actions of timing being. These changes lead to different or
another eco system. A most remarkable aspect of eco system is that it is capable of
self maintenance and self regulation. Our country has a variety of eco system. In
this lesson an attempt is made to expose the concept of ecology different fields of
ecology and its components. The concept of eco system and its classification is
explained in this section for a clear understanding.
17.2 ECOLOGY
17.2.1 MEANING
An aspect of biology which deals with the inter-relationship between biotic and
biotic components as well as the relationship among the individuals of the biotic
component is called ecology. The word ‗ecology‘ first proposed by a zoologist named
H. Reiter in 1885, is derived from Greek words, Oikos meaning the dwelling place or
home and logos meaning the discourse or study: thus, the word ecology literally
means the study of living organisms, both plants and animals in their natural
habitats or homes.
The things of the world are classified into two major groups namely the living
or biotic component and the non-living or abiotic component. The biotic component
includes all types of living organisms, both plants and animals and the abiotic
component includes the non-living materials (soil, water, air, etc.) and the forces of
nature (light, gravity and molecular energy). The living organisms exist in an
environmental setting of which they are a part. Every aspect of life is influenced by
the environment and the activities of organisms affect their environment. An aspect
of biology which deals with the inter-relationship between biotic and abiotic
components as well as the relationships among the individuals of the biotic
component is called ecology. Organisms form interacting systems or communities,
these communities are coupled to their environments by transfer of matter and
energy and the communities and environment are interrelated. A functional system
formed by communities and their environment is called ecosystem. Thus ecology is
a science of ecosystems or totality of reciprocal interactions between living
organisms and their physical surroundings. Clark, M.E. 1973).
The word 'ecology' (oekologie), first proposed by a zoologist named
H. Reiter in 1885, is derived from Greek words, oikos meaning the dwelling
place or home and logos meaning the discourse or study; thus, the word
ecology literally means the study of living organisms, both plants and
animals in their natural habitats or homes. It can also be defined as the
study of life in relation to environment; the environment being the aggregate
of all external conditions and influences which affect the life and development
organisms at a given spot. The most widely accepted definition of
ecology was proposed by zoologist named Earnest Haeckel. According to
him, 'ecology is the study of the reciprocal relationship between living
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organisms and their environments. Recently, Odum has defined ecology as

the study of the structure and the function of nature. This branch of
science seeks to determine the effects of environmental factors on the
growth, distribution and migration of the organisms and also deals with
some other aspects of relationship between organisms and these factors.
Ecology, like biology, has been subdivided into plant ecology and animal
ecology. Plant ecology deals with the relationship between plants and their
environments and animal ecology is concerned with the study of relationship
between animals and their environments. Ethology is the term now generally used
by biologists to denote the scientific study of animal behaviour with special
reference to the behaviour of animal in its normal environment. In recent years
there has grown an idea that in biological organisation the plants and animals are
closely interdependent and they react with one another in many ways and at a
particular place plants and animals share the same set of conditions and same
environment. Therefore, these two subdivisions, plant ecology and animal ecology
should be unified. In view of this reasonable fact, the authors of modern ecology
have accounted for the study of both plants and animals in the environment.
17.2.2 DEFINITION
The most widely accepted definition of ecology was proposed by zoologist
named Earnest Haeckel. According to him, ‗ecology is the study of the reciprocal
relationship between living organisms and their environment.‘
17.2.3 ECOLOGY AND ITS DIVISIONS
Ecology may be divided into autecology and synecology.
Autecology. Autecology is concerned with the study of individual animal or
plant species or its population throughout its life history in relation to the habitat
in which it grows or, in other words, it is a study of inter-relationship between
individual species or its population and its environment.
Synecology. The other area of ecology which deals with systems of many
species—whole communities or major fractions of communities and ecosystems is
termed Synecology in English speaking countries, biocenology or biosociology by
many Europeans. (Whittaker, R.H. 1970).
It is concerned with the structure, nature, development and causes of
distribution of communities. To understand the ecology of plant communities, the
ecological life cycles (autecology) of at least most important plant species of the
communities must first be studied. Thus, autecology forms a basis for the study of
synecology.
The study of plant community structure is called phytosociology or plant
sociology. The study of plant ecology merges with plant geography or
phytogeography. This is a science which deals with the distribution of plants on or
near the surface of earth and water and it also deals with the migration of species.
Actually speaking there is no sharp line of distinction between plant ecology and
plant geography. W.B. Turrill comments that plant ecology is intensive while plant
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geography is extensive in outlook, but both are concerned with plant and in
attempting to correlate observed structure and behaviour of plants with causes,
both refer to the same sum total of environmental factors though the emphasis
varies.
17.2.4 DIFFERENT FIELDS OF ECOLOGY
Different branches which are made to account for the various specific and
detailed aspects of ecology are as follows:
1. Habitat Ecology. It deals with habitat as a central theme and plants and
animals as only inhabitants. It includes forest ecology, grassland ecology, fresh
water ecology, marine ecology, desert ecology, etc.
2. Paleoecology. It is concerned with the organisms and geological
environments of the past.
3. Cytoecology. It deals with the cytological details of the species on
Populations in relation to different environmental conditions.
4. Ecosystem ecology. It deals with the structure and working of ecological
systems in relation to space and time and also with the analysis of components of
ecosystem, In this, special emphasis is laid on the reciprocal relationship between
living and non-living systems.
5. Conservation ecology or Resource ecology. It is concerned with the proper
management of plant, animal, soil, water and mineral resources for Human welfare.
6. Ecological energetics and Production ecology. These modem branches of
ecology are still in developing stage. These deal with the mechanisms and quantity
of energy conversion and flow of energy through organisms. Energy production
processes, rate of increase in organic weights of organisms in relation to space and
time are also discussed in this branch of ecology.
17.2.5 PLANT ECOLOGY AND OTHER BRANCHES OF SCIENCE
Ecology is a synthetic branch of biological science which draws source
materials from many other sciences. It is fundamentally related to morphology,
taxonomy, physiology, biochemistry, cytology, genetics etc. Various other sciences,
such as physics, mathematics, statistics are also being increasingly used in the
study of ecological problems. Application of radioactive isotopes, use of many
modern and advanced instruments like spectrometer, infrared gas analyser, flame
photometer, computers in the analysis of data, calorimeters, phytotrons for
culturing the plants in environment controlled chambers and many other
equipments are common in ecological researches. Besides botany, zoology,
chemistry and physics, the knowledge of climatology, geography, pedology and
geology is also essential in the study of complicated problems of plant ecology.
17.2.6 APPLICATION OF PLANT ECOLOGY
The study of plants in their environment has yielded a large body of knowledge
which provides aids to the science of conservation of natural resources. The
knowledge of ecology is of great help in controlling soil erosion, reforestation,
restoration of wild animals as well as grassland vegetation and flood control. Plant
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ecology is directly related to silvics and silviculture and other branches of forest
biology. In British Commonwealth Forestry Terminology (1953) silvics has been
defined as the study of general characteristics and life history of forest trees and
crops with particular reference to environmental factors as the basis for practice of
silviculture while the silviculture has been defined as the art and science of
culturing forest trees and crops.
Every farmer or gardener is ecologist, since by such practices as cultivation,
irrigation, artificial pollination and spraying, he affects the plant behaviour.
Knowledge of ecology is being applied in agriculture, food production and
horticulture. The soil conservation practices are in use these days in agronomy. The
modern ecology revolves round the biological production processes and ecological
energetics. The International Biological Programme (IBP).was launched since July
1, 1967 to study the biological basis of organic productivity and conservation of
natural resources in relation to human welfare. Launching of this programme has
given impetus to the ecologists all over the world and over 70 nations including
India have participated in the IBP studies at either national or international level.
The future of ecology and indeed of biology is likely to be changed by some
international programmes such as 'Man and Biosphere' (MAB).
The history of ecology in India is not very different from that of any other
country in the world. Indeed, it has been much influenced by western school which
provided the leadership. Publications of botanical explorations by Dudgeon (1920),
Saxton (1922), Bor (1942), Osmaston (1926) and Champion (1936) provided enough
opportunity for ecological investigation in India. Professor F.R. Bharucha, a student
of Braun-Blanquet, established the first school of ecology at Bombay. This school
contributed a great deal of informations on the biological spectra of different regions
of India and on the phytosociology of grass and forest vegetation. The second school
of ecology developed under the leadership of Professor R. Mishra first in Sagar and
later at Varanasi. At present, many secondary schools of ecology are emerging at
Ujjain, Ahmedabad, Pilani, Jodhpur, Pondicherry, etc. and ecologists in these
centres are engaged in different fields of study.
17.3 ECO SYSTEM
17.3.1 INTRODUCTION
An eco system is not a static system. Changes takes place in the physical
environment due to the actions of timing being. These changes lead to different or
another eco system. A most remarkable aspect of eco system is that it is capable of
self maintenance and self regulation. Our country has a variety of eco system. In
this lesson an attempt is made to expose the concept of ecology different fields of
ecology and its components. The concept of eco system and its classification is
explained in this section for a clear understanding.
According to Woodbury (1954) ecosystem is a complex in which habitat, plants
and animals are considered as one interesting unit, the materials and energy of one
passing in and out of the others.
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17.3.2 MEANING AND TYPES
Encyclopaedia Britannica has defined Ecosystem as: "A unit that includes all
the organisms (biological factor) in a given area interacting with the environmental
(physical factors) so that a flow of energy leads to a clearly defined trophic (nutrient
requiring) structure, biotic diversity, and material cycles (i.e., exchange of materials
between living and non-living sectors). Thus ecosystem is a term applied to a
particular relationship between living organism and their environment.
An organism is always in the state of perfect balance with the environment.
The environment literally means the surroundings. The environment refers to the
things and conditions around the organisms which directly or indirectly influence
the life and development of the Organisms and their populations. Organisms and
environment are two nonkeparable factors. Organisms interact with each other and
also with the physical conditions that are present in their habitats. "The organisms
and the physical features of the habitat form an ecological complex or more h, ic fly
an ecosystem." (Clarke, 1954).
The concept of ecosystem was first put forth by A.G. Tansley (1935). Eco-
system is the major ecological unit. It has both structure and functions. Tin c
structure is related to species diversity. The more complex is the structure the
greater is the diversity of the species in the ecosystem. The functions of ecosystem
are related to the flow of energy and cycling of materials through structural
components of the ecosystem.
According to Woodbury (1954), ecosystem is a complex in which habitat,
plants and animals are considered as one interesting unit, the materials and energy
of one passing in and out of the others.
According to E.P. Odum, the ecosystem is the basic functional unit of foams
and their environment interacting with each other and with their components. An
ecosystem may be conceived and studied in the is of various sizes, e.g., one square
metre of grassland, a pool, a large ii large tract of forest, balanced aquarium, a
certain area of river and ocean. All the ecosystems of the earth are connected to one
another, e.g., ecosystem is connected with the ecosystem of ocean, and a small eco-
system of dead logs is a part of large ecosystem of a forest. A complete self-
sufficient ecosystem is rarely found in nature but situations approaching self-
sufficiency may occur.
An ecosystem has two main components: (a) abiotic, and (b-) biotic. All the
non-living components of environment present in an ecosystem are known as
abiotic components. These include the inorganic and organic components and
climatic factors. On the other hand, the living organisms of an ecosystem are
known as its biotic components which include plants, animals and micro-
organisms. The major components within the ecosystem are the lithosphere (solid
earth), the atmosphere, the hydrosphere (water) and the biosphere. There us also
the cryosphere (of ice and snow).
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The ecosystems are classifiedinto two major types

