Buisness 12th Part-2

Business Studies
Part II
Business Finance and Marketing
Textbook for Class XII
2020-21
Click on this link to buy latest Educart Books on Amazon - https://amzn.to/3OwEosm
0__Prelims.indd 1 11/23/2019 12:02:10 PM
ISBN 81-7450-697-7 (Part I)
81-7450-756-6 (Part II)
First Edition
ALL RIGHTS RESERVED
May 2007 Jyaistha 1929
 No part of this publication may be reproduced, stored in a retrieval
ISBNor 81-7450-697-7
system transmitted, in any form or(Part
by any I)
means, electronic,
Reprinted
February 2008 Magha 1929

mechanical, 81-7450-756-6 (Part
photocopying, recording or II)without the prior
otherwise
permission of the publisher.
March 2009 Chaitra 1929  This book is sold subject to the condition that it shall not, by way of
January 2010 Magha 1931 trade, be lent, re-sold, hired out or otherwise disposed of without
the publisher’s consent, in any form of binding or cover other than
January 2011 Magha 1932 that in which it is published.
January 2012 Magha 1933
 The correct price of this publication is the price printed on this page.
January 2013 Pausha 1934 Any revised price indicated by a rubber stamp or by a sticker or
November 2013 Kartika 1935 by any other means is incorrect and should be unacceptable.
January 2015 Magha 1936
May 2016 Vaishakha 1938
January 2018 Magha 1939 OFFICES OF THE PUBLICATION
February 2019 Phalguna 1940 DIVISION NCERT
November 2019 Agrahayana 1941 NCERT Campus

Sri Aurobindo Marg
New Delhi 110 016 Phone : 011-26562708
PD 300T BS
108, 100 Feet Road
Hosdakere Halli Extension
© National Council of Educational Banashankari III Stage
Research and Training, 2007 Bengaluru 560 085 Phone : 080-26725740
Navjivan Trust Building

P.O. Navjivan
Ahmedabad 380 014 Phone : 079-27541446
CWC Campus
Opp. Dhankal Bus Stop
Panihati
Kolkata 700 114 Phone : 033-25530454
CWC Complex
Maligaon
Guwahati 781 021 Phone : 0361-2674869
0361-2674869
` 80.00
Publication Team
Head, Publication : Anup Kumar Rajput
Division
Chief Editor : Shveta Uppal
Chief Production : Arun Chitkara
Officer
Printed on 80 GSM paper with NCERT Chief Business : Bibash Kumar Das
watermark
Manager
Published at the Publication Division Assistant Editor : Vineet Joshi
by the Secretary, National Council of
Production Assistant : Mukesh Gaur
Educational Research and Training,
Sri Aurobindo Marg, New Delhi 110 016
and printed at Aadarsh Private Limited, Cover
Plot No. 106, 107 & 108, Sector-1, Shweta Rao
Govindpura Industrial Area, Bhopal Illustrations
462 023 (M.P.) Suresh Lal
2020-21
0__Prelims.indd 2 04-12-2019 15:30:43
Foreword
The National Curriculum Framework (NCF), 2005, recommends that
children’s life at school must be linked to their life outside the school.
This principle marks a departure from the legacy of bookish learning
which continues to shape our system and causes a gap between the
school, home and community. The syllabi and textbooks developed on
the basis of NCF signify an attempt to implement this basic idea. They
also attempt to discourage rote learning and the maintenance of sharp
boundaries between different subject areas. We hope these measures will
take us significantly further in the direction of a child-centred system
of education outlined in the National Policy on Education (1986).
The success of this effort depends on the steps that school
principals and teachers will take to encourage children to reflect on
their own learning and to pursue imaginative activities and questions.
We must recognise that, given space, time and freedom, children
generate new knowledge by engaging with the information passed on
to them by adults. Treating the prescribed textbook as the sole basis
of examination is one of the key reasons why other resources and sites
of learning are ignored. Inculcating creativity and initiative is possible
if we perceive and treat children as participants in learning, not as
receivers of a fixed body of knowledge.
These aims imply considerable change in school routines and
mode of functioning. Flexibility in the daily time-table is as necessary
as rigour in implementing the annual calendar so that the required
number of teaching days are actually devoted to teaching. The methods
used for teaching and evaluation will also determine how effective this
textbook proves for making children’s life at school a happy experience,
rather than a source of stress or boredom. Syllabus designers have
tried to address the problem of curricular burden by restructuring and
reorienting knowledge at different stages with greater consideration
for child psychology and the time available for teaching. The textbook
attempts to enhance this endeavour by giving higher priority and space
to opportunities for contemplation and wondering, discussion in small
groups, and activities requiring hands-on experience.
2020-21
0__Prelims.indd 3 11/23/2019 12:02:10 PM
iv
The National Council of Educational Research and Training (NCERT)

appreciates the hardwork done by the textbook development committee
responsible for this book. We wish to thank the Chairperson of the
advisory group in Social Sciences Professor Hari Vasudevan and the
Chief Advisor for this book, D.P.S. Verma, Professor (Retd.), Delhi School
of Economics, University of Delhi, and Dr. G.L. Tayal, Reader, Ramjas
College, University of Delhi, for guiding the work of this committee.
Several teachers contributed to the development of this textbook; we are
grateful to their principals for making this possible. We are indebted to
the institutions and organisations which have generously permitted us
to draw upon their resources, material and personnel. We are especially
grateful to the members of the National Monitoring Committee, appointed
by the Department of Secondary and Higher Education, Ministry of
Human Resource Development, under the chairpersonship of Professor
Mrinal Miri and Professor. G.P. Deshpande, for their valuable time and
contribution. As an organisation committed to systemic reform and
continuous improvement in the quality of its products, NCERT welcomes
comments and suggestions which will enable us to undertake further
revision and refinement.
Director
New Delhi National Council of Educational
20 November 2006 Research and Training
2020-21
0__Prelims.indd 4 11/23/2019 12:02:10 PM
Textbook Development Committee
Chairperson, Advisory Committee for Textbooks in Social Sciences at
Senior Secondary Level
Hari Vasudevan, Professor, Department of History, University of
Calcutta, Kolkata
Chief Advisor
D.P.S. Verma, Retired Professor, Department of Commerce, Delhi School
of Economics, University of Delhi, Delhi.
Advisor
G.L. Tayal, Reader, Ramjas College, University of Delhi, Delhi.
Members
Anand Saxena, Reader, Deen Dayal Upadhyaya College, University of
Delhi, Delhi.
Davinder K. Vaid, Professor, Department of Education in Social Sciences
and Humanities, NCERT, New Delhi.
M.M. Goyal, Reader, PGDAV College, University of Delhi, Delhi.
Narsimha Murthy, Principal, University Post-Graduate College, Subedari,
Anam Konda, Distt. Warangal, Andhra Pradesh.
Pooja Dasani, PGT (Commerce) Convent of Jesus and Mary,
Gol Dakkhana, New Delhi.
R.B. Solanki, Principal, B.R. Ambedkar College, University of Delhi, Delhi.
Ruchi Kakkar, Lecturer, Acharya Narendra Dev College, University of
Delhi, Delhi.
Shruti Bodh Aggarwal, Vice-Principal, Rajkiya Pratibha Vikas Vidyalaya,
Kishanganj, Delhi.
Sumati Verma, Reader, Sri Aurobindo College, University of Delhi, Delhi.
Y.V. Reddy, Reader, Department of Commerce, Goa University, Goa.
Member Coordinator
Minoo Nandrajog, Reader, Department of Education in Social Sciences
and Humanities, NCERT, New Delhi.
2020-21
0__Prelims.indd 5 11/23/2019 12:02:10 PM
Acknowledgements
The National Council of Educational Research and T raining
acknowledges the valuable contributions of the Textbook Development
Commiteee, which took considerable pain in the development and review
of manuscript as well.
Thanks are due to Savita Sinha Professor and Head, Department
of Education in Social Science for her guidance and constant support
at every stage of the textbook development process. The textbook has
been reworked and updated at appropriate point of time in the context of
recent development in business scenario and the Compaines Act 2013.
The contribution of practcing teacher of Business Studies is also duly
acknowledged for develping e-resourses for QR Codes.
The contribution of APC Office, Administration, Publication Division,
and Secretariat of NCERT are also duly acknowledged for bringing out
the updated textbook of Business Studies.
Note to the Teacher