(a) the aquatic, and (b) the terrestrial.
17.3.3 AQUATIC ECOSYSTEM
The aquatic ecosystem relates to the following
(i) Freshwater: The freshwater ecosystems are highly productive with rich
biological diversity. In India, wetlands cover a vast area and are of various;Dries,
namely, tanks and reservoirs, saline tracks, freshwater lakes, marshes, They have a
wide range of habitats. The lifestyle of the population is according to the nature of
the ecosystem.
(ii) Marine: The open sea and wetlands include the continental shelf, estuarine
backwaters, continental slopes, exclusive economic zone of India, sandy beaches
and mangroves. The coral reefs are highly productive and are restricted to tropical
shallow waters of the sea and harbour rich biological diversity. One of the unique
features of the ecosystem is the sea-grasses which play an important role in
maintaining the biodiversity and productivity. The open ocean is the least explored
as yet.
(iii) Coastal: In India, we have fairly vast coastline of 9000 km. There are 10
maritime states in the country, namely, West Bengal, Orissa, Andhra Pradesh,
Tamil Nadu, Pondicherry, Kerala, Karnataka, Goa, Maharashtra. and Gujarat. In
addition, there are two groups of Islands, Lakshadweep and Andaman & Nicobar.
The coastal zones represent a very specialized ecosystem which supports unique
flora and fauna. The developmental strategies for these have direct impact on the
life style of the people. Some of the main activities in this region are shipping,
fishing, oil and gas exploration and recreational activities. For coastal zones, an
appropriate monitoring system is very essential, especially keeping in view the
threat of frequent natural calamities, possible sea level rise and the increasing
migration of population from the rural areas to urban areas, and particularly the
coastal areas. The efforts of the Departments of Space and Ocean Development are
important in this regard. A scientific biological monitoring system also needs to be
evolved. The coastal zone is an Unique interface of land, sea and the atmosphere.
(iv) Mangroves: Mangroves are specialized communities inhabiting intertidal
zones of sheltered, low-lying, tropical and subtropical coasts. They are of two types
swampy mangroves which occur below the level of high tides and are covered by sea
water twice a day, and (ii) tidal mangroves which are submerged only by spring
tides and during cyclones or by exceptional tides. About 674,000 hectares of
mangroves exist in India. The mangroves are a source of livelihood for the people in
Tamil Nadu and Andaman and Nicobar Islands, and in Sunderbans in West Bengal.
(v) Islands: Islands are characterized by significant land-sea interaction, large
extent of littoral areas and exclusive economic zone. These features relate to their
volcanic origins or as coral atolls, degrees of isolation and need for transportation
and interaction. Tourism is the mainstay of their economy. Environmentally sound
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tourism, marine related employment, relevant human resource development and

agricultural production plans are required for the development of islands.
17.3.4 TERRESTRIAL ECOSYSTEM
The deserts, the mountains, the hills, the forests and the grassland are the
important constituents of the terrestrial ecosystems.
(i) Deserts: The Indian deserts constitute 2% of the total land mass and
comprise the sand desert of Western Rajasthan, the salt desert of Kutch in Gujarat
and the Alpine cold desert of the Himalayas. They are characterised by variations in
temperature, low precipitations and high velocity winds and have different types of
sand dunes and unique plant and animal species. Sand dune stabilization through
biomass is one of the high priority tasks.
(ii) Cold desert: The cold desert located in the innermost ranges of the
Himalayas at higher altitudes has. very rich flora and fauna having almost 1000
species of seed plants and a relatively unexplored lower group of plants. The
diversity in the animal population in the cold desert is very rich containing some
unique species of wild sheeps and goats, Tibetan wild ass, etc. and about 70
endemic insect fauna and migratory birds.
(iii) Mountains: A large part of the forest area of the country and watershed
region is included under this category. There are 10 types which represent major
formations and biomes. These are the tropical wet evergreen, semi-evergreen, moist,
and dry deciduous, subtropical evergreen, temperate, Himalayan and sub-alpine
forests. It is estimated that these ecosystems harbour 50,000 species of plants and
72,000 animals and also a large number of unknown insects, microbes, etc.
(iv) Forests: The forest ecosystem is most important for humankind. The
tropical forests on the earth's surface comprise a precious ecosystem of varying
habitats, species and individual groups of plants interacting with each other. The
world has witnessed a major erosion of the forest ecosystem due to deforestation in
tropical Asia, Africa and Latin America.
It is estimated that as many as 25% of the species on the earth in the mid
19805 would disappear by 2025 if the current deforestation rate continues. The
forest ecosystem is a source of continued biological productivity and important for
climatic stability. More than 500 million people inhabit in these areas.
The forests contribute to food security, fibre, medicine, and industrial
products. But the most important contribution is in the form of genetic diversity.
The closed tropical forests all over the world cover only about 7% of the earth's land
surface, but contain at least half and probably upto 90% of the world species. We
still lack adequate knowledge of this natural wealth. Only about 10% of all the
tropical species have been described. The current estimate indicates that half of all
the vascular plants and vertebrate species occur in the tropical forests. There is a
striking difference between the tropical and the temperate forests in terms of their
diversity.
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Miller and Barber have pointed out that species loss through extinction is not
a new phenomena in nature. The 10 million species on the earth today are the
survivors of the safe population that evolution has produced since life began, Ill the
history of the planet, there have been many mass extinctions. The last mass
extinction was 65 million years ago. Since then, the global bio-diversity has
reoriented and is almost close to an all time high.
(v) Grasslands: The grassland ecosystem occupies about 10 percent of the
earth's surface which includes tropical and temperate grassland. The abiotic
components and the nutrients present in the soil and aerial environment. The
producers are mainly grasses and small trees and shrubs. The primary consumers
include cows, buffaloes, sheep, goats, deer, rabbits and other animals, while
Secondary consumers are animals like foxes, jackals, snakes, frogs, lizards and
birds etc.
17.3.5 STRUCTURE OF ECOSYSTEM
The structure of an ecosystem is basically a description of the organisms and
physical features of environment including the amount and distribution of
nutrients in a particular habitat. It also provided information regarding the range of
climatic conditions prevailing in the areas. From the structure point of view all
ecosystems consist of the following basic components:
1. Abiotic components
2. Biotic components
1) Abiotic components
Ecological relationship is manifested in physico-chemical environment. Abiotic
component of ecosystem included basic inorganic elements and compounds, such
as soil, water, oxygen, calcium carbonates, phosphates and a variety of organic
compounds.
2) Biotic components
The biotic components include all living organisms present in the
environmental system. From nutrition point of view, the biotic components can be
grouped into two basic components:
1. Autotrophic components, and
2. Heterophic components.
SUMMARY
In the above pages of this section the ecology and its divisions, different fields
of ecology are explained.
In the last part, the concept of eco system classification of ecosystem and
other related concepts are discussed.
KEY WORDS
 Antecology
 Synecology
 Paleoecology
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 Agnatic ecosystem
 Terrestrial ecosystem
REVIEW QUESTIONS
1. Define the concept of ecology
2. What are the different fields of ecology?
3. What do you mean by ecosystem?
4. Explain the major classification of eco system
5. Write about terrestrial eco system.
REFERENCES
1. D. K. Asthana & Meern Asthana, ―Environmental Studies”, S.Chand &
Company Ltd, New Delhi – 2006.
2. G. N. Pandey, ―Environmental Management‖, Vikas Publishing House Pvt Ltd,
New Delhi – 2003.
3. R. C. Sharma & Gurbir Sangha, ―Environmental Studies‖, Kalyani Publishers,
New Delhi, 2005.
4. R. S. Shukla, P.S.Chandel, ―A Text Book of Plant Ecology‖, S.Chand &
Company Ltd, New Delhi – 2008.
5. N. K. Uberoi, Environmental Management, Excel Books, New Delhi, 2007.

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LESSON – 18

ENERGY CONSERVATION
18.0 Objectives
18.1 Introduction
18.2 Energy conservation
18.2.1 Power shortage
18.2.2 Energy conservation in steel and allied Industries
18.2.3 Global scenario
18.2.4 Action areas for energy conservation
18.2.5 Energy conservation in textile industry
18.2.6 Energy conservation in the railways
18.2.7 Energy conservation in other areas
18.2.7.1 Use of electronic controls
18.2.8 Conservation of non-renewable resources
18.2.9 Conservation of renewable resources
18.0 OBJECTIVES
After reading this lesson you will be able to:
 Define conservation
 Mention the objectives of conservation
 Explain different fields of conservation
 Classify the different aspects of conservation.
18.1 INTRODUCTION
Conservation is an intelligent and judicious management of resources towards
their optimum utilization without depleting the basic stock. Emergy crisis is a
global problem today. The survival of man will be difficult if the energy problem is
not solved on the priority basis. Energy consumption and its qualitative trends
characterize the life style of a country. In developing countries, there is more
dependence on non-commercial sources of energy like, firewood, animal wastes and
agricultural wastes rather than the fossil and fission fuels.
18.2 ENERGY CONSERVATION
Conservation has been defined as management for the benefit of all life,
including human kind, of the bio-sphere so that it may yield sustainable benefits to
the present generation while maintaining its potential to meet the needs and
aspirations of the future generations.
The objectives of conservation are: (a) to focus on relative aspects to
environment protection through conservation; (b) rational use of natural resources;
and (c) protection of earth for sustainable lifestyles
All ecosystems are energy-driven complexes. The energy concerned with the
ecosystem is light energy, chemical energy and heat energy. The source of all these
energies is the solar energy. The solar energy is gradually transformed to light
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energy, chemical energy and heat energy. The green plants absorb light energy
which is then converted to chemical energy. The chemical energy stored in the food
passes from producers to consumers and then to decomposers, through food chain.
This is how energy obtained from sum flows through the ecosystem and is
distributed according to the need in each level.
Producers convert solar energy to chemical energy but it cannot return the
solar energy back once it is converted. Similarly, the consumers build up potential
energy by acquiring energy from the producers, but it cannot return the same to
the producers again. In this way the energy once acquired cannot be sent back to
its source. The flow of energy is always unidirectional.
The green plant conserves only 10 per cent of total solar energy it receives as
net primary production. The rest is lost as heat energy. The primary net production
is used by the consumer but 90% of it is lost again as heat energy and 10%
incorporated in the body of the primary consumer as net energy. In this way as we
go further and further up from the primary source of food the energy available to
the animals of successive food levels goes on progressively decreasing so that
population of animals that can be sustained goes on decreasing as we move up
through food chain. As we go up higher tropic levels, the residual energy is
deceased to such an extent that no further tropic level can be supported.
Conservation is an intelligent and judicious management of resources towards
their optimum utilization without depleting the basic stock. Emergy crisis is a
global problem today. The survival of man will be difficult if the energy problem is
not solved on the priority basis. Energy consumption and its qualitative trends
characterize the life style of a country. In developing countries, there is more
dependence on non-commercial sources of energy like, firewood, animal wastes and
agricultural wastes rather than the fossil and fission fuels.
It is well known that energy saving could be obtained to the extent of 15%,
without an additional input and with proper modification addition of equipments
both, for generation of power, especially boilers of about 33% efficiency. Using
fluidized bed techniques, it is possible to save energy to the extent of 30%. The
organised sector, especially industries, transport, etc., could take lead in this
direction. The other sector especially agriculture could very well make use of
alternate energy sources including biogas, wind energy, and photovoltaic which is
considered extremely suitable for remote areas including hills because of
distribution problems as with conventional energy.
It is well known that any additional generation of power, especially through
thermal will lead to further environmental degradation. It is, therefore, obvious that
conservation of energy will also reduce environmental degradation. Hence, any
effort on energy conservation will automatically contribute to control of
environmental pollution as well as ecorestoration. Energy conservation techniques
are briefly described in this chapter.
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18.2.1 POWER SHORTAGE
The rise in demand of power against supply may hamper the growth of
industry and agriculture. At the end of sixth plan, a gap of 5,444 MW between
demand and supply, may become as wide as 10,000 MW during seventh plan. In
the first year of the seventh plan (1985-86) the addition to the utilities was 4072
MW including 2,830 MW in the thermal sector. The power position in the country
worsened in 1985 -86 with a 7.9% shortfall in power supply. In 1984-85, the power
deficit was around 6.7%. The expected annual growth rate in the demand for the
electricity in the seventh plan is 12.2%.
There has been substantial increase in cost per megawatt of power. This has
gone up from Rs. 24 lakhs in the first plan to Rs. 159 lakhs at the end of the sixth
plan. Transmission and distribution losses were as high as 21 percent in 1985-86,
while in Japan and in the Federal Republic of Germany, the loss was about 5.3%
and 4.7%, respectively.
As the thermal and hydel energies are very costly and are also location based,
so the gap, in demand and supply can be reduced to some extent by non-
conventional energy sources, such as solar, wind, biomass, etc.
Energy, through other sources, is being looked into but we are not in a
position to tap other sources which are not very much efficient. Efficient use of
energy, therefore, has to be given more importance, wastage has to be minimized
and maximum utilization of capacity is the need of the hour. It is obvious that there
is no alternative to conservation of energy. Thus, any innovation contributing to the
saving of energy should be welcomed and effort in this area should be encouraged.
18.2.2 ENERGY CONSERVATION IN STEEL AND ALLIED INDUSTRIES
The iron and steel industry in India, involving high temperature processes,
consumes as much energy as 9-10 million cal per tonne of crude steel which is
about 58% more than that in USA and is about 38% more than the lowest energy
consumed in the world. Energy consumption costs in an integrated steel plant
account for as much as 25% of total production costs. Indian steel Industry alone
consumes about 50% energy consumed by the Industrial sector.
18.2.3 GLOBAL SCENARIO
To explain the reasons for high energy consumption in Indian steel industry, a
shop-wise comparison with that of a developed country may give better insight. The
following observations were made from a comparison between energy usage in
Indian steel plant and steel plant in Japan during 1980
i. Specific energy consumption in the Indian steel plant is twice that of the
Japanese steel plant.
ii. In both the cases, about 72% of the energy consumed is upto the iron making
stage.
iii. The fuel utilization efficiency, in the steel making and reheat furnaces, is poor
in the Indian steel plants. In these areas, the specific energy consumption is
twice that in the Japanese steel plant.
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18.2.4 ACTION AREAS FOR ENERGY CONSERVATION
In the operation of steel industries, maximum attention should be given to the
optimum utilization of energy by use of appropriate technologies. The following
areas maybe easily observed where conservation efforts should be focussed:
1. The consumption of petroleum fuels contributes to about 13% of the total fuel
bill of the steel plants. So, reduction in consumption of petroleum products is
really advisable at this stage.
2. A high priority should be given to the energy conservation efforts in the iron
making areas where about 72% of the total energy is consumed.
The energy conservation measures can be categorized as follows:
(1) Equipment improvements
(2) Operational improvements
(3) Modernization
1. Equipment Improvements
This category of measures may give quite high return with marginal
investment. The following areas maybe recognised easily:
1. Insulation of cold blast main
2. Minimising leakages of hot blast
3. Improvement in combustion systems
4. Insulation of furnaces by ceramic fibre may reduce the heat loss to an extent
of 5-7%.
5. Modification of water cooled spide in the reheating furnaces.
2. Operational Improvements
This category does not require any capital investment that have to be followed
on a continuous routine basis. Some areas of improving operational aspects are:
To minimize leakage of oil, air, steam, etc.
To analyse fuel gases regularly
To maintain proper quality and size of input raw materials.
3. Modernization
A huge amount of investment is required for this purpose. Leisure is an
essential requirement for efficient plant and failure to modernise the plant at the
right time leads to steep deterioration in the plant output.
18.2.5 ENERGY CONSERVATION IN TEXTILE INDUSTRY
It is estimated that textile industry consisting of a little over 700 mills
consumes energy worth Rs. 490.00 crores per year (1982 figures). This, in other
word, means that energy alone forms 8 to 10% of the total production cost of the
textile produced by them. Effective conservation measures can save us as much as
10% of the energy cost. In the past, the power and utility cost of the textile sector
was only 3 to 4% of the total cost structure. The hike in coal and other fuel prices
has led to this cost going up to 8 to 10%. Obviously our efforts should be effected
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towards a more economical use of our fuels. The more instant energy conservation
measures specifically suggested for some industries are as follows:
i. Use of premium efficiency electric motors and correct motor and load sizing.
ii. Regular inspection of transformers for distribution lines, prevention of
leakages, prevention in abnormal rise of temperature and working
transformers over 85% of the rated load.
iii. Use of static condensers to improve power factor.
iv. Roof level reduction to reduce lighting load.
v. Optimum speed of spindle to produce most economic yarn.
vi. Proper motor maintenance to prevent loose cotton and dust accumulation and
burn out of motors.
vii. In the heat energy side, proper boiler operation and maintenance, good
insulation of steam lines, feed water recycling and waste heat recovery can be
economically carried out.
viii. Solar energy in textile industry can be used for
(a) Steam generation
(b) Preheating of motor
(c) Air cooling and humidification
(d) Cooking and dish washing in the canteen
(e) Drying of cloth.
18.2.6 ENERGY CONSERVATION IN THE RAILWAYS
Energy accounts for 22-23 percent of the operating expenses of the Railways.
Over the years, the railways have taken systematic steps towards reduction in
energy consumption and this is manifest in the changeover from steam to diesel
and now electric traction. The Railways consume, annually about 7.25 million
tonnes of coal, 1550 million litres of HSD oil and about 3250 million kwh of
electricity for traction alone. Any measure which promotes more efficient use of
energy in the Railways would greatly add to measures of reducing in operating
costs in Railways and to be a trend setter in energy utilization in the rest of the
economy. The study of the following aspects may contribute somewhat in the area
of energy saving:
1. Better Track
The consumption of energy is directly related with the surface on which the
movement of the body takes place. A road vehicle gives less kilometrage per unit of
fuel on a rough road. The same phenomenon occurs in railway system, too, and,
hence, the design, construction and maintenance of track are important factors to
be taken care of, if energy has to be conserved.
2. Fuel Economy in Diesel Engines
The primary aim of the diesel engine designers has been to achieve fuel
economy. Considerable economy in fuel consumption has been achieved using
assemblies/ components of improved designs and optimizing energy performance
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parameters based on these changes. However, some fuel economy can be achieved
by minor modifications and adjustments on the engines.
18.2.7 ENERGY CONSERVATION IN OTHER AREAS
Domestic consumers can be motivated to curtail energy consumption on many
household goods. These include fan regulators, lighting fluorescent chokes,
pressure cookers, etc. Introduction of high technology will help in conservation and
in minimizing wastage. Advancement in electronics, in general, and semiconductor
technology, in particular, has opened avenues for improving energy efficiency in
almost all sectors of industry. For transmission of high voltage electrical energy, the
use of high power semiconductors can contribute to better cost effectiveness.
18.2.7.1 Use of Electronic Controls
One area for energy conservation is the use of electronic controls for a wide
variety of electrical motor operated systems, where speed is required to be
maintained at level significantly lower than full rated speed over reasonably
prolonged periods. If an electronic regulator is used in place of resistance type
regulators in fans, about 12 watt per fan can be saved easily Thus, 6 MW for 5.5
million fans, now being manufactured in India, per year, can be saved. Power
semiconductors will also be effective for light dimmers, room coolers, sodium
lamps, radios, TVs and other equipments.
Considering the existing dismal power scenario, a concerted campaign needs
to be mounted on conservation and efficient use of energy industry. Industry needs
motivation to discard inefficient use of power. Appropriate legislation containing a
package of incentives would induce manufactures of equipment, using energy, to
switch over to modem technology including electronics.
Growing population at the global level and a desire to uplift the standard of
living by the development of science and technology have affected the environment
a great deal. Natural resources are being misused in the name of industrial and
urban development that has put all life into danger. Today, a state of imbalance has
been created in environment due to consumerist culture and impatient use of
natural resources.
Main is an integral part of the environment, exchanging materials with the
environment in a countinuous cycle. With the increase in population, he needs
more space to utilize resources from other places which he had not exploited
earlier. It must, therefore, be realized that as an individual he should try to
conserve his environment and use natural resources in a rational manner so that
human race is not exposed to environmental hazards.
18.2.8 CONSERVATION OF NON-RENEWABLE RESOURCES
1. Energy Conservation
The question of is how much energy necessarily involves a basic issue
concerning man, his life style, and his environment. Similarly, the question III how
much energy is needed to keep these wheels of society well lubric.114d and moving
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is one of the difficult questions. The type of energy conservation includes the
following measures:
(a) Improving the efficiency of energy supply systems, (b) decreasing tm energy-
intensiveness of a given standard of living through acceptable lift style changes
(e.g), thermostat settings, lighting levels, or smaller cars 111W car-pooling), and (c)
shifting from gas or electricity to solar energy system.
Energy influences practically every single economic activity and availability
and cast determine the economic future and well-being of the nation as well as the
quality of life. Optimum conservation of energy implies use for the benefit of
mankind on a long-term rather than on a shot-term h and to prevent unnecessary
wastages. As such, conservation of energy can bring about substantial gain to the
utility of human life. The production of coal, electricity and natural gas is not
adequate to all as per our pre requirements. It is important to use economically the
available resources compensate the sc4rcity with alternatives which society faces
today.
Energy is only a means to the end of economic well-being. Energy frees
man from heavy labour. It enables him to use low cost resources and to create
many physical comforts. It is important to know, however, that the amount of
energy used as a function alternative sources. Therefore, energy conservation
simply becomes implementation of cost-effectiveness or socially desirable
substitutes.
Specific enemy conservation actions are deemed desirable if one of the two
criteria is met: (a) the value of the energy saved equals or exceed additional
operating cost or investment (both appropriately discounted) required to achieve it;
(b) compared to the alternate measure to increase energy supply; and (c) the
particular conservation option is superior in terms of total cost (including capital
investment energy price, economic and environment impacts) of non-exhaustive
source of energy.
2. Mineral Conservation
D. Meadow is, of the view that at the present rate of expansion, silver, and
uranium may be in short supply even at higher prices by the turn of the century.
By the year 2050, several more minerals may be exhausted I current rate of
consumption continues.
Non-renewable energy resources like coal, oil and natural gas cannot be
recycled or reused. Some material resources, such as copper and aluminium an be
recycled or reused to some extent. Pollution from mining can be reduced by efficient
methods.
Mineral oil is the greatest demand in modern industry, and it supplies half the
world's energy. Natural gas may occur in association with petroleum in the
uppermost part of an oil reserve. In fact, exploitation in all parts of the world is
continually extending the known resources of energy despite the fact that
production and consumption continue to increase every year. This exhaustive
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source of energy, in which our country has almost sixty per cent self-efficiency in
production, invites conservation initiatives.
18.2.9 CONSERVATION OF RENEWABLE RESOURCES
Conservation of land, soil, minerals, water, vegetation and wildlife which is cry
essential in ensuring a continuous yield of plants used as food and other materials
for the growing population.
1. Soil Conservation: Soil is the top cover of the earth in which plants n grow.
Top soil is essential for the growth of plants which in turn provides oil for human
beings and animals. But rain water, wind and other natural forces gradually erode
the top soil. Farmers can reduce soil erosion by planting trees, strip cropping and
crop rotation methods etc.
2. Water Conservation: Conjunctive use of surface and ground water wild be
encouraged to atomize the water use and to alleviate the degradation water and soil
resources. Some of the measures include: (a) avoiding Cage of water, and encourage
recycling of water; (b) reducing water pollution by treating sewage and factory
wastes before disposing them; and adopting various technologies for groundwater
recharge such as use of tilt wells and ponds.
3. Forests Conservation: Forests are homes for a number of wild animals. ii
man, these provide fuel, coal, timber, paper, rubber and lac, etc. They heel water
loss from top soil and thus prevent formation of deserts. They help in regulating,
rainfall, avoid erosion, silting of streams and floods.
During World War II, the indiscriminate felling of trees has resulted in
denudation of areas and frequent floods. Thus realizing the importance of forests
reforestation programmes have been put into effect in several countries.
reforestation, knowledge of ecological succession and climax community very
essential. If the valuable trees are climax in a particular forest, the ecological
problem is to speed the return of the climax community after the trees have been
cut. Presently, various insecticides and pesticides are being d lo destroy the insects
and pests in forest lands.
4. Fish Conservation: Man is trying to supplement his existing food resources
through an increased yield of fish from ponds, lakes, rivers and seas. In his own
interest, man has reduced the number of certain species of fish by overfishing. The
number of reduced varieties can be restored by implementing the following steps:
1. Regulation of rate of fishing and of fish production.
2. Prohibition of overfishing.
3. Taking fish of the optimum size. Very young and sexually mature fishes
should not be caught.
4. Rate of fish breeding should be increased.
For increased yield of fish, artificial breeding under controlled conditions in
lakes, ponds, rivers and seas are also practised. This needs proper attention to the
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physico-chemical factors of the environment such as temperature, light, salinity,