This textbook is expected to provide a good understanding of the
environment in which a business operates. A manager has to analyse the
complex, dynamic situations in which a business is placed. Therefore,
content enrichment in the form of business news and abstracts of articles
from business journals and magazines has been given as inset material
(boxes). This will encourage students to be observant about all business
activity and discover what is happening in business organisations with
the expectation that they will update their knowledge through the use
of libraries, newspapers, business oriented TV programmes and the
Internet. Various types of questions are given and case problems have
been introduced to test the application of subject knowledge to realistic
business situations.
2020-21
0__Prelims.indd 6 11/28/2019 10:23:08 AM
Contents
Foreword iii
Chapter 9 Financial Management 225
Chapter 10 Financial Markets 252
Chapter 11 Marketing 276
Chapter 12 Consumer Protection 323
2020-21
0__Prelims.indd 7 11/23/2019 12:02:10 PM
Contents (Part I)
Chapter 1 Nature and Significance of Management 1
Chapter 2 Principles of Management 30
Chapter 3 Business Environment 69
Chapter 4 Planning 93
Chapter 5 Organising 111
Chapter 6 Staffing 141
Chapter 7 Directing 171
Chapter 8 Controlling 205
2020-21
0__Prelims.indd 8 11/23/2019 12:02:10 PM
chapter
9
Financial Management
Learning Objectives
When Tata Steel Acquired Corus
After studying this chapter, you Tata Steel, the biggest steel producer in
should be able to: the Indian private sector has acquired
Corus, (formerly known as British
Steel) in a deal worth $8.6 billion in
¾¾ explain the meaning of 2007. This makes Tata Steel the fifth
business finance; largest steel producer in the world. A
financial decision of this magnitude
¾¾ d e s c r i b e f i n a n c i a l has significant implicitness for both
management; Tata Steel and Corus as well as their
employees and shareholders. To mention
some of them:
¾¾ explain the role of financial
management in our yyTata Steel raised a debt of over $8
billion to finance the transaction.
enterprise;
The deal will be paid for by Tata Steel
UK, a special purpose vehicle (SPV)
¾¾ d i s c u s s o b j e c t i v e s o f set up for the purpose. This SPV
financial management and received funds from Tata Steel routed
how they could be achieved; through a Singapore subsidiary.
Another company of the Tata group,
¾¾ explain the meaning and Tata Sons Ltd., invested $ 1 billion
dollars for preference shares along
importance of financial
with Tata Steel which will invest an
planning; equal amount.
yyTata Steel, the acquirer company,
¾¾ state the meaning of capital arranged about 36,500 crores of
structure; rupees to finance the take-over.
yyTata Steel raised this amount through
¾¾ analyse the factors affecting debt or equity or a combination
the choice of an appropriate of both. Some amount came from
capital structure; internal accruals also. This financing
decision affected the capital structure
¾¾ state meaning of fixed capital of Tata Steel.
and working capital; and yyNeedless to emphasise, decisions
like this affect the future of the
organisation. These decisions are
¾¾ analyse the factors affecting
almost irrevocable after they have been
the requirement of fixed and formalised.
working capital.
Source: The Economic Times
2019-2020

Ch_9.indd 229 27-Feb-19 5:05:03 PM
BUSINESS STUDIES
230
Introduction thus, very crucial for the survival and

growth of a business.
In the above case, these decisions
require careful financial planning,
Financial Management
an understanding of the resultant
capital structure and the riskiness All finance comes at some cost. It
and profitability of the enterprise. All is quite imperative that it needs to
these have a bearing on shareholders be carefully managed. Financial
as well as employees. They require Management is concerned with optimal
an understanding of business procurement as well as the usage of
finance, major financial decision finance. For optimal procurement,
areas, financial risk, and working different available sources of finance
capital requirements of the business. are identified and compared in terms
Finance, as we all know, is essential of their costs and associated risks.
for running a business. Success of Similarly, the finance so procured
business depends on how well finance needs to be invested in a manner that
is invested in assets and operations the returns from the investment exceed
and how timely and cheaply the the cost at which procurement has
finances are arranged, from outside taken place. Financial Management
or from within the business. aims at reducing the cost of funds
procured, keeping the risk under
Meaning of Business Finance control and achieving effective
deployment of such funds. It also
Money required for carrying out aims at ensuring availability of enough
business activities is called business funds whenever required as well as
finance. Almost all business activities avoiding idle finance. Needless to
require some finance. Finance is emphasise, the future of a business
needed to establish a business, to depends a great deal on the quality of
run it, to modernise it, to expand, or its financial management.
diversify it. It is required for buying Importance : The role of financial
a variety of assets, which may be management cannot be over-
tangible like machinery, factories, emphasised, since it has a direct
buildings, offices; or intangible such bearing on the financial health of a
as trademarks, patents, technical business. The financial statements,
expertise, etc. Also, finance is central such as Balance Sheet and Profit
to running the day-to-day operations and Loss Account, reflect a firm’s
of business, like buying material, financial position and its financial
paying bills, salaries, collecting cash health. Almost all items in the financial
from customers, etc. needed at every statements of a business are affected
stage in the life of a business entity. directly or indirectly through some
Availability of adequate finance is, financial management decisions. Some
2019-2020

Ch_9.indd 230 27-Feb-19 5:05:03 PM
Financial Managements
231
prominent examples of the aspects raised by way of debt and/or equity

being affected could be as under: is also a financial management
(i) The size and the composition of decision. The amounts of debt,
fixed assets of the business: For equity share capital, preference
example, a capital budgeting share capital are affected by the
financing decision, which is a part
decision to invest a sum of Rs. 100
of financing management.
crores in fixed assets would raise
the size of fixed assets block by this ( v) All items in the Profit and Loss
amount. Account, e.g., Interest, Expense,
Depreciation, etc. : Higher amount
( ii) The quantum of current assets and of debt means higher interest
its break-up into cash, inventory expense in future. Similarly, use
and receivables: With an increase of higher equity may entail higher
in the investment in fixed assets, payment of dividends. Similarly, an
there is a commensurate increase expansion of business which is a
in the working capital requirement. result of capital budgeting decision
The quantum of current assets is likely to affect virtually all items
is also influenced by financial in the profit and loss account of the
management decisions. In addition, business.
decisions about credit and inventory
It can, thus, be stated that the
management affect the amount of
financial statements of a business
debtors and inventory which in
are largely determined by financial
turn affect the total current assets
as well as their composition. management decisions taken earlier.
Similarly, the future financial
( iii) The amount of long-ter m and statements would depend upon past
short- ter m funds to be used:
as well as current financial decisions.
Financial management, among
Thus, the overall financial health
others, involves decision about
of a business is determined by the
the proportion of long-term and
quality of its financial management.
short-term funds. An organisation
Good financial management aims at
wanting to have more liquid assets
mobilisation of financial resources at
would raise relatively more amount
a lower cost and deployment of these
on a long-term basis. There is
in most lucrative activities.
a choice between liquidity and
profitability. The underlying
assumption here is that current
Objectives
liabilities cost less than long term The primary aim of financial
liabilities. management is to maximise
( iv) Break-up of long-term financing into shareholders’ wealth, which is referred
debt, equity etc: Of the total long- to as the wealth-maximisation concept.
term finance, the proportions to be The market price of a company’s shares
2019-2020