abundance of food and breeding grounds.
5. Biodiversity Conservation: The increasing human pressure on wildlife had
led to the extinction or disappearance of some of the species. There is over-
exploitation of animal species for commercial use, such as the selling of the skins of
leopards, tigers and other animals. Even their teeth and claws are sold. Global
trade in wildlife is estimated to be over 20 billion US dollors annually. Global trade
includes atleast 40,000 primates, ivory from at leas 90,000 African elephants, 1
million orchids, 4 million live birds, 10 million reptile skins, 15 million furs and
over 350 million tropical fish.
OECD divides incentive measures for the conservation and sustainable use of
biodiversity into the following categories:
1. Positive Incentives: The mechanisms (monetary or otherwise) encourage
governments, organisations and individuals to protect biodiversity.
2. Disincentives: The internalisation of the cost of use and damage biodiversity,
thus discouraging behaviours that deplete it.
3. Indirect Incentives: Eco-labels for the biological resources should I
encouraged.
4. People's Participation: An effective and practical approach is involve a
competitive task-force of the local people in the biodiversity process.
5. Ban on Trade: A ban on the exploration and export of rare and endangered
animals and plants should be legally imposed by the governments.
6. Other Steps: There are technical, social and legal steps for the conservation
and restoration of biodiversity:
i. Planning and co-ordinated efforts for sustainable use of biodiversity within
the management systems for forestry, fisheries and agriculture.
ii. Conserving genetic diversity in existing domesticated plant and animal
varieties.
iii. Equitable sharing the benefits of biodiversity through social and economic
instruments.
iv. Building human and institutional capacity to integrate measures at bio-
regional scales.
There are many other issues related to socio-economic measures important for
Biodiversity conservation such as the investments required, monitoring
mechanisms, information base and involvement of people particularly living in rural
areas.
SUMMARY
In this section, the concept of conservation, the energy conservation practices
in different industries and conservation of renewable and non-renewable sources of
energy are discussed in detail.
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KEY WORDS
 Biodiversity conservation
 Soil conservation
 Ban on trade
 Optimum consumption
REVIEW QUESTIONS
1. What do you mean by energy conservation?
2. Explain conservation of renewable sources.
3. Write about the different steps taken for conservation of energy in industries.
REFERENCES
1. D.K.Asthana & Meern Asthana, “Environmental Studies”, S.Chand &
Company Ltd, New Delhi – 2006.
2. G.N.Pandey, ―Environmental Management‖, Vikas Publishing House Pvt Ltd,
New Delhi – 2003.
3. R.C.Sharma & Gurbir Sangha, ―Environmental Studies”, Kalyani Publishers,
New Delhi, 2005.
4. R.S.Shukla, P.S.Chandel, ―A Text Book of Plant Ecology‖, S.Chand & Company
Ltd, New Delhi – 2008.
5. N.K.Uberoi, Environmental Management, Excel Books, New Delhi, 2007.

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LESSON – 19

DIMENSIONS OF ENVIRONMENT PROBLEMS

19.0 Objectives
19.1 Introduction
19.2 Dimensions of environment problems
19.2.1 pollutants are dived into two categories
19.2.2 different types of pollution
19.2.2.1 water pollution
19.2.2.2 air pollution
19.2.2.3 important agricultural pollutants
19.2.2.4 noise pollution
19.2.2.4.1 effects of noise pollution
19.2.2.4.2 measures to control noise pollution
19.2.3 control of environmental pollution
19.2.4 different legislations for environmental Protection
19.0 OBJECTIVES
After going through this lesson you will be able to:
 Write the environment problems
 Explain environment pollution
 Describe the different types of environment pollution
 Suggest steps to be taken to counter environment pollution
19.1 INTRODUCTION
Environment problems lie air, water and land pollution or municipal waste
disposal exist in every country. The nation has identified the causes of these
problems and continue to del with them depending upon how severe these are and
how serious is commitment for their abatement. A detailed discussion on these
issues following the subsequent pages.
The environmental science is concerned with the study of all systems of air,
land, water, energy and life that surround us. Environmental problems are so
diverse and diffused that virtually every activity of civilization interacts with the
environment. The addition of extraneous materials or energy in a particular
environment in concentrations greater than the normal renders the environment
partially or wholly unfavorable for human life. This is referred as environment
pollution.
―Environmental pollution is the unfavorable alteration of our surrounding,
wholly or largely as byproducts of man‘s action through direct or indirect effects of
changes in energy patterns, radiation levels, chemical and physical constitutions
and abundance of organisms‖
POLLUTION is defined as the addition of extraneous materials to water, air or
land which adversely affect the natural quality of the environment. In some cases, it
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may involve the removal, rather than addition, of constituents from the
environment.
19.2 DIMENSIONS OF ENVIRONMENT PROBLEMS
19.2.1 POLLUTANTS ARE DIVED INTO TWO CATEGORIES:
i. Biodegradable pollutants: These pollutants are natural organic compounds
which are degraded by biological or microbial action e.g., sewage.
ii. Non-biodegradable pollutants: These are not acted upon by microbes but are
oxidized and dissociated automatically. They are further divided into two
classes
a) Wastes e.g., glass, plastics, phenolics, aluminum cans, etc. like
mercury, lead cadmium etc.
b) E.g., radioactive substances, pesticides, heavy metals like mercury,
lead, cadmium etc.
As regards the nature of pollutants, the problem of pollution can be divided
into the following categories:
1. Pollution caused by solid wastes
2. Pollution caused by liquid wastes
3. Pollution caused by gaseous wastes
4. Pollution caused by wastes without weights.
19.2.2 DIFFERENT TYPES OF POLLUTION
19.2.2.1 Water Pollution
Water is essential for all forms of life and none can survive on this earth
without water. The surface of earth measures 50,000 billion hectare of which about
70% is covered by water and the rest is land.
Most of the wastes generated by human society are disposed of in the bodies of
water such as rivers, lakes and oceans. Some of the wastes which are discharged in
air or on land may also ultimately enter the bodies of water. When human
population is concerned too much along the water ways they are unable to handle
huge quantities of domestic wastes released into them and consequently they
become polluted with unhappy results.
Important water pollutants
1. Sewage and other oxygen demanding wastes: These are largely organic
materials that can be oxidized by micro-organisms to CO2 and water.
2. Biopollutants: Micro-organisms such as algae, fungi-bacteria, viruses,
protozoa, etc, often reach to water bodies through surface run roof, domestic
wastes and sewage.
3. Plant nutrients: Surface run off from agricultural fields‘ carries nitrogenous
and phosphate nutrients that increase the growth of aquatic plants and later
undergo decomposition adding to organic loading of the streams.
4. Exotic organic chemicals: These include surfactants, detergents, pesticides,
various industrial products, oils and decomposition products of other organic
compounds.
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5. Inorganic minerals and chemical compounds: Inorhanic chemicals of many

types find their way into waters through municipal and industrial wastes and
the urban runoff. These pollutants can kill and injure fishes and other
aquatic life and they can interfere with the suitability of water for drinking
and industrial purposes.
19.1.2.2 Air Pollution
The atmosphere is a mixture of gases, predominantly nitrogen (78.09%),
oxygen (20.94%) and some other cases(less than 1%). The air pollution may be
defined as qualitative and quantitative changes in the atmospheric constituents
due to addition or contamination of such may be categorized into indoor and
outdoor pollutions. Pollution of atmosphere inside buldings, offices and residences
is called indoor pollution and atmospheric pollution in the open space is referred to
as outdoor air pollution.
Causes of Air pollution:
1. Over population and urbanization.
2. Increasing traffic
3. Industrialization and energy consumption.
4. Agricultural pollution
Improved agronomic practices, artificial fertilizers, farm chemicals and
improved methods of preserving and transporting food are playing roles in
agricultural pollution. Although air and water pollutions have affected agriculture
adversely, agricultural method themselves have contributed to environmental
pollution.
19.1.2.3 Important agricultural pollutants
1. Farm animal wastes.
2. Soil erosion
3. Plant residues
4. Agricultural chemicals
19.1.2.4 Noise pollution
Noise is generally defined as an unwanted or undesirable sound and the
release of unwanted sound into the atmosphere is called noise pollution. High pitch
sound produced by automobiles, machines, power plant, trains, helicopters,
airplanes, jet, rockets, public broadcasting system, T.V., sudden ratting of doors
and windows, explosion of bombs, sound of crackers etc. are potent sources of
noise pollution.
According to world health organization a level of 45dB is considered a safe
noise level for city. By international standard, a noise level up to 65dB may be
taken as tolerable.
19.2.2.4.1 Effects of noise pollution
1. Effect on industry
(a) Effect on audition: No environmental factor has caused so much confusion
regarding its effect on workers efficiency and health as industrial noise. Its effect on
 263

audition is well recognized. Mechanics, locomotive drivers, telephone operators etc.,

all have their hearing impairment as a result of noise at the workshops.
(b) Effect on worker‘s efficiency: Regarding the impact of noise on human
efficiency, there are a number of studies which point out that human efficiency
increases with noise reduction. Further, effect of noise reduction on efficiency
varies from worker to worker.
2. Effects on Non-living things: Noise has harmful effects on non-living
materials too. Numerous examples can be cited where old places and even newly
constructed buildings have developed cracks under the stress of explosive sound.
19.2.2.4.2 Measures to control Noise pollution:
1. Use of silencing devices
2. Traffic management
3. Use of loudspeakers
4. Irregular and unnecessary use of pressure horns by the drivers of trucks,
buses and other automobiles.
5. Punishment should be provided for non-use of silencers and proper horns.
6. Public awareness
19.2.3 CONTROL OF ENVIRONMENTAL POLLUTION
1. Combustible solid wastes should be burnt in incinerators. This method does
not solve the problem in a real sense because in this, solid waste is being
converted into gaseous wastes causing air pollution.
2. Solid organic wastes including faucal matter and wastes from tanneries
should be converted into compost manure at the places far away from the
cities and human dwellings.
3. Non-combustible solid waste materials like ash, rubbish, tins, glass pieces if
not recoverable for usual purposes should be disposes of by landfall method
in low-lying areas.
4. Anaerobic septic tank treatment can be uses for individual houses or small
communities, besides aerobic biological treatment systems including trickling
filters, activities sludge treatment and oxidation ponds can also be uses for
liquid wastes or sewage disposal.
5. Automobiles must be either made to eliminate use of gasoline and diesel oil or
complete combustion is obtained in the engine so that noxious compounds
are not emitted.
6. There should be cut back in the use of fertilizers, herbicides, pesticides and
other agrochemicals as far as possible.
7. Excessive and undesirable burning of vegetation should be stopped.
8. Sponges and towels should be used in place of paper towels and also the use
of paper cups and plates and similar materials should be stopped.
9. Little use of electric appliances and motor-run appliances will reduce thermal
pollution.
10. Washing soda and scouring pad should be uses instead of detergents.
 264

11. Waste management is based on principle of Reduce, Recycle, and Reuse. Used
boxes, bags, plastics and bottles should be reused whenever possible.
12. Since about 40% of the phosphates in water pollution come from detergent, it
has been suggested that only detergents low in phosphates should be used.
13. Shampoos, lotions and similar products should not be bought in plastic
bottles. It has recently been suggested that use of plastic containers and
glasses my cause cancer.
14. Smoking should be stopped.
15. Proper attention should be given by the government to make people realize the
implications of environmental problems.
16. Legislation against pollution should be strictly implemented.
19.2.4 DIFFERENT LEGISLATIONS FOR ENVIRONMENTAL PROTECTION
Environmental legislation is one of the most important means for improving
the environment and for controlling pollution. This is so because law is the only
effective instrument for social justice, when other aspects of environmental
protection are not followed.
The first international attempt on legal provisions regarding environmental
concerns was made when a conference on human environment was held at
Stockholm (Sweden) in 1972, in which 113 countries participated. The
recommendations evolved the principles and action plan to control and regulate the
human environment. India also participated and was one of the first countries to
enact the following legislations:
1. Water (Prevention and control of Pollution) Act, 1978, 1988
2. Air (Prevention and control of Pollution) Act, 1981, amended in 1987.
3. Environment (Protection )Act, 1986
India was also the first country to impose a constitutional obligation on the
state and citizens to protect and improve the environment as one of the primary
duties. To exercise its powers, the government of India has constituted the central
and state pollution control boards. Different rules formulated by these boards are:
1. Water (Prevention and control of Pollution) Rule 1975.
2. Air (Prevention and control of pollution) Rule 1982.
3. Environmental (Protection) Rule, 1986.
4. Hazardous waste management Rules, 1989.
5. Manufacturing, storage and important of hazardous chemicals Rules 1989.
Some other Acts regarding environmental protection, some of which were in
practice before independence and were subsequently amended are:
1. India Forest Act, 1927.
2. Motor vehicle Act, 1938 amended in 1988.
3. The factories (Pollution and pesticides) Act 1948.
4. The Insecticide Act, 1968.
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5. The water (Prevention and control of pollution) Act, 1974, 1977. Under this
Act, pollution of water and water bodies had been made a criminal offence
under section 277 of the Indian Penal code.
6. Air (prevention and control of pollution) Act, 1981. This provides a declaration
that ―No industrial plant shall be operated in an air pollution controlled area,
by any person, without the previous consent of the state board.
7. The environment (Protection) Act, 1986 passes by the parliament. This Act
declares- ―Persons responsible for the discharge of any hazardous substance
in excess of the prescribed norms will have to immediately intimate the face of
such occurrence to the concerned authorities‖
8. The Hazardous waste (Management and handling) Rules, 1989.
9. Biomedical waste (Management and handling) Rules, 1998.
10. Batteries (Management and handling) Rules, 2001.
Thus India has some legal provisions to guide the public and the authorities
for discharge their duties sincerely and effectively towards reducing pollution and
improving the environment.
SUMMARY
Environment problems are to diverse. Environment pollution is the most
important among the problems. In this section an attempt has been made to
identify the environment problems relating to Air, water, noise pollution and so on.
The steps that are necessary to protect the environment is also discussed in detail.
KEY WORDS
 Pollution
 Gaseous waste
 Exotic organic chemicals
 Soil erosion
REVIEW QUESTIONS
1. What do you mean by environment pollution?
2. State the different types of pollution
3. What is meant by pollutants, What are its divisions.
4. How would you control environment pollution.
5. Mention the different legislations for environment protection?
REFERENCES
1. D.K.Asthana & Meern Asthana, ―Environmental Studies‖, S.Chand & Company
Ltd, New Delhi – 2006.
2. G.N.Pandey, ―Environmental Management‖, Vikas Publishing House Pvt Ltd,
New Delhi – 2003.
3. R.C.Sharma & Gurbir Sangha, ―Environmental Studies‖, Kalyani Publishers,
New Delhi, 2005.
4. R.S.Shukla, P.S.Chandel, ―A Text Book of Plant Ecology‖, S.Chand & Company
Ltd, New Delhi – 2008.
5. N.K.Uberoi, Environmental Management, Excel Books, New Delhi, 2007.

 266
LESSON – 20

REGULATORY MECHANISM
FOR ENVIRONMENTAL POLLUTION AND SUPPORT
SYSTEM FOR IMPLEMENTATION OF ENVIRONMENT POLICY
20.0 Objectives
20.1 Introduction
20.2 Environmental laws
20.2.1 Objectives of environmental laws
20.2.2 The role of ministry of environment and Forests
20.2.3 The motor vehicles act, 1988
20.2.4 The factories act, 1948
20.2.5 The water (prevention and control of (pollution) act, 1974
20.2.5.1 Its objectives
20.2.5.2 Powers and functions of central pollution control board
20.2.5.3 Powers and functions of state pollution control boards
20.2.5.4 Prohibition on use of stream or well for disposal or
polluting of water
20.2.5.5 Restrictions on new outlets and new discharges by
industry or any person
20.2.5.6. Penalties under the water act, 1974
20.2.6 The air (prevention and control of pollution) act, 1981
20.2.6.1 Powers and functions of central and state pollution 14
control boards
20.2.7 The environmental (protection) act, 1986
20.2.7.1 Objectives of the act
20.2.7.2 Salient features of the act
20.2.7.3 Criticism of the environment (protection) act
20.2.7.4 The noise pollution (regulation and control) rules, 2000
20.2.8 The wildlife (protection) act, 1972
20.2.9 The wildlife (protection) amendment act, 2002
20.2.10 Forest (conservation) act, 1980
20.2.11 Amendments of forest (conservation) act
20.2.12 The environment (setting for industrial projects) rules, 1999
20.2.13 Hazardous wastes management and handling) rules, 1989
20.2.14 The bio-medical waste (management and handling) rules, 1998
20.2.15 The recycled plastics manufacture and usage (amendments) rules,
2003
20.2.16 Public liability insurance act (PLIA), 1991
20.2.17 National environment tribunal act, 1995
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20.3 Support system for effective implementation of the environment policy

20.3.1 National organisations
20.3.1.1 Department of environment, forests & wildlife of India
20.3.2 Role of NGOs
20.0 OBJECTIVES
After studying this section you will be able to:
 Write about different regulations for environment pollution.
 Explain the powers and functions of the state and central pollution central
board.
 State the role of ministry of environment and forests
 List the supporting system for implementation of environment policy.
20.1 INTRODUCTION
Besides being historically and culturally respectful to environment, India did
recognize and visualize the ‗significance of environmental protection and resource
conservation before the first international meet on environment within 5 years of
the Stockholm conference, India amended its constitutions to include
―Environmental protection‖ as a constitutional obligation. In this section an attempt
is made to explain the different law exacted in India for environmental protection
and agencies for supporting environment policy.
Environmental laws consist of all legal guidelines that are intended to protect
our environment.
20.2 ENVIRONMENTAL LAWS
20.2.1 OBJECTIVES OF ENVIRONMENTAL LAWS
The objective of environmental law is to preserve and protect the nature's gifts
from pollution. Further, the objective of environmental law is to protect the man's
fundamental rights of freedom, equality and adequate conditions of life in an
environment of quality that permits a life of dignity and wellbeing. The Constitution
of India obligates the state as well as citizens to protect and improve the
environment. The Constitution (Forty-Second Amendment) Act, 1976 and Article
5lA(g) cites, "The requirement of the time is that we should be real citizens of the
country striving towards excellence in all spheres of individual and collective
activity including the protection of environment.
20.2.2 THE ROLE OF MINISTRY OF ENVIRONMENT AND FORESTS
The Department of Environment was created in November, 1981 and since
then it has acted as a nodal agency for environmental protection. It has also been
assigned administrative responsibility for pollution monitoring and regulation, as
well as conservation of eco systems and biosphere reserves. It has set up a
computerised Environment Information System at Botanical Survey of India. There
is also the Ministry of Environment and Forests which performs the following
functions in the country:
1. Survey of natural resources in the country.
2. Conservation of natural resources including forestry and wildlife
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3. The management action plans for wetlands and coral reefs of Andaman and
Nicobar
4. Lake conservation.
5. Biodiversity Conservation: The convention on biodiversity was ratified by India
on 18th February, 1994 and it has come into force from 191h May, 1994.
6. Forest Conservation: Out of the 6253 proposals received till date under the
Forest Conservation Act 1980, more than 3232 proposals have been approved
so far.
7. Wildlife Conservation: The network of protected areas in the country now
consists of 89 national parks, 490 sanctuaries and 13 biosphere reserves
covering an area of 1,48,700 sq. km.
8. Animal Welfare: Twentyone States/UTs have so far constituted State Advisory
Boards and 29 States have appointed Nodal Office for Animal Welfare.
9. Environmental Information System: Environmental information system
network with its 20 centres on various subject areas continues its activities in
environmental information collection, storage, retrieval and dissemination to
all concerned.
10. Forestry Education and Research: The Indian Council of Forestry Research
and Education is the main forestry research and education centre in the
country. It organises seminars and conferences on forest management.
20.2.3 THE MOTOR VEHICLES ACT, 1988
The Motor Vehicles Act, 1939 which was amended over the years after
independence did not carry any provision about air and noise pollution generated
by automobiles.
In 1988, the Motor Vehicles Act was passed which became operative
throughout the country from July 1989. The new Act covers both air and noise
pollution generated by automobiles. The Act is enforced by the State governments
in their respective States. With the concurrence of the central government, the
States can amend this Act, keeping in view their local needs and circumstances.
The Motor Vehicles (Amendment) Act was passed in July 2000 which permits
the use of CNG as an environment friendly auto fuel.
20.2.4 THE FACTORIES ACT, 1948
The Factories Act of 1948 may be considered as an important milestone in
environmental legislation. It is an old legislation amended substantially lo make it
more comprehensive and effective.
Chapter III relates to Health.
(i) Cleanliness under Section II
1. Every factory shall be kept clean and free from any nuisance particularly:
a) accumulation of dirt and refuse shall be removed daily by sweeping or by
any other effective method from the floors and benches of workrooms and
from staircases, passages and disposed of in a suitable mannerl;
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b) all inside walls and partitions, all ceilings or topes of rooms should be
washed at least once in every week; and
c) the health of workers should be checked regularly.
Chapter IV (A) is relevant to hazardous process. It has linter alia provisions for
the constitution of site appraisal committee, specific, responsibility of the occupier
in relation of the hazardous processes, emergency standards, permissible limits of
exposure of chemical and toxic substances.
Further, Section 12 of the Factories Acts 1948 requires every factory to make
an effective arrangement for the disposal of wastes and effluents in accordance with
the rules framed under this Act, and to (take all practicable measures to make the
place safe.
The Factories Act of 1948 when originally enacted was primarily meant to
provide for the health, safety and welfare of the workers in factories. By the
Amendment of 1987, the Act now is not confined only to the welfare and safety of
workers inside the factory, but also concerns witch neighbours living in and around
the vicinity and environment thereof.
20.2.5 THE WATER (PREVENTION AND CONTROL OF POLLUITION) ACT, 1974
Water pollution has assumed such high proportion today that not only the
aquatic eco-systems are greatly damaged but even the livers of animals on land are
threatened. The pollution of rivers, lakes and seas is at direct result of the
population explosion and large scale industrialization. The Water (Prevention and
Control of Pollution) Act was passed by the Parliamernt in 1974 to tackle this
problem. The Act tends to provide legal deterrents against the spread of water
pollution. It applies to the States of Bihar, Assam,, Gujarat, Haryana, H.P., J&K,
Karnataka, Kerala, M.P., Maharashtra, Rajasthan, Tamilnadu, Tripura and West
Bengal and all the Union Territories and such other States which may adopt it in
pursuance of Article 252 (1) of the Constitution.
20.2.5.1 Its Objectives
The Act was passed with the following objectives
1. To Control, Water Pollution: The main objectives of this Act was to provide for
the prevention and control of water pollution, and maintaining or restoring of
wholesomeness of water (in streams or wells or sewer or on laundry.)
2. To Maintain the Quality of Water: It was realized that on account of large
scale discharge of industrial waste into the rivers and streams, the quality of water
as well as its utility have been adversely affected. In this direction, the Act was
passed and there was provision to take action against industries or persons in this
regards.
3. Establishment of Central and State Boards: The Act made provisions for
establishment of Central and State Boards with a view to carry out the above
objectives.
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The Water (Prevention and Control of Pollution) Act, 1974 has defined some
terms related to water pollution:
1. Pollution: Under this Act, pollution means such contamination of water or
such alternation of the physical, chemical or biological properties of water or such
discharge of any sewage or trade effluent or of any other liquid, gaseous or solid
substance into water (whether directly or indirectly) as may, or is likely to create a
nuisance or render such water harmful or injurious to public health or safety, or to
domestic, commercial, industrial agricultural or other legitimate uses, or to the life
and health of animals or of aquatic organisms.
2. Trade Effluent: Trade effluent includes any liquid gaseous or solid substance
which is discharged from any premises used for carrying on any (industry,
operations or process or treatment and disposal system) other than domestic
sewage.
3. Sewage Effluent: Sewage effluent means effluent from any swerage system or
sewage disposal works and includes sullage from open drains.
4. Outlet: Outlet includes any conduit pipe or channel, open or closed, carrying
sewage or trade effluent or any other holding arrangement which causes, or it likely
to cause pollution.
20.2.5.2 Powers and functions of Central Pollution Control Board
The following are the powers and functions of Central and State Pollution
Boards as per Water (Prevention and Control of Pollution) Act, 1974.
The Central Pollution Control Board (CPCB) has to perform the following
functions:
1. Adviser to government: CPCB advises the central government on any matter
concerning the prevention and control of water pollution in India.
2. Coordinate Activities: It coordinates the activates of the State Pollution
Control Boards and resolve disputes.
3. To Publish Statistical Data: CPCB collects, compiles and publishes technical
and statistical data related to water pollution. It suggests measures for its effective
prevention and control.
4. To Organise Training: It plans and organises the training of persons engaged
or to be engaged in programmes for the prevention, control or abatement of water
pollution.
5. To Sponsor Research: It provides technical assistance and guidance to the
State Pollution Control Boards for carrying out research. It sponsors investigations
and research relating to problems of water pollution and prevention.
20.2.5.3 Powers and functions of State Pollution Control Boards
The State Pollution Control Board has to perform the following functions:
(i) Adviser to State Government: It advises the State government on any matter
concerning the prevention, control or abatement of water pollution.
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(ii) Setup Effluent Treatment Plants: The Board inspects works and plants for
the treatment of sewage and to review plans for the purification of water.
(iii) Coordinate Activities: The Board coordinates the activities of Central Water
Pollution Control Board and resolves disputes.
(iv) Effluent Standards: It lays down, modify or annul effluent standards for the
sewage and grade effluents. It evolves methods of utilisation of sewage and suitable
trade effluents in agriculture.
(v) Laboratory Testing: The Board may establish laboratories to test the
samples of water from any stream or well or of samples of any sewage or trade
effluents.
20.2.5.4 Prohibition on use of stream or well for disposal or polluting of water
(a) No person shall knowingly cause or permit any poisonous, noxious or
polluting matter determined in accordance with such standards as may be laid
down by the State Board to enter (whether directly or indirectly) into any stream or
well or sewer or on land, or
(b) No person shall knowingly cause or permit to enter into any stream any
other matter which may tend, either directly or in combination with similar
matters, to impede the proper flow of the water of the, stream in a manner leading
or likely to lead to a substantial aggravation of pollution due to other causes or of is
consequences.
20.2.5.5 Restrictions on new outlets and new discharges by industry or any person
No person shall, without the previous consent of the State Board, establish of
take any steps to establish any industry, operation or process, or any treatment
and disposal system or any extension or addition thereto, which is likely to
discharge sewage or trade effluent into a stream or well or sewer or oil land.
20.2.5.6. Penalties under The Water Act, 1974
Failure to comply with the directions of the Act shall, on conviction, be
punishable with imprisonment for a term which may extend to three months or
with fine which may extend to ten thousand rupees or with both and in case the
failure continues, with an additional fine which may extend to five thousand rupees
for every day during which such failure continues after the conviction for the first
such failure.
20.2.6 THE AIR (PREVENTION AND CONTROL OF POLLUTION) ACT, 1981
This Act has been passed to provide for the prevention, control and abatement
of air pollution. According to its statement of objectives, "Various pollutants
discharged through industrial emission and from certain human activities
connected with traffic, heating, use of domestic fuels, and refuse have a
deterimental effect not only on the health of the people, but also on animal life,
vegetation and property."
There are some important definitions mentioned in this Act
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1. Air Pollutant: It means any solid, liquid or gaseous substance (Including