Ch_9.indd 231 27-Feb-19 5:05:03 PM
BUSINESS STUDIES
232
is linked to the three basic financial some value addition should take place.
decisions which you will study a little All those avenues of investment, modes
later. This is because a company funds of financing, ways of handling various
belong to the shareholders and the components of working capital must
manner in which they are invested and be identified which will ultimately lead
the return earned by them determines to an increase in the price of equity
their market value and price. It means share. It can happen through efficient
maximisation of the market value of decision-making. Decision-making is
equity shares. The market price of efficient if, out of the various available
equity share increases, if the benefit alternatives, the best is selected.
from a decision exceeds the cost
involved. All financial decisions aim at Financial Decisions
ensuring that each decision is efficient
Financial management is concerned
and adds some value. Such value
with the solution of three major issues
additions tend to increase the market
relating to the financial operations
price of shares. Therefore, those
of a firm corresponding to the three
financial decisions are taken which
questions of investment, financing
will ultimately prove gainful from
and divident decision. In a financial
the point of view of the shareholders.
context, it means the selection of
The shareholders gain if the value of
best financing alternative or best
shares in the market increases. Those
investment alternative. The finance
decisions which result in decline in
function, therefore, is concerned
the share price are poor financial
with three broad decisions which are
decisions. Thus, we can say, the
explained below:
objective of financial management is
to maximise the current price of equity
Investment Decision
shares of the company or to maximise
the wealth of owners of the company, A firm’s resources are scarce in
that is, the shareholders. comparison to the uses to which
Therefore, when a decision is taken they can be put. A firm, therefore,
about investment in a new machine, has to choose where to invest these
the aim of financial management resources, so that they are able to earn
is to ensure that benefits from the the highest possible return for their
investment exceed the cost so that investors. The investment decision,
some value addition takes place. therefore, relates to how the firm’s
Similarly, when finance is procured, funds are invested in different assets.
the aim is to reduce the cost so that Investment decision can be long-
the value addition is even higher. term or short-term. A long-term
In fact, in all financial decisions, investment decision is also called a
major or minor, the ultimate objective Capital Budgeting decision. It involves
that guides the decision-maker is that committing the finance on a long-
2019-2020

Ch_9.indd 232 27-Feb-19 5:05:03 PM
233
term basis. For example, making decisions) are concerned with the
investment in a new machine to decisions about the levels of cash,
replace an existing one or acquiring inventory and receivables. These
a new fixed asset or opening a new decisions affect the day-to-day
branch, etc. These decisions are very working of a business. These affect
crucial for any business since they the liquidity as well as profitability of a
affect its earning capacity in the long business. Efficient cash management,
run. The size of assets, profitability inventory management and receivables
and competitiveness are all affected by management are essential ingredients
capital budgeting decisions. Moreover, of sound working capital management.
these decisions normally involve
huge amounts of investment and are Factors affecting Capital
irreversible except at a huge cost. Budgeting Decision
Therefore, once made, it is often almost
A number of projects are often available
impossible for a business to wriggle out
to a business to invest in. But each
of such decisions. Therefore, they need
project has to be evaluated carefully
to be taken with utmost care. These
and, depending upon the returns, a
particular project is either selected or
rejected. If there is only one project, its
viability in terms of the rate of return,
viz., investment and its comparability
with the industry’s average is seen.
There are certain factors which affect
capital budgeting decisions.
(a) Cash flows of the project: When
a company takes an investment
decision involving huge amount
it expects to generate some cash
flows over a period. These cash
flows are in the form of a series
Wealth Maximisation Concept
of cash receipts and payments
over the life of an investment.
The amount of these cash flows
decisions must be taken by those who should be carefully analysed before
understand them comprehensively. considering a capital budgeting
A bad capital budgeting decision decision.
normally has the capacity to severely (b) The rate of retur n: The most
damage the financial fortune of a important criterion is the rate
business. Short-ter m investment of return of the project. These
decisions (also called working capital calculations are based on the
2019-2020

Ch_9.indd 233 27-Feb-19 5:05:03 PM
BUSINESS STUDIES
234
expected returns from each whether or not a firm has earned a

proposal and the assessment of profit. Likewise, the borrowed funds
the risk involved. Suppose, there have to be repaid at a fixed time. The
are two projects, A and B (with the risk of default on payment is known
same risk involved), with a rate as financial risk which has to be
of return of 10 per cent and 12 considered by a firm likely to have
per cent, respectively, then under insufficient shareholders to make
normal circumstance, project B these fixed payments. Shareholders’
should be selected. funds, on the other hand, involve no
(c) The investment criteria involved: commitment regarding the payment
The decision to invest in a particular of returns or the repayment of capital.
project involves a number of A firm, therefore, needs to have a
calculations regarding the amount judicious mix of both debt and equity
of investment, interest rate, cash in making financing decisions, which
flows and rate of return. There are may be debt, equity, preference share
different techniques to evaluate capital, and retained earnings.
inv e s t m ent p ro p o sals which The cost of each type of finance has
are known as capital budgeting to be estimated. Some sources may
techniques. These techniques are be cheaper than others. For example,
applied to each proposal before debt is considered to be the cheapest
selecting a particular project. of all the sources, tax deductibility
of interest makes it still cheaper.
Financing Decision Associated risk is also different for
This decision is about the quantum each source, e.g., it is necessary to
of finance to be raised from various pay interest on debt and redeem the
long-term sources. Short-term sources principal amount on maturity. There
are studied under the ‘working capital is no such compulsion to pay any
management’. dividend on equity shares. Thus, there
It involves identification of various is some amount of financial risk in
available sources. The main sources debt financing. The overall financial
of funds for a firm are shareholders’ risk depends upon the proportion of
funds and borrowed funds. The debt in the total capital. The fund
shareholders’ funds refer to the equity raising exercise also costs something.
capital and the retained earnings. This cost is called floatation cost.
Borrowed funds refer to the finance It also must be considered while
raised through debentures or other evaluating different sources. Financing
forms of debt. A firm has to decide the decision is, thus, concerned with the
proportion of funds to be raised from decisions about how much to be raised
either sources, based on their basic from which source. This decision
characteristics. Interest on borrowed determines the overall cost of capital
funds have to be paid regardless of and the financial risk of the enterprise.
2019-2020

Ch_9.indd 234 27-Feb-19 5:05:04 PM
235
Financial Decisions
Factors Affecting Financing different. A prudent financial

Decisions manager would normally opt for a
The financing decisions are affected source which is the cheapest.
by various factors. Important among (b) Risk: The risk associated with each
them are as follows: of the sources is different.
(a) Cost: The cost of raising funds (c) Floatation Costs: Higher the floatation
through different sources are cost, less attractive the source.
2019-2020

Ch_9.indd 235 27-Feb-19 5:05:04 PM
BUSINESS STUDIES
236
(d) Cash Flow Position of the Company: the choice of source of fund. During
A stronger cash flow position may the period when stock market is
make debt financing more viable rising, more people invest in equity.
than funding through equity. However, depressed capital market
(e) Fixed Operating Costs: If a business may make issue of equity shares
has high fixed operating costs (e.g., difficult for any company.
building rent, Insurance premium,
Salaries, etc.), It must reduce fixed Dividend Decision
financing costs. Hence, lower debt
financing is better. Similarly, if The third important decision that
every financial manager has to
fixed operating cost is less, more
take relates to the distribution of
of debt financing may be preferred.
dividend. Dividend is that portion
(f) Control Considerations: Issues of of profit which is distributed to
more equity may lead to dilution shareholders. The decision involved
of management’s control over here is how much of the profit earned
the business. Debt financing has by company (after paying tax) is to be
no such implication. Companies distributed to the shareholders and
afraid of a takeover bid would how much of it should be retained
prefer debt to equity. in the business. While the dividend
(g) State of Capital Market: Health of constitutes the current income
the capital market may also affect re-investment as retained earning
India Inc. Issues Bonus Shares and Dividends
Corporate India has opened its purse strings to shareholders with interim
dividends and bonus shares. At least 60 companies have declared interim dividend
or announced plans to do so in the first three weeks of January. In addition, around
12 companies have announced bonus share issues this month, about three times
more than January 2006.
There are range of things that a company can do for maximising shareholder
value and dividend is the most direct and simple form of it. Ideally companies
need to balance it up between paying cash and building value of the stock for total
shareholder returns.
This trend of dividends and bonuses is in synchronisation with the good profits
being posted by companies. It’s a way of rewarding shareholders.
A number of companies have also announced plans of bonus shares for their
shareholders. Most of the companies who have already declared bonus issues or
announced that they would be taking it up in their next board meeting are small or
mid-sized companies.
Source: The Economic Times
2019-2020

Ch_9.indd 236 27-Feb-19 5:05:04 PM
237
increases the firm’s future earning the change in earnings is small or

capacity. The extent of retained seen to be temporary in nature.
earnings also influences the financing (d) Growth Opportunities: Companies
decision of the firm. Since the firm having good growth opportunities
does not require funds to the extent retain more money out of their
of re-invested retained earnings, the earnings so as to finance the
decision regarding dividend should required investment. The dividend
be taken keeping in view the overall in growth companies is, therefore,
objective of maximising shareholder’s smaller, than that in the non–
wealth. growth companies.
Factors Affecting Dividend (e) Cash Flow Position: The payment
Decision of dividend involves an outflow of
cash. A company may be earning
How much of the profits earned by a profit but may be short on cash.
company will be distributed as profit Availability of enough cash in
and how much will be retained in the the company is necessary for
business is affected by many factors. declaration of dividend.
Some of the important factors are
(f) Shareholders’ Preference: While
discussed as follows:
declaring dividends, managements
(a) Amount of Earnings: Dividends
must keep in mind the preferences
are paid out of current and past
of the shareholders in this regard. If
earning. Therefore, earnings is a
the shareholders in general desire
major determinant of the decision
that at least a certain amount is
about dividend.
paid as dividend, the companies
(b) Stability Earnings: Other things are likely to declare the same. There
remaining the same, a company are always some shareholders who
having stable earning is in a better depend upon a regular income
position to declare higher dividends. from their investments.
As against this, a company having (g) Taxation Policy: The choice between
unstable earnings is likely to pay the payment of dividend and
smaller dividend. retaining the earnings is, to some
(c) Stability of Dividends: Companies extent, affected by the difference in
generally follow a policy of the tax treatment of dividends and
stabilising dividend per share. The capital gains. If tax on dividend is
increase in dividends is generally higher, it is better to pay less by
made when there is confidence that way of dividends. As compared
their earning potential has gone to this, higher dividends may be
up and not just the earnings of declared if tax rates are relatively
the current year. In other words, lower. Though the dividends are free
dividend per share is not altered if of tax in the hands of shareholders,
2019-2020

Ch_9.indd 237 27-Feb-19 5:05:04 PM
BUSINESS STUDIES
238
a dividend distribution tax is levied Financial Planning

on companies. Thus, under the
present tax policy, shareholders Financial planning is essentially the
are likely to prefer higher dividends. preparation of a financial blueprint of
an organisation’s future operations.
(h) Stock Market Reaction: Investors,
The objective of financial planning
in general, view an increase in
is to ensure that enough funds are
dividend as a good news and
stock prices react positively to it. available at right time. If adequate
Similarly, a decrease in dividend funds are not available the firm will
may have a negative impact on the not be able to honour its commitments
share prices in the stock market. and carry out its plans. On the other
Thus, the possible impact of hand, if excess funds are available, it
dividend policy on the equity share will unnecessarily add to the cost and
price is one of the important factors may encourage wasteful expenditure.
considered by the management It must be kept in mind that financial
while taking a decision about it. planning is not equivalent to, or a
(i) Access to Capital Market: Large and substitute for, financial management.
reputed companies generally have Financial management aims at
easy access to the capital market choosing the best investment and
and, therefore, may depend less financing alternatives by focusing on
on retained earning to finance their costs and benefits. Its objective
their growth. These companies is to increase the shareholders’ wealth.
tend to pay higher dividends than Financial planning on the other
the smaller companies which have hand aims at smooth operations
relatively low access to the market. by focusing on fund requirements
(j) L e g a l C o n s t r a i n t s : C e r t a i n and their availability in the light of
provisions of the Companies Act financial decisions. For example, if a
place restrictions on payouts as capital budgeting decisions is taken,
dividend. Such provisions must the operations are likely to be at a
be adhered to while declaring the higher scale. The amount of expenses
dividend. and revenues are likely to increase.
(k) Contractual Constraints: While Financial planning process tries to
granting loans to a company, forecast all the items which are likely
sometimes the lender may impose to undergo changes. It enables the
certain restrictions on the payment management to foresee the fund
of dividends in future. The requirements both the quantum as
companies are required to ensure well as the timing. Likely shortage
that the dividend does not violate and surpluses are forecast so that
the terms of the loan agreement in necessary activities are taken in
this regard. advance to meet those situations.
2019-2020

Ch_9.indd 238 27-Feb-19 5:05:04 PM
239
Thus, financial planning strives to programmes. Short-term planning

achieve the following twin objectives. covers short-term financial plan called
(a) To ensure availability of funds budget.
whenever required: This include Typically, financial planning is
a proper estimation of the funds done for three to five years. For longer
required for different purposes periods it becomes more difficult and
such as for the purchase of long- less useful. Plans made for periods of
term assets or to meet day-to- one year or less are termed as budgets.
day expenses of business etc. Budgets are example of financial
Apart from this, there is a need to planning exercise in greater details.
estimate the time at which these They include detailed plan of action
funds are to be made available. for a period of one year or less.
Financial planning also tries to Financial planning usually begins
specify possible sources of these with the preparation of a sales forecast.
funds. Let us suppose a company is making
(b) To see that the firm does not a financial plan for the next five years.
raise resources unnecessarily: It will start with an estimate of the
Excess funding is almost as bad sales which are likely to happen in
as inadequate funding. Even if the next five years. Based on these,
there is some surplus money, good the financial statements are prepared
financial planning would put it to keeping in mind the requirement
the best possible use so that the of funds for investment in the fixed
financial resources are not left idle capital and working capital. Then the
and don’t unnecessarily add to the expected profits during the period are
cost. estimated so that an idea can be made
of how much of the fund requirements
Thus, a proper matching of funds
can be met internally i.e., through
requirements and their availability
retained earnings (after dividend
is sought to be achieved by financial
payouts). This results in an estimation
planning. This process of estimating
of the requirement for external funds.
the fund requirement of a business
Further, the sources from which the
and specifying the sources of funds
external funds requirement can be
is called financial planning. Financial
met are identified and cash budgets
planning takes into consideration the
are made, incorporating these factors.
growth, performance, investments
and requirement of funds for a given
period. Financial planning includes
Importance
both short-term as well as long-term Financial planning is an important
planning. Long-term planning relates part of overall planning of any business
to long term growth and investment. enterprise. It aims at enabling the
It focuses on capital expenditure company to tackle the uncertainty in
2019-2020

Ch_9.indd 239 27-Feb-19 5:05:04 PM
BUSINESS STUDIES
240
respect of the availability and timing sales is predicted. However, it

of the funds and helps in smooth may happen that the growth rate
functioning of an organisation. The eventually turns out to be 10%
importance of financial planning can or 30%. Many items of expenses
be explained as follows: shall be different in these three
(i) It helps in forecasting what may situations. By preparing a
happen in future under different
blueprint of these three situations
business situations. By doing
the management may decide what
so, it helps the firms to face the
eventual situation in a better way. must be done in each of these
In other words, it makes the firm situations. This preparation of
better prepared to face the future. alternative financial plans to meet
For example, a growth of 20% in different situations is clearly of
Cutting Back on Debt