noise) present in the atmosphere in such concentration as may be or fiend to be
injurious to human beings or other living creatures or plants or property or
environment.
2. Automobile: It means any vehicle powered either by internal combustion
engine or by any method of generating power to drive such vehicle by loaning fuel.
3. Chimney: It includes any structure with an opening or outlet from or
1hiough which any air pollutant may be emitted.
4. Emission: It means any solid or liquid for gaseous substance coming any
chimney, duct or flue or any other outlet.
The Act was amended in 1987. Failure to comply with the provisions of Act or
directions shall be punishable with imprisonment for a term which shall not be less
than one year and six months but which may extend to six years and by
imprisonment for a term which may be extended to Ten Thousand pees or with
both. But in the case at continuing contravention with an additional fine which
may extend to Five Thousand Rupees for everyday imp, which such contravention
continues after conviction of the first such contravention.
In contravention of the New Industrial Policy of 1980, the Act extended in rules
for setting up of industries in the country. It issued new guide – lines in this regard:
(a) clearance certificate from State Pollution Control Board; (b) shifting of industries
from urban areas; (c) industries have to follow the air quality measurements as per
State/Central pollution boards; and (d) replacement of pollution generating
machinery.
20.2.6.1 Powers and functions of Central and State Pollution 14 Control Boards
The Central Pollution Control Board has to perform the following functions:
1. Adviser to Government: CPCB advise the Central government on any matter
concerning the prevention and control of air pollution in India.
2. Co-ordinate Activities: It coordinates the activities of the State/ Pollution
Control Boards and resolves disputes.
3. To Publish Statistical Data: CPCB collects, compiles and publishes technical
and statistical data related to water pollution. Its suggests measures for its effective
pevention and control.
4. To Organise Training: It plans and organises the t training of persons
engaged or to be engaged in programmes for the prevention, control or abatement of
air pollution.
5. To Sponsor Research: It provides technical assistance and guidance to the
State Pollution Control Boards for carrying out activities. It sponsors investigations
and research relating to problems of pollution and prevention.
The State Pollution Control Board has to perform the following functions:
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(1) Adviser to State Government: It advises the State Government on any

matter concerning the prevention, control or abatement of air pollution.
(2) Coordinates Activities: The State Pollution Control Board coordinates the
activities of Central Pollution Control Board and resolves disputes.
(3) Effluent Standards: It lays down, modify or annul effluent standards.
(4) Laboratory Testing: The Board establishes laboratories to test air pollution.
20.2.7 THE ENVIRONMENTAL (PROTECTION) ACT, 1986
The Water (Prevention and Control of Pollution) Act was passed in 1974. It
aimed at maintaining the purity of water by preventing water pollution Anti
provided for establishment of Pollution Control Boards at State level. Simi1arly, the
Air (Prevention and Control of Pollution) Act was passed in 1981 to control air
pollution. Inspite of these Acts, it was realised that it environment was deteriorating
at an alarming rate in the country. Therefore, a more comprehensive and general
piece of legislation was framed in the form of the Environmental (Protection) Act,
1986.
20.1.7.1 Objectives of the Act
The Act was passed with the following objectives
1. To Improve the Quality of Environment: Under this Act, the Central
Government has the power to take all such measures as it deems necessary for the
purpose of protecting and improving the quality of environment.
2. Safe Limits: The Act lays down standards for emission or discharge of
environmental pollutants from various sources. Moreover, it restricts thy areas in
which any industry operations or processes or class of industries shall be carried
out subject to certain safeguards only.
3. Handling of Hazardous Substances: The Act was passed for the protection,
regulation of discharge of environmental pollutants and handling of hazardous
substances.
4. Prevention of Accidents: The Act lays down procedures and safeguards for
the prevention of accidents which may cause environmental pollution and remedial
measures for such accidents and deterrent punishment to those who endanger
human environment, safety and health.
20.1.7.2 Salient Features of The Act
Environment has been widely defined under the Act as inclusive of
―Interrelationship that exists among and in between water, air, land and human
beings, other living creatures, plants, micro-organisms and property."
(a) This Act is said to be a more effective and bold measure to fight the problem
of pollution as compared to all the previous laws in this regard. Under the Act, the
Central Government has been empowered to take all appropriate measures to
prevent and control pollution and to establish an effective machinery to achieve this
object. Until such a new machinery is established, the existing machinery will be
used for implementation of the Act.
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b) The Act enables the Central Government to take all such measures as it
deems necessary or expedient for the purpose of protecting and improving the
quality of the environment and preventing, controlling and abating environmental
pollution. The Central Government is also empowered to constitute an authority for
exercising the power vested in it and to frame rules for that purpose.
c) The Act has adopted a new stand with regard to the question of locus standi
so that now even a citizen has the right to approach a court provided he has given
notice of not less than 60 days of the alleged offence and his intention to made a
complaint to the Central Government or the competent authority.
(d) The Act strengthens the penal provisions. The maximum penalties for
contravention of the Act are imprisonment up to five years or fine up to one lakh
rupees or both. If the failure or contravention continues beyond a period of one year
after the date of conviction, the offender shall be punishable with imprisonment for
a term which may extend to seven years.
(e) The Government has been given the powers to collect samples of air, water,
soil or other substances as evidence of the offences under the Act.
(f) The Act applies to the pollution generated by the Government agencies as
well, where an offence under this Act has been committed by any department of
Government. The Head of the Department shall be deemed to be guilty of the
offence and liable under the Act unless he proves that the offence was committed
without his knowledge or that he exercised all due diligence to prevent such
offence.
(g) A special procedure can be prescribed for handling hazardous substance
and no person can handle such substance except in accordance with procedure.
(h) The Central Government has been vested with powers of entering and
inspecting any place through any person or agency authorised by it.
(i) This Act also authorises the Central Government to issue direction for the
closure, prohibition or regulation of any industry, operation or process. It also
authorises the Central Government to stop or regulate the supply of electricity or
water or any other service directly without obtaining a court order.
20.1.7.3 Criticism of The Environment (Protection) Act
The Act has been criticised on the following grounds
(1) The Act is criticised on the ground that its radical approach regarding the
rule of locus standi is rendered ineffective by the requirement of sixty days notice
which gives a long enough time to the offender to make, amend and escape liability
under the Act.
(2) The Act does not cover some major areas of environmental hazards. There
are inadequate linkages in handling matters of industrial and environmental safety.
Control mechanisms to guard against slow, invidious build up of hazardous
substances, especially new chemicals, in the environment, are weak.
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(3) If the authority contemplated by the Central Government continues to be

the existing Pollution Control Boards, it is feared that the entire exercise is
foredoomed to failure. This is so because the present Pollution Control Boards seem
to have adopted a soft line vis-a-vis the industry and prefer to be persuasive rather
than punitive.
(4) Inspite of the bold departure under the Act from the locus standi rule, since
only the Central Government has been given the authority to collet samples of air,
water, soil or other substances, the aggrieved citizen or private agency will
apparently have no means of proving that an offence has been committed by the
alleged offender.
(5) There is undue centralisation under the Act and that all power is vested in
the Central Government and even the authorities constituted to implement are
subject to the supervision and control of the Central Government.
(6) The Act lays down that, "Where any act or omission constitutes an offence
punishable under this Act and also under any other Act then the offender found
guilty of such offence shall be liable to be punished under the other Act and not
under this Act." This provision is anomalous, since many offences would also be
punishable under the previous pollution laws which prescribe a lesser punishment
and hence in such cases the new Act will only prove to be a paper tiger.
(7) The Act is also silent with regard to conservation of forests which is a
subject of supreme importance in a country like India.
20.1.7.4. The Noise Pollution (Regulation and Control) Rules, 2000
Under the Environment (Protection) Act, 1986, the Central government made
the Noise Pollution Rules in 2000 for regulation and control of noise producing and
generating sources.
The Rules explain the objectives in these words: "Whereas the increasing
ambient noise levels in public places from various sources, inter-alia, industrial
activity, construction activity, generator sets, loudspeakers, public address
systems, music systems, vehicular horns and other mechanical devices have
deleterious effects on human health and the psychological well-being of the people,
it is considered necessary to regulate and control noise producing and generating
sources with the objective of maintaining the ambient air quality standards in
respect of noise," The Rules relate to the following:
1. Development Activities: All development authorities and local bodies while
planning development activity or carrying out functions relating to town and
country planning shall take into consideration all aspects of noise pollution as a
parameter of quality of life to avoid noise menance and to achieve the objective of
maintaining the ambient air quality standards in respect of noise.
2. Silence Zone: An area comprising not less than 100 metres around colleges,
schools, hospitals and courts comes under silence zone.
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3. Noise Standards for Different Zones: For the purpose of implementation of

noise standards for different zones, the State Governments may categorize the
areas into industrial zone, commercial zone, and silence zone.
The State government shall take necessary measures for abatement of noise
including noise emanating from vehicular movements. It should ensure that the
existing noise levels do not exceed the ambient air quality standards specified
under Rules 2000.
1) Consequences of any Violation in Silence Zone
Whoever, in any place covered under the silence zone commits any offence, he
/ she shall be liable for penalty under the provisions of the Rules 2000 as under:
a) Whoever plays any music or uses any sound amplifiers;
b) Whoever beats a drum or tom-tom or blows a horn either musical or
pressure or trumpet or beat or sounds of any type of instruments;
c) Whoever exhibits any mimetic, musical or other performances which attract
crowds near the silence zone.
2) Restrictions on the Use of Loudspeakers or Public Address System
a) A 1oud-speaker or a public address system shall not be used except after
obtaining written permission from the district/local authorities.
b) A loudspeaker or a public address system shall not be used at night
(between 10P.M. to 6A.M.) except in closed premises for communication
within an institution's auditorium, conference rooms, community halls, and
banquet halls.
A person may, if the noise level exceeds the ambient noise standards by lOdB
(A) or more, make a complaint to the authority. The authority shall act on the
complaint and take action against the violator in accordance with the provisions of
these rules.
20.2.8 THE WILDLIFE (PROTECTION) ACT, 1972
The Act is meant to prevent the rapid decline of wild animals and birds in the
country. Poaching of certain animals has been completely prohibited under this
Act. It also provides that the State government may declare any area to be a
sanctuary or as a national park if it considers that such area is of adequate
ecological, geomorphological, natural or zoological significance for the purpose of
protecting, propagating or developing wildlife.
The Act has the following objectives:
1. Protection of wildlife in the country.
2. To prevent hunting and treading in wildlife in any form.
3. Control and maintenance of national parks and sanctuaries in the country.
20.2.9 THE WILDLIFE (PROTECTION) AMENDMENT ACT, 2002
The Wildlife (Protection) Act 1972 was amended by the Parliament In 2002.
The main objective of this Act is "to provide for the protection of wild animals, birds
 277