Even successful businesses have debt, but how much is too much? Learning how
to manage debt is what can put you ahead.
Taking on the right amount of debt can mean the difference between a business
struggling to survive and one that can respond nimbly to changing economic or
market conditions. A number of circumstances may justify acquiring debt. As a
general rule, borrowing makes the most sense when you need to bolster cash flow
or finance growth or expansion. But while debt can provide the leverage you need
to grow, too much debt can strangle your business. So the question is: How much
debt is too much?
The answer, experts say, lies in a careful analysis of your cash flow as well as
your industry. A business that doesn’t grow dies. You’ve got to grow, but you’ve got
to grow within the financial constraints of your business. What is the ideal capital
structure a business needs in its industry to remain viable? The higher the volatility
(in your industry), the less debt you should have. The smaller the volatility, the more
debt you can afford.
Although banks and other financial institutions look for a satisfactory debt-to-
equity ratio before agreeing to make a loan, don’t assume a creditor’s willingness
to extend funds is evidence that your business is in a strong debt position. Some
financial institutions are overzealous lenders, particularly when trying to lure
or hold on to promising business customers. “The bank may be looking more at
collateral than whether the (business’s) earnings are going to come in to justify the
debt service.
To avoid these and other credit pitfalls, it’s up to you to get the financial facts
on your business and make sound borrowing decisions. Unfortunately, many
entrepreneurs fail to recognise how important financial analysis is to running a
successful business. Even business owners who receive detailed financial statements
from their accountants often do not take advantage of the valuable information
contained in the documents.
2019-2020

Ch_9.indd 240 27-Feb-19 5:05:04 PM
241
immense help in running the public deposits etc. These may be

business smoothly. borrowed from banks, other financial
(ii) It helps in avoiding business institutions, debentureholders and
shocks and surprises and helps public.
the company in preparing for the Capital structure refers to the mix
future. between owners and borrowed funds.
These shall be referred as equity and
(iii) If helps in co-ordinating various
debt in the subsequent text. It can
business functions, e.g., sales
be calculated as debt-equity ratio
and production functions, by
providing clear policies and  Debt 
i.e.,  or as the proportion
procedures.  Equity 
(iv) Detailed plans of action prepared
of debt out of the total capital i.e.,
under financial planning reduce
waste, duplication of efforts, and  Debt 
gaps in planning.  Debt + Equity 
.
(v) It tries to link the present with the
Debt and equity differ significantly
future.
in their cost and riskiness for the
(vi) It provid es a lin k between firm. The cost of debt is lower than
investment and financing decisions the cost of equity for a firm because
on a continuous basis. the lender’s risk is lower than the
(vii) By spelling out detailed objectives equity shareholder’s risk, since the
for various business segments, it lender earns an assured return and
makes the evaluation of actual repayment of capital and, therefore,
performance easier. they should require a lower rate of
return. Additionally, interest paid
Capital Structure on debt is a deductible expense for
computation of tax liability whereas
One of the important decisions under dividends are paid out of after-tax
financial management relates to the profit. Increased use of debt, therefore,
financing pattern or the proportion of is likely to lower the over-all cost of
the use of different sources in raising capital of the firm provided that the
funds. On the basis of ownership, the cost of equity remains unaffected.
sources of business finance can be Impact of a change in the debt-equity
broadly classified into two categories ratio upon the earning per share
viz., ‘owners’ funds’ and ‘borrowed is dealt with in detail later in this
funds’. Owners’ funds consist of chapter.
equity share capital, preference share Debt is cheaper but is more risky
capital and reserves and surpluses or for a business because the payment of
retained earnings. Borrowed funds can interest and the return of principal is
be in the form of loans, debentures, obligatory for the business. Any default
2019-2020

Ch_9.indd 241 27-Feb-19 5:05:05 PM
BUSINESS STUDIES
242
in meeting these commitments may Capital structure of a company,

force the business to go into liquidation. thus, affects both the profitability and
There is no such compulsion in case of the financial risk. A capital structure
equity, which is therefore, considered will be said to be optimal when the
riskless for the business. Higher use proportion of debt and equity is
of debt increases the fixed financial such that it results in an increase
charges of a business. As a result, in the value of the equity share. In
increased use of debt increases the other words, all decisions relating to
financial risk of a company. capital structure should emphasise on
Financial risk is the chance that increasing the shareholders’ wealth.
a firm would fail to meet its payment The proportion of debt in the overall
obligations. capital is also called financial leverage.
Example I
Company X Ltd.
Total Funds used Rs. 30 Lakh
Interest rate 10% p.a.
Tax rate 30%
EBIT Rs. 4 Lakh
Debt
Situation I Nil
Situation II Rs. 10 Lakh
Situation III Rs. 20 Lakh
EBIT-EPS Analysis
Situation I Situation II Situation III

EBIT 4,00,000 4,00,000 4,00,000
Interest NIL 1,00,000 2,00,000
EBT 4,00,000 3,00,000 2,00,000
(Earnings before taxes)
Tax 1,20,000 90,000 60,000
EAT 2,80,000 2,10,000 1,40,000
(Earnings after taxes)
No. of shares of Rs.10 3,00,000 2,00,000 1,00,000
EPS 0.93 1.05 1.40
(Earnings per share)
2019-2020

Ch_9.indd 242 27-Feb-19 5:05:05 PM
243
D that company is earning on funds

Financial leverage is computed as employed. The company is earning a
E
D return on investment (RoI)
or D + E when D is the Debt and E is  EBIT 
of 13.33%  × 100 
the Equity. As the financial leverage  Total Investment ,
increases, the cost of funds declines  4Lakh 
 × 100  . This is higher than
because of increased use of cheaper 30Lakh 
debt but the financial risk increases. the 10% interest it is paying on debt
The impact of financial leverage on the
funds. With higher use of debt, this
profitability of a business can be seen
difference between RoI and cost of debt
through EBIT-EPS (Earning before
Interest and Taxes-Earning per Share) increases the EPS. This is a situation
analysis as in the following example. of favourable financial leverage. In
Three situations are considered. such cases, companies often employ
There is no debt in situation-I i.e. more of cheaper debt to enhance the
(unlevered business). Debt of Rs. 10 EPS. Such practice is called Trading
lakh and 20 lakh are assumed in on Equity.
situations-II and III, respectively. All Trading on Equity refers to the
debt is at 10% p.a. increase in profit earned by the equity
The company earns Rs. 0.93 per shareholders due to the presence of
share if it is unlevered. With debt of fixed financial charges like interest.
Rs. 10 lakh its EPS is Rs. 1.05. With Now consider the following case of
a still higher debt of Rs. 20 lakh, its, Company Y. All details are the same
EPS rises to Rs. 1.40. Why is the EPS except that the company is earning
rising with higher debt? It is because a profit before interest and taxes of
the cost of debt is lower than the return Rs. 2 lakh.
Example II
Company Y Ltd.
Situation I Situation II Situation III
EBIT 2,00,000 2,00,000 2,00,000
Interest NIL 1,00,000 2,00,000
EBT 2,00,000 1,00,000 NIL
Tax 60,000 30,000 NIL
EAT 1,40,000 70,000 NIL
No. of shares of Rs.10 3,00,000 2,00,000 1,00,000
EPS 0.47 0.35 NIL
2019-2020

Ch_9.indd 243 27-Feb-19 5:05:05 PM
BUSINESS STUDIES
244
In this example, the EPS of the borrowing. Cash flows must not only
company is falling with increased use cover fixed cash payment obligations
of debt. It is because the Company’s but there must be sufficient buffer
rate of return on investment (RoI) is also. It must be kept in mind that a
less than the cost of debt. The RoI company has cash payment obligations
2Lakh for (i) normal business operations;
for company Y is × 100 , i.e.,
30Lakh (ii) for investment in fixed assets;
6.67%, whereas the interest rate on and (iii) for meeting the debt service
debt is 10%. In such cases, the use commitments i.e., payment of interest
of debt reduces the EPS. This is a and repayment of principal.
situation of unfavourable financial 2. Interest Coverage Ratio (ICR):
leverage. Trading on Equity is clearly The interest coverage ratio refers to
unadvisable in such a situation. the number of times earnings before
Even in case of Company X, interest and taxes of a company covers
reckless use of Trading on Equity is the interest obligation. This may be
not recommended. An increase in debt calculated as follows:
may enhance the EPS but as pointed
EBIT
out earlier, it also raises the financial ICR =
Interest
risk. Ideally, a company must choose
that risk-return combination which The higher the ratio, lower shall
maximises shareholders’ wealth. The be the risk of company failing to
debt-equity mix that achieves it, is the meet its interest payment obligations.
optimum capital structure. However, this ratio is not an adequate
measure. A firm may have a high EBIT
Factors affecting the Choice of
but low cash balance. Apart from
Capital Structure
interest, repayment obligations are
Deciding about the capital structure also relevant.
of a firm involves determining the 3. Debt Service Coverage Ratio
relative proportion of various types (DSCR): Debt Service Coverage Ratio
of funds. This depends on various
takes care of the deficiencies referred
factors. For example, debt requires
to in the Interest Coverage Ratio (ICR).
regular servicing. Interest payment
The cash profits generated by the
and repayment of principal are
obligatory on a business. In addition operations are compared with the total
a company planning to raise debt cash required for the service of the
must have sufficient cash to meet the debt and the preference share capital.
increased outflows because of higher It is calculated as follows:
debt. Similarly, important factors Profit after tax + Depreciation + Interest + Non Cash exp.
which determine the choice of capital Pref. Div + Interest + Repayment obligation
structure are as follows: A higher DSCR indicates better

1. Cash Flow Position: Size of projected ability to meet cash commitments
cash flows must be considered before and consequently, the company’s
2019-2020

Ch_9.indd 244 27-Feb-19 5:05:05 PM
245
potential to increase debt component reason that a company can not use
in its capital structure. debt beyond a point. If debt is used
4. Return on Investment (RoI): If beyond that point, cost of equity may
the RoI of the company is higher, it go up sharply and share price may
can choose to use trading on equity decrease inspite of increased EPS.
to increase its EPS, i.e., its ability to Consequently, for maximisation of
use debt is greater. We have already shareholders’ wealth, debt can be used
observed in Example I that a firm only upto a level.
can use more debt to increase its 8. Floatation Costs: Process of
EPS. However, in Example II, use of raising resources also involves some
higher debt is reducing the EPS. It is cost. Public issue of shares and
because the firm is earning an RoI of debentures requires considerable
only 6.67% which lower than its cost expenditure. Getting a loan from a
of debt. In example I the RoI is 13.33%, financial institution may not cost so
and trading on equity is profitable. much. These considerations may also
It shows that, RoI is an important affect the choice between debt and
determinant of the company’s ability equity and hence the capital structure.
to use Trading on equity and thus the 9. Risk Consideration: As discussed
capital structure. earlier, use of debt increases the
5. Cost of debt: A firm’s ability to financial risk of a business. Financial
borrow at a lower rate increases its risk refers to a position when a
capacity to employ higher debt. Thus, company is unable to meet its fixed
more debt can be used if debt can be financial charges namely interest
raised at a lower rate. payment, preference dividend and
6. Tax Rate: Since interest is a repayment obligations. Apart from
deductible expense, cost of debt is the financial risk, every business
affected by the tax rate. The firms in has some operating risk (also called
our examples are borrowing @ 10%. business risk). Business risk depends
Since the tax rate is 30%, the after upon fixed operating costs. Higher
tax cost of debt is only 7%. A higher fixed operating costs result in higher
tax rate, thus, makes debt relatively business risk and vice-versa. The total
cheaper and increases its attraction risk depends upon both the business
vis-à-vis equity. risk and the financial risk. If a firm’s
7. Cost of Equity: Stock owners business risk is lower, its capacity to
expect a rate of return from the equity use debt is higher and vice-versa.
which is commensurate with the risk 10. Flexibility: If a firm uses its
they are assuming. When a company debt potential to the full, it loses
increases debt, the financial risk flexibility to issue further debt. To
faced by the equity holders, increases. maintain flexibility, it must maintain
Consequently, their desired rate of some borrowing power to take care of
return may increase. It is for this unforeseen circumstances.
2019-2020

Ch_9.indd 245 27-Feb-19 5:05:06 PM
BUSINESS STUDIES
246
11. Control: Debt normally does business risk of a firm is higher, it can
not cause a dilution of control. A not afford the same financial risk. It
public issue of equity may reduce the should go in for low debt. Thus, the
managements’ holding in the company management must know what the
and make it vulnerable to takeover. industry norms are, whether they are
This factor also influences the choice following them or deviating from them
between debt and equity especially in and adequate justification must be
companies in which the current holding there in both cases.
of management is on a lower side.
12. Regulatory Framework: Every Fixed and Working Capital
company operates within a regulatory Meaning
framework provided by the law e.g.,
Every company needs funds to finance
public issue of shares and debentures
its assets and activities. Investment
have to be made under SEBI
is required to be made in fixed assets
guidelines. Raising funds from banks
and current assets. Fixed assets are
and other financial institutions require
fulfillment of other norms. The relative those which remains in the business
ease with which these norms can, be for more than one year, usually
met or the procedures completed may for much longer, e.g., plant and
also have a bearing upon the choice of machinery, furniture and fixture, land
the source of finance. and building, vehicles, etc.
Decision to invest in fixed assets
13. Stock Market Conditions: If the
must be taken very carefully as the
stock markets are bullish, equity
investment is usually quite large. Such
shares are more easily sold even at
decisions once taken are irrevocable
a higher price. Use of equity is often
except at a huge loss. Such decisions
preferred by companies in such a
are called capital budgeting decisions.
situation. However, during a bearish
Current assets are those assets
phase, a company, may find raising
which, in the normal routine of the
of equity capital more difficult and it
business, get converted into cash or
may opt for debt. Thus, stock market
cash equivalents within one year, e.g.,
conditions often affect the choice
inventories, debtors, bills receivables,
between the two.
etc.
14. Capital Structure of other
Companies: A useful guideline in the Management of Fixed Capital
capital structure planning is the debt- Fixed capital refers to investment in
equity ratios of other companies in long-term assets. Management of fixed
the same industry. There are usually capital involves allocation of firm’s
some industry norms which may help. capital to different projects or assets with
Care however must be taken that the long-term implications for the business.
company does not follow the industry These decisions are called investment
norms blindly. For example, if the decisions or capital budgeting decisions
2019-2020