and plants and for matters connected therewith or ancillary or incidental thereto
with a view to ensuring the ecological and environmental security of the country."
The Act provides for the establishment of The National Board under flic
chairmanship of the Prime Minister of India who may constitute committees, sub-
committees or study groups, as may be necessary from time to time in proper
discharge of the functions assigned to it. The Board performs the following
functions:
1. framing policies and advising the Central and State Governments oil the ways
and means of promoting wildlife;
2. reviewing from time to time, the progress in the field of wildlife conservation in
the country and suggesting measures for improvement;
3. assess the environmental assessment of various projects and activities on
wildlife; and
4. prepare and publish a status report at least once in two years on wildlife in
the country.
Similarly, State Boards for wildlife under the chairmanship of Chief Minister of
the State will function for the protection of wild life.
The Act was further amended in 2006 to set up of a Tiger Task Force in tiger
reserve hotspots. Now there is also a provision of forfeiture of property in case of
illegal hunting and trade of wildlife.
20.2.10 FOREST (CONSERVATION) ACT, 1980
After independence, the Government of India adopted the National Forest
Policy wherein it emphasized on the need of protection of forests and categorised
forests of India into four categories, namely, protected forests, national forests,
village forests and tree forests. State governments were left free in forest
administration, provided that it was in consonance with the Centre's forest policy
for preservation and development of the nation's forest resources. Subsequently,
the Forest (Conservation) Act was also promulgated in 1980 to make certain
reforms over the preceding Act of 1927 which imposes restrictions on the
reservation of forests or use of forest land for non-forest purposes by States.
'The Act has been passed to prevent deforestation which results in ecological
imbalance and environmental deterioration. The Act prevents even the State
governments and any other authority to dereserve a forest which is already
reserved. The Act also prohibits forest land to be used for non-forest purposes,
except with the prior approval of the Central Government.
Under Section 2, non-forest purpose means the breaking up or cleaning of any
forest land or portion thereof for:
i. the cultivation of tea, coffee, spices, rubber, palms oil bearing plants,
horticulture crops or medicinal plants; and
ii. any purpose other than reforestation but does not include any work relating
or ancilliary to conservation, development, management of forests and
wildlife, namely, the establishment of check-posts, fire lines, wireless
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communications, construction of fencing, bridges, dams, waterholes,

boundary marks, pipelines and other like purposes.
The Central Government may constitute a committee to advise the government
with regard to:
i. the grant of approval under Section 2, and
ii. any matter connected with the conservation of forests in the country.
According, to Forest (Conservation) Act, 1980, "Whoever contravenes or abet
the contravention of any of the provisions of Section 2, shall be punishable with
simple imprisonment for a period of fifteen days".
20.2.11 AMENDMENTS OF FOREST (CONSERVATION) ACT
In 1992, some amendments were made in the Forest Act of 1980.
i. Some non-forest activities in forests were allowed without cutting trees with
the prior approval of the Central Government. These activities are setting of
transmission lines, seismic surveys, exploration, drilling and hydroelectric
projects.
ii. Prior approval of Central Government is required in the case of cultivation of
fruit-bearing trees, oil-yielding plants or plants of medicinal value.
iii. Removal of stones, bajri or boulder etc. from river-beds located within the
forest area will be considered under non-forest activities.
iv. Ban on mining activities near forest area and prior approval of Central
Government is mandatory.
v. Plantation of mulberry for rearing silkworm is considered as a non-forest
activity.
vi. Wildlife Sanctuaries and National Parks are totally prohibited for any
exploration or survey without prior approval of Central Government.
vii. Cultivation of spices, rubber, tea, coffee and plants which- are cash crops are
included under non-forestry activities. Their cultivation is not allowed in
forest reserve areas.
20.2.12 THE ENVIRONMENT (SETTING FOR INDUSTRIAL PROJECTS) RULES, 1999
The New Industrial Policy of 1980 recognised the need for preserving die
ecological balance and improving living conditions in the urban centres of the
country. On the basis of this policy, indiscriminate expansion of the existing
industries and setting up of new industrial undertakings within the limits of
metropolitan cities and the larger towns shall not be permitted. However, the policy
has not touched upon the implications of setting up an industry in the sensitive
areas, both ecological or otherwise, which would have an effect on the overall
development process. So the Environment Rules of 1999 were framed with the
following provisions:
The industrial licenses should be issued under the fulfillment of the following
conditions:
1. The State Director of Industries confirms that the site of industrial project has
been approved from environmental angle by the competent State Authority.
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2. The concerned State Pollution Control Board has certified that the proposal
meets with the environmental requirements and that the equipments installed
or proposed to be installed are adequate and appropriate to the requirements.
3. The industries will be required to submit half-yearly progress report on
installation of pollution control devices to the respective State Pollution
Control Boards.
4. Depending on the nature and location of the industrial project, the
industrialists will be required to submit comprehensive Environmental Impact
Assessment Report.
(a) Areas to be avoided
No new unit of the industries shall be allowed to be set up in the following
areas:
1. The entire area within the municipal limits of all municipal corporations,
municipal councils and Nagar Panchayats and a 25 Kms. belt around the
cities having population of more than one million;
2. 7 Kms. belt around the periphery of the wetlands.
3. 25 Kms. around the periphery of National Parks, Sanctuaries and Coil-zones
of Biosphere Reserves.
4. Half Km. wide strip on either side of national highways and rail lines.
5. No new industries shall be allowed to be set up within 7Kms. periphery of the
important archaeological monuments listed in annexure.
(1) Forest Land: No forest land shall be converted into non-forest activity Ian
the sustenance of the industry.
(2) Agricultural Land: No prime agricultural land shall be converted into
industrial site.
(b) Requirements for industry
The following are the requirements to set up industries
i. Land acquired shall be sufficiently large to provide space for appropriate
treatment of waste water.
ii. The green belt between two adjoining large scale industries shall be one Km.
iii. Enough space should be provided for storage of solid wastes so that these
could be available for possible reuse.
iv. Layout and form of the industry that may come up in the area must conform
to the landscape of the area without affecting the scenic features of that place.
v. Associated township of the industry must be created at a space that have
physiographic barrier between the industry and the township.
vi. Efforts should be made to recycle or recover the waste materials to some
extent. The waste material should be recycled safely.
vii. Intensive programmes of tree plantation on disposal area should be
undertaken by industries.
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viii. Industries should plant trees and ensure vegetable cover in their premises.
This is particularly advisable for those industries having more than 10 acres
of land.
20.2.13 HAZARDOUS WASTESMANAGEMENT AND HANDLING) RULES, 1989
The Hazardous Wastes Rules 1989, notified under the Environment
(Protection) Act, 1986 lay down that before hazardous wastes are delivered at the
hazardous waste site, the occupier or operator of a facility shall ensure that the
hazardous wastes are packaged, in a manner suitable for storage, transport,
labelling and packaging shall be easily visible and be able to withstand physical
conditions and climate factors.
Imports of hazardous wastes from any country to India shall not be permitted
for dumping and disposal of such wastes. However, imports of such wastes may be
allowed for processing or reuse as raw material after examining each case on merit
by the State or Central Pollution Control Board.
Any person importing hazardous wastes shall maintain the records of the
hazardous wastes imported.
The exporting country or the exporters as the case may bc, of h.i/aidowh
wastes shall communicate in Form 6 to the Ministry of Environment and Forests of
the proposed transboundary movement of hazardous wastes.
20.2.14 THE BIO-MEDICAL WASTE (MANAGEMENT AND HANDLING) RULES, 1998
These rules apply to all persons who generate, collect, receive, store, transport,
treat, dispose, or handle bio-medical waste in any form.
Bio-medical waste shall not be mixed with other wastes. Bags should be
attached with special labels.
20.2.15 THE RECYCLED PLASTICS MANUFACTURE AND USAGE
(AMENDMENTS) RULES, 2003
Under the Environment (Protection) Act 1986, the Central Government has
amended the Recycled Plastics Manufacture and Usage Rules, 1999 that lay down
the following:
1. No vendor shall use carry bags or containers made of recycled plastic for
storing, carrying, dispensing, or packaging of foodstuffs.
2. No vendor shall use containers, made of recycled plastic for storing, carrying,
dispensing or package of foodstuffs.
3. No person shall manufacture, stock, distribute or sell carry bags made of
virgin or recycled plastic bags which are less than 8 x 12 inches [20 x 30 cms]
in size and which do not conform to the minimum thickness specified
in Rule 8.
20.1.16 PUBLIC LIABILITY INSURANCE ACT (PLIA), 1991
The Act covers accidents involving hazardous substances and insurance
coverage for these. Where death or injury results from an accident, this Act makes
the owner liable to provide relief as is specified in the Schedule of the Act. The PLIA
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was amended in 1992, and the Central Government was authorised to establish the
Environmental Relief Fund, for making relief payments.
20.2.17 NATIONAL ENVIORNMENT TRIBUNAL ACT, 1995
The Act provided strict liability for damages arising out of any accident
occurring while handling any hazardous substance and for the establishment of a
National Environment Tribunal for effective and expeditious disposal of cases
arising from such accident, with a view to give relief and compensation for damages
to persons, property and the environment and for the matters connected therewith
or incidental thereto.
20.3 SUPPORT SYTEM FOR EFFECTIVE IMPLEMENTATION OF
THE ENVIRONMENT POLICY
There are a number of international and national organisations, agencies and
Programmes involved in different areas of environment, forestry, wildlife and c1her
relevant aspects. Some of the important bodies of this type are as follows:
20.3.1 INTERNATIONAL BODIES
1. Earthscan. An agency-founded by UNEP in 1976, that commissions original
articles on environmental matters and sells them as features to newspapers and
magazines, especially in developing countries.
2. Convention on International Trade in Endangered Species (CITES). An
international forum, whose membership for agreement is open to all countries. For
India, the Ministry of Environment and Forests functions as nodal agency
participation in international agreements.
3. Environmental Protection Agency (EPA). This is an independent Federal
Agency of the U.S. Government established in 1970. It deals with protection of
environment by air, water, solid wastes, radiation, pesticides, noise etc.
4. European Economic Community (EEC). It is a community of 12 European
nations, with sound political, economic and legal base. The community has joint
agricultural and scientific programmes. It has programmes of framing and
implementation of coordinated policy for environmental improvement and
conservation of natural resources. CPCB, India has taken up project - on air quality
monitoring with assistance of EEC.
5. Human Exposure Assessment Location (HEAL). The project is a part of the
Health Related Monitoring Programme by WHO in co-operation with UNEP. This
project has three components, viz (i) air monitoring, (ii) walL.1 quality monitoring,
and (iii) food contamination monitoring on a global basis.
6. International Council of Scientific Unions (ICSU). A non-government ill
organisation, based in Paris, that encourages the exchange of scientific
informations, initiates programmes requiring international scientific co-operation
and studies and reports on matters related to social and political responsiblilty in
treatment of scientific community.
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7. International Union for Conservation of Nature and Natural Resources (IUCN).
An autonomous body, founded in 1948 with its Headquarters at Morges,
Switzerland, that initiates and promotes scientifically based conservation measures.
It also cooperates with United Nations and other intergovernmental agencies and
sister bodies of World Wide Fund for Nature (WWF).
8. International Marine Consultative Organisation (IMCO). It regulates the
operation of ships in high seas, from marine water pollution viewpoint.
9. South Asia Co-operative Environment Programme (SACEP). This hah been
recently set up for exchange of professional knowledge and expertise on
environmental issues among member countries-Afghanistan, Bangladesh, Bhutan,
India, Iran, Pakistan and Sri Lanka.
10. United Nations Educational, Scientific and Cultural Organisation (UNESCO).
An United Nations agency, found in 1945 to support and implement the efforts of
member states to promote education, scientific research and information, and the
arts to develop the cultural aspects of world relations. It also holds conferences and
seminars, promotes research and exchange of information and provides technical
support. Its Headquarters lit in Paris. Independently as well as in collaboration with
other agencies like UNEP, it supports activities related to environmental quality,
human settlements, training to environmental engineers and other socio-cultural
progrmmes related to environment.
11. United Nations Environment Programme (UNEP). A UN responsible for co-
operation of inter-governmental measures for environmental monitoring and
protection. It was set up in 1972. There is a voluntary United Nations
Environmental Coordination Board, to coordinate the UNEP programmes. Its
Headquarters are in Nairobi, Kenya. UNEP was founded to study formulate
international guidelines for management of the environment. UNEP is assisting
many such programmes in India.
12. World Commission on Environment and Development (WCED). This is a 23
member commission, set up in 1984 in pursuance to a UN General Assembly
resolution in 1983 to re-examine the critical environmental and development issues
and to formulate proposals for them. This is a call for political action to manage
better environmental resources to ensure human progress and survival. The
commission makes an assessment of the level of understanding and commitment of
individuals, voluntary organisations and governmental bodies on environmental
issues.
13. Earthwatch Programme. A worldwide programme, established in 1972
under the terms of the Declaration on the Human Environment. It monitors trends
in the environment, based on a series of monitoring stations. Its activities are
coordinated by UNEP.
14. Project Earth. Developed in collaboration with UNEP to inspire, interest and
educate young people worldwide on the crucial issues facing the Earth's
Environment. The project is led by Mr. Robert Swan, UNEP Goodwill Ambassador
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for youth. He is the only person to have reached the North Pole and the South Pole
on foot.
15. Earthwalks. A series of expeditions designed to focus international attention
on environmental issues in key geographic areas. First such walk was taken by
R.Swan and six young people were presented by him on 6th June 1992 at UNCED,
Earth Summmit (3-14 June 1992), held at Rio de Janeiro (Brazil). There are global
500 awards under UNEP for youth linked to Earthwalk programme.
16. Man and Biosphere Programme (MAB). The program is the outcome of
International Biological Programme (IBP) that has already concluded its activities.
MAB was formerly launched by UNESCO in 1971. There are 14 projects areas
under this programme. We shall provide here the details of MAB with special
reference to major activities in our own country so far done under, the same, and
the priority areas for future.
20.3.2 NATIONAL ORGANISATIONS
There are a number of governmental as well as non-government organisations,
agencies, and programmes engaged in environmental studies, A number of non-
governmental, voluntary organisations have been doing good job in this area.
Most of the governmental bodies involved in environmental studies arc either
put under the administrative control of, or assisted by the Department of
Environment, Forests & Wildlife (D.O.En) in the Ministry of Environment and
Forests, Government of India.
The role, allocation of business and organisation of the D.O.En. is given below:
20.3.2.1 Department of Environment, Forests & Wildlife of India
Department of Environment was set up in 1980 to serve as the focal point in
the administrative structure of the Government for planning, promotion and
coordinator of environmental programmes.
The present integrated Department of Environment, Forests and Wildlife
(D.O.En) in the Ministry of Environment and Forests was created in robs, 1985. The
Ministry serves as the focal point in the administrative structure of the Central
Government for the planning, promotion and coordination of environmental and
forestry programmes. The Ministry's main activities are, the survey and
conservation of flora, fauna, forests and wildlife, prevention and control of
pollution, afforestation and regeneration of the degraded areas of the environment.
These are to be achieved through impact assessment support to organisations,
education and training to augment the requisite manpower, collection,
implementing the programmes, environmental forestry research, extension,
education and training to augment the requisite manpower, collection, collation
and dissemination of environmental information and creation of environmental
awareness.
1) Organisation
Organisational structure of the Ministry showing Different Divisions and
Agencies is shown in chart It may be seen that there are (i) Ganga Project
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Directorate, and (ii) Twenty-three Divisions under the Department of Environment,