Ch_9.indd 246 27-Feb-19 5:05:06 PM
247
and affect the growth, profitability and is undertaken. This may involve
risk of the business in the long run. decisions like where to procure
These long-term assets last for more funds from and at what rate of
than one year. interest.
It must be financed through (iii) Risk involved: Fixed capital involves
long-term sources of capital such investment of huge amounts. It
as equity or preference shares, affects the returns of the firm as a
debentures, long-term loans and whole in the long-term. Therefore,
retained earnings of the business. investment decisions involving
Fixed Assets should never be financed fixed capital influence the overall
through short-term sources. business risk complexion of the
Investment in these assets firm.
would also include expenditure on
acquisition, expansion, modernisation (iv) Irreversible decisions: These
and their replacement. These decisions decisions once taken, are not
include purchase of land, building, reversible without incurring heavy
plant and machinery, launching losses. Abandoning a project after
a new product line or investing in heavy investment is made is quite
advanced techniques of production. costly in terms of waste of funds.
Major expenditures such as those Therefore, these decisions should
on advertising campaign or research be taken only after carefully
and development programme having evaluating each detail or else the
long term implications for the firm adverse financial consequences
are also examples of capital budgeting may be very heavy.
decisions. The management of fixed
Factors affecting the Requirement
capital or investment or capital
of Fixed Capital
budgeting decisions are important for
the following reasons: 1. Nature of Business: The type
(i) Long-term growth: These decisions of business has a bearing upon
have bearing on the long-term the fixed capital requirements. For
growth. The funds invested in example, a trading concern needs
long-term assets are likely to yield lower investment in fixed assets
returns in the future. These will compared with a manufacturing
affect the future prospects of the organisation; since it does not require
business. to purchase plant and machinery, etc.
(ii) Large amount of funds involved: 2. Scale of Operations: A larger
These decisions result in a organisation operating at a higher
substantial portion of capital funds scale needs bigger plant, more space
being blocked in long-term projects. etc. and therefore, requires higher
Therefore, these investments are investment in fixed assets when
planned after a detailed analysis compared with the small organisation.
2019-2020

Ch_9.indd 247 27-Feb-19 5:05:06 PM
BUSINESS STUDIES
248
3. Choice of Technique: Some textile company is diversifying and

organisations are capital intensive starting a cement manufacturing
whereas others are labour intensive. plant. Obviously, its investment in
A capital-intensive organisation fixed capital will increase.
requires higher investment in plant 7. Financing Alternatives: A developed
and machinery as it relies less on financial market may provide leasing
manual labour. The requirement of facilities as an alternative to outright
fixed capital for such organisations purchase. When an asset is taken on
would be higher. Labour intensive lease, the firm pays lease rentals and
organisations on the other hand uses it. By doing so, it avoids huge sums
require less investment in fixed assets. required to purchase it. Availability of
Hence, their fixed capital requirement leasing facilities, thus, may reduce the
is lower. funds required to be invested in fixed
4. Technology Upgradation: In certain assets, thereby reducing the fixed
industries, assets become obsolete capital requirements. Such a strategy
sooner. Consequently, their replace- is specially suitable in high risk lines
ments become due faster. Higher of business.
investment in fixed assets may, 8. Level of Collaboration: At times,
therefore, be required in such cases. certain business organisations share
For example, computers become each other’s facilities. For example,
obsolete faster and are replaced much a bank may use another’s ATM or
sooner than say, furniture. Thus, such some of them may jointly establish a
organisations which use assets which particular facility. This is feasible if the
are prone to obsolescence require scale of operations of each one of them
higher fixed capital to purchase such is not sufficient to make full use of the
assets. facility. Such collaboration reduces
5. Growth Prospects: Higher growth the level of investment in fixed assets
of an organisation generally requires for each one of the participating
higher investment in fixed assets. organisations.
Even when such growth is expected,
a company may choose to create Working Capital
higher capacity in order to meet the
Apart from the investment in fixed
anticipated higher demand quicker.
assets every business organisation
This entails larger investment in fixed
needs to invest in current assets. This
assets and consequently larger fixed investment facilitates smooth day-to-
capital. day operations of the business. Current
6. Diversification: A firm may choose assets are usually more liquid but
to diversify its operations for various contribute less to the profits than fixed
reasons, With diversification, fixed assets. Examples of current assets, in
capital requirements increase e.g., a order of their liquidity, are as under.
2019-2020

Ch_9.indd 248 27-Feb-19 5:05:06 PM
249
1. Cash in hand/Cash at Bank if it can be converted into cash quicker

2. Marketable securities and without reduction in value.
Insufficient investment in current
3. Bills receivable
assets may make it more difficult for
4. Debtors an organisation to meet its payment
5. Finished goods inventory obligations. However, these assets
provide little or low return. Hence, a
6. Work in progress
balance needs to be struck between
7. Raw materials liquidity and profitability.
8. Prepaid expenses Current liabilities are those
These assets, as noted earlier, are payment obligations which are due
expected to get converted into cash for payment within one year; such as
or cash equivalents within a period bills payable, creditors, outstanding
of one year. These provide liquidity to expenses and advances received from
the business. An asset is more liquid customers, etc.
Working Capital Position

“Its been a rather glamorous 18 months, with sales just huge,” says, CFO of PT
Astra International, the US $4 billion in sales Indonesian automaker. Indonesia
was on the growth path again, and a new breed of consumer was eager for a first
vehicle – motorcycles – as well as Astra’s more premium brands of Hondas and
Toyotas. And one of the most beautiful parts of the proposition was that working
capital management seems to be taking care of itself. “Depending on the business,
and counting trade receivables only, we had between eight and 19 days working
capital,” which was manageable given the company’s steady growth. One of the
reasons that working capital had not expanded at the rate of the business was
inventory, or rather the dearth of it. “We were in a market that responded very
strongly to new products,” said the manager “and the presales of products were very
high. We had advanced orders form four to six months, with deposits paid, and this
helped our cash position.” Best of all, as soon as a vehicle was off the assembly line,
it was out to the dealer. “We had low inventory costs and the product lines were
very easy to move.” The salutary role of banks in working capital management was
a result reason that cashflow had improved in his business. Better management
was a result of banking competition that had allowed the company to move from
traditional bankers, the state-owned Indian institutions, to more competitive private
institutions and teh foreign banks that partner with them. These banks had invested
in technology, allowing a visibility over cashflow unheard of few years ago.
http://www.cfoasia.com/archives/200503-02.html
2019-2020

Ch_9.indd 249 27-Feb-19 5:05:06 PM
BUSINESS STUDIES
250
Some part of current assets is to the organisations which operate on a

usually financed through short-term lower scale.
sources, i.e., current liabilities. The 3. Business Cycle: Different phases of
rest is financed through long-term business cycles affect the requirement
sources and is called net working of working capital by a firm. In
capital. Thus, NWC = CA – CL (i.e. case of a boom, the sales as well as
Current Assets - Current Liabilities.) production are likely to be larger and,
Thus, net working capital may be therefore, larger amount of working
defined as the excess of current assets capital is required. As against this,
over current liabilities. the requirement for working capital
will be lower during the period of
Factors Affecting the Working depression as the sales as well as
Capital Requirements production will be small.
1. Nature of Business: The basic 4. Seasonal Factors: Most business
nature of a business influences the have some seasonality in their
amount of working capital required. operations. In peak season, because of
A trading organisation usually higher level of activity, larger amount
needs a smaller amount of working of working capital is required. As
capital compared to a manufacturing against this, the level of activity as well
organisation. This is because there as the requirement for working capital
is usually no processing. Therefore, will be lower during the lean season.
there is no distinction between raw 5. Production Cycle: Production
materials and finished goods. Sales cycle is the time span between the
can be effected immediately upon receipt of raw material and their
the receipt of materials, sometimes conversion into finished goods. Some
even before that. In a manufacturing businesses have a longer production
business, however, raw material needs cycle while some have a shorter
to be converted into finished goods one. Duration and the length of
before any sales become possible. production cycle, affects the amount
Other factors remaining the same, a of funds required for raw materials
trading business requires less working and expenses. Consequently, working
capital. Similarly, service industries capital requirement is higher in firms
which usually do not have to maintain with longer processing cycle and lower
inventory require less working capital. in firms with shorter processing cycle.
2. Scale of Operations: For organisations 6. Credit Allowed: Different firms
which operate on a higher scale of allow different credit terms to their
operation, the quantum of inventory and customers. These depend upon the
debtors required is generally high. Such level of competition that a firm faces
organisations, therefore, require large as well as the credit worthiness of their
amount of working capital as compared clientele. A liberal credit policy results
2019-2020

Ch_9.indd 250 27-Feb-19 5:05:06 PM
251
in higher amount of debtors, increasing the lead time, larger the quantity of
the requirement of working capital. material to be stored and larger shall
7. Credit Availed: Just as a firm be the amount of working capital
allows credit to its customers it also required.
may get credit from its suppliers. 10. Growth Prospects: If the growth
To the extent it avails the credit potential of a concern is perceived to
on purchases, the working capital be higher, it will require larger amount
requirement is reduced. of working capital so that it is able
8. Operating Efficiency: Firms to meet higher production and sales
manage their operations with varied target whenever required.
degrees of efficiency. For example, 11. Level of Competition: Higher level
a firm managing its raw materials of competitiveness may necessitate
efficiently may be able to manage with larger stocks of finished goods to
a smaller balance. This is reflected
meet urgent orders from customers.
in a higher inventory turnover ratio.
This increases the working capital
Similarly, a better debtors turnover
requirement. Competition may also
ratio may be achieved reducing the
force the firm to extend liberal credit
amount tied up in receivables. Better
terms discussed earlier.
sales effort may reduce the average
time for which finished goods inventory 12. Inflation: With rising prices,
is held. Such efficiencies may reduce larger amounts are required even
the level of raw materials, finished to maintain a constant volume of
goods and debtors resulting in lower production and sales. The working
requirement of working capital. capital requirement of a business
9. Availability of Raw Material: If thus, become higher with higher rate
the raw materials and other required of inflation. It must, however, be noted
materials are available freely and that an inflation rate of 5%, does not
continuously, lower stock levels may mean that every component of working
suffice. If, however, raw materials do capital will change by the same
not have a record of un-interrupted percentage. The actual requirement
availability, higher stock levels may shall depend upon the rates of price
be required. In addition, the time lag change of different components (e.g.,
between the placement of order and raw material, finished goods, labour
the actual receipt of the materials (also cost,) Finished goods as well as their
called lead time) is also relevant. Larger proportion in the total requirement.
2019-2020

Ch_9.indd 251 27-Feb-19 5:05:06 PM
BUSINESS STUDIES
252
Key Terms
Financial Management Wealth Maximisation Investment Decision
Financing Decision Dividend Decision Capital Budgeting
Working Capital Financial Planning Capital Structure
Trading on Equity
Summary
Business finance: The money required for carrying out business activities is
called business finance. Almost all business activities require some finance.
Finance is needed to establish a business, to run it, to modernise it, to expand,
and diversify it.
Financial Management: Financial Management is concerned with optimal
procurement as well as usage of finance. For optimal procurement, different
available sources of finance are identified and compared in terms of their costs
and associated risks.
Objectives and Financial Decisions The primary aim of financial management
is to maximise shareholders’ wealth which is referred to as the wealth
maximisation concept. The market price of a company’s shares are linked to
the three basic financial decisions
Financial decision-making is concerned with three broad decisions which are
Investment Decision, Financing Decision, Dividend Decision
Financial Planning and Importance Financial planning is essentially

preparation of a financial blueprint of an organisation’s future operations. The
objective of financial planning is to ensure that enough funds are available at
right time.
Financial planning strives to achieve the following twin objectives.
(a) To ensure availability of funds whenever these are required:
(b) To see that the firm does not raise resources unnecessarily:
Financial planning is an important part of overall planning of any business
enterprise. It aims at enabling the company to tackle the uncertainty in respect
of the availability and timing of the funds and helps in smooth functioning of
an organisation.
Capital Structure and Factors One of the important decisions under financial
management relates to the financing pattern or the proportion of the use
of different sources in raising funds. On the basis of ownership, the sources
2019-2020

Ch_9.indd 252 27-Feb-19 5:05:06 PM
253
of business finance can be broadly classified into two categories viz., ‘owners
funds’ and ‘borrowed funds’. Capital structure refers to the mix between owners
and borrowed funds.
Deciding about the capital structure of a firm involves determining the
relative proportion of various types of funds. This depends on various factors
which are: Cash Flow Position, Interest Coverage Ratio (ICR), Debt Service
Coverage Ratio (DSCR), Return on Investment (RoI), Cost of debt, Tax Rate,
Cost of Equity, Floatation Costs, Risk Consideration, Flexibility, Control,
Regulatory Framework, Stock Market Conditions, and Capital Structure of
other Companies.
Fixed and Working Capital Fixed capital refers to investment in long-term

assets. Management of fixed capital involves around allocation of firm’s capital
to different projects or assets with long-term implications for the business.
These decisions are called investment decisions or capital budgeting decisions.
They affect the growth, profitability and risk of the business in the long run.
Factors affecting the Requirement of Fixed Capital are: Nature of Business,
Scale of Operations, Choice of Technique, Technology Upgradation, Growth
Prospects, Diversification, Financing Alternatives and Level of Collaboration.
Apart from the investment in fixed assets, every business organisation
needs to invest in current assets. This investment facilitates smooth day-to-
day operations of the organisation. Current assets are usually more liquid but
contribute less to the profits than fixed assets.
Factors affecting the working capital requirement are: Nature of Business,
Scale of Operations, Business Cycle, Seasonal Factor, Production Cycle, Credit
Allowed, Credit Availed, Operating Efficiency, Availability of Raw Material,
Growth Prospects, Level of competition, and rate of Inflation.
exercises
Very Short Answer Type

1. What is meant by capital structure?
2. Sate the two objectives of financial planning.
3. Name the concept of financial management which increases the return
to equity shareholders due to the presence of fixed financial charges.
4. Amrit is running a ‘transport service’ and earning good returns by
providing this service to industries. Giving reason, state whether the
working capital requirement of the firm will be ‘less’ or ‘more’.
2019-2020

Ch_9.indd 253 27-Feb-19 5:05:06 PM
BUSINESS STUDIES
254
5. Ramnath is into the business of assembling and selling of televisions.

Recently he has adopted a new policy of purchasing the components on
three months credit and selling the complete product in cash. Will it affect
the requirement of working capital? Give reason in support of your answer.
Short Answer Type
1. What is financial risk? Why does it arise?
2. Define current assets? Give four examples of such assets.
3. What are the main objectives of financial management? Briefly explain.
4. Financial management is based on three broad financial decisions. What
are these?
5. Sunrises Ltd. dealing in readymade garments, is planning to expand
its business operations in order to cater to international market. For
this purpose the company needs additional `80,00,000 for replacing
machines with modern machinery of higher production capacity. The
company wishes to raise the required funds by issuing debentures. The
debt can be issued at an estimated cost of 10%. The EBIT for the previous
year of the company was `8,00,000 and total capital investment was
`1,00,00,000. Suggest whether issue of debenture would be considered
a rational decision by the company. Give reason to justify your answer.
(Ans. No, Cost of Debt (10%) is more than ROI which is 8%).
6. How does working capital affect both the liquidity as well as profitability
of a business?
7. Aval Ltd. is engaged in the business of export of canvas goods and bags. In
the past, the performance of the company had been upto the expectations.
In line with the latest demand in the market, the company decided to
venture into leather goods for which it required specialised machinery.
For this, the Finance Manager Prabhu prepared a financial blueprint
of the organisation’s future operations to estimate the amount of funds
required and the timings with the objective to ensure that enough funds
are available at right time. He also collected the relevant data about the
profit estimates in the coming years. By doing this, he wanted to be sure
about the availability of funds from the internal sources of the business.
For the remaining funds, he is trying to find out alternative sources from
outside.
a. Identify the financial concept discussed in the above paragraph. Also,
state the objectives to be achieved by the use of financial concept so
identified. ( Financial Planning).
b. ‘There is no restriction on payment of dividend by a company’.
Comment. ( Legal & Contractual Constraints)
2019-2020

Ch_9.indd 254 27-Feb-19 5:05:06 PM
255
Long Answer Type

1. What is working capital? Discuss five important determinants of working
capital requirement?
2. “Capital structure decision is essentially optimisation of risk-return
relationship.” Comment.
3. “A capital budgeting