Forests and Wildlife.
2) Ganga Action Plan
Central Ganga Authority was constituted in February 1985 to guide zmd
oversee the implementation of a programme for restoring the quality of the river,
Ganga. The Ganga Project Directorate (GPD) of the Ministry coordinates the
implementation. The State Governments of U.P., Bihar and W.Bengal are to
coordinate the Action yThe National Wash Lot Development Board (NWDB) was set
up under the Ministry of Environment & Forests in 1985 with the objective of (i) to
increase tree and other green 13 on wastelands, (ii) to prevent good land from
becoming wasteland, and (iii) In formulate within the overall nodal policy,
perspective plans and programmes for the management and development of thee
wastelands in the country. In 1992, the Board was transferred to the Ministry of
Rural Development, putting under a new Department of Wastelands Development
under the charge of a Minister of State. This was done as an effort to boost
wasteland plans for which Ministry of Environment & Forests is said not to have
proved equal to the task.
3) Divisions, Agencies and Units
There are 23 Divisions, including the Headq of the Regional Offices the
Ministry. International Cooperation Division has two wings (IC-I & IC-II). There are
16 Associated Units under the administrative control of the Ministry. Of these one
(Forest Survey of India) is under Forest Survey and Utilisation, one (Indira Gandhi
National Forest Academy, Dehradun) under Forest Research Education and
Training; six Regional offices at Bombay, Madras, New Delhi and Calcutta) under
Wildlife Conservation; and three (National Museum of Natural History, New Delhi,
Botanical Survey of India, Calcutta and Zoological Survey of India, Calcutta) are
under Conservation and Survey Division.
There are 13 Autonomous Agencies assisted by the Ministry. These Agencies
and the Divisions to which they are attached (given in parentheses) are as follow
parentheses) are as follows:
(1) Salim Ali Centre for Ornithology & Natural d History, Bombay
(Conservation & Survey), (2) Padmaja Naidu Himalayan Zoological Park, Darjeeling
and (3) Wildlife Institute of India, Dehradun (Wildl1life Conservation), ( 4) Central
Pollution Control Board (Control of Pollution), (5) G.B. Pant Himalayan Paryavaran
Evam Vikas Sansthan, Almora (Environmental Research), (6) Centre for
Environment Education, Ahmedabad, (7) C.P. Rama Sivami Aiyar Environmental
Education Centre, Madras, (8) Centre for Ecological Research and Training,
Bangalore and (9) Centre of Mining Environment, Dhanbad (Environmental
Information), (10) Indian Institute of Forest Management, Bhopal, (11) Indian
Council of Forestry Research & Education, Dehradun, and (12) Indian Plywood
Research Institute, Bangalore (Forest Research Education & Training), (13) Animal
Welfare Bc3oard (Animal Welfare).
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4) Other National Organisations
There are 'other governmental and nom)n-governmental organisations/
agencies involved in environmental issues. Some of the important ones are as
follows:
1. Advisory Board on Energy (ABE)
2. Bombay Natural History Society (BNHS)
3. Central Forestry Commission (CFC)
4. Department of Non-Conventional Energy Sources (DNES)
5. Industrial Toxicology Research Centre (ITRC)
6. National Environmental Engineering Research Institute (NEERI)
7. National Dairy Development Board
8. National Natural Resources Management System
9. National Wetland Management Committee
10. State Pollution Control Boards (SPCB)
11. Tata Energy Research Institute (TERI)
12. Several Research Institutes under I.C.A.R. including I.G.F.R.I., Jhansi,
Central Soil Salinity Research Institute, Karnal.
20.3.3 ROLE OF NGOS
As mentioned in the preceding pages, the national governments started setting
up ministries/ departments of environment after Stockholm conference. This was
followed by national and international commitments for protection of environment
as also by entering into Agreements/ Protocols at international level. However, in
most of the cases many problems surfaced during the implementation phase of the
agreements. We must emphasise that commitments or agreements made have no
sanctity without enforcement. The reasons for poor implementation may be many,
ranging from lack of political will to scarcity of funds. Also, sometimes decisions
taken in regard to environmental issues may not be very sound, and the
implications of such decisions could not be visualised. It is against this background
that public-spirited citizens generate pressure either themselves or through non-
governmental organisations (NGOs) for enforcement. The service being rendered by
environmental NGOs is commendable. The environmental NGOs exert all sorts of
pressure to national governments, the international agencies and the business
corporations for fostering the cause of environment related issues. Their role at
global level is significant in developing lobbies especially for transboundary issues
implying that environmental problems are not limited by national borders but are
the problems of entire humanity. There are all sorts of NGOs engaged in various
programmes but most of them are working in the area of development and poverty
reducing programmes. Total number of NGOs all over the world may run into
thousands.
NGOs usually act as mediators between governments and citizens. They work
at grass roots or community level as also with poor or socially disadvantaged people
and provide them necessary support. Most of the NGOs get government funding or
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aid from other agencies. However, there are NGOs that do not accept funds from
others and raise funds through charities.
Many NGOs like World Wide Fund (NVWF), Greenpeace and Friends of Earth
operate at global level. Most of the NGOs have websites that provide all sorts of
informations to members and others.
Various NGOs work hard to rally public opinion. The efforts of these groups
have brought changes in the policy of some companies. Shell, the oil giant, was
wanting to dump its worn out oil ship, the Brent Spar in North Sea. Greenpeace
played a crucial role in preventing this to happen. Greenpeace organised a boycott
of service stations of Shell in Germany. The sales fell, Shell adopted another way of
disposal of Brent Spar.
What happened in Seattle, Washington in 1999 is well known. WTO organised
a meeting in Seattle to develop agenda for next round of talks the Millennium
Round. The meeting was attended by about 5000 delegates including environment
ministers of various governments. There were thousands of protesters who
disrupted the meeting. The situation was so serious that US authorities used tear
gas, arrested hundreds of protesters and imposed curfew. Seattle meeting was a
fiasco, the talks failed because WTO was not willing to consider environmental and
poverty issues adequately.
Another example is that of Taiwan which wanted to buy a piece of land in
North Korea to dump its nuclear waste. The Korean Federation of Environmental
Movement opposed this move and succeeded.
The above cases underscore the point that NGOs are important stakeholders
and can be as effective for the upliftment of society as labour unions or politicians.
They can confront the governments that do not act rationally. In fact, many a times
NGOs are considered as a part of negotiations.
In India, Chipko Movement presents a typical case of how people—both men
and women mostly living around forests — organised themselves in a group to save
the forests. In 1970s, India's forest cover was declining. It directly affects forest
dewellers who depend upon their livelihood on forest resources - fuel, fodder and
food. It was at this time that Chipko Movement started in 1973 in Uttar Pradesh,
the largest state of India. Chipko means to 'embrace'. The people, especially the
women literally embraced the trees when the loggers would come to fell them. As a
result of this movement, the government banned felling of trees in Himalyan region.
This movement spread to other states of India in 1980s including the coastal areas.
Chipko movement is an example of how a non-violent struggle by thousands of
people can achieve the protection of environment. This movement helped to seek for
alternative renewable resources for meeting the needs of industry.
SUMMARY
In the above pages we have discussed about the provisions of the Air Act, the
Water Act, and so on. The agencies in support of environmental protection both
national and international are listed for reference.
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KEY WORDS
 Hazardous waste
 Biomedical waste
 Earth scan
 Earth walks
 Earth watch programme
REVIEW QUESTIONS
1. What are the objectives of environmental laws?
2. Explain the role of ministry of environment and forest in the protection of
environment?
3. What are the important provisions of the environmental protection act.
4. Write briefly about the provisions of the Air, (prevention and control of
pollution) act, 1981.
5. Enumerate the role of pollution control board in the protection of
environment.
REFERENCES
1. D. K. Asthana & Meern Asthana, ―Environmental Studies”, S.Chand &
Company Ltd, New Delhi – 2006.
2. G. N. Pandey, ―Environmental Management‖, Vikas Publishing House Pvt Ltd,
New Delhi – 2003.
3. R. C. Sharma & Gurbir Sangha, ―Environmental Studies”, Kalyani Publishers,
New Delhi, 2005.
4. R. S. Shukla, P.S.Chandel, “A Text Book of Plant Ecology”, S.Chand &
Company Ltd, New Delhi – 2008.
5. N. K. Uberoi, Environmental Management, Excel Books, New Delhi, 2007.

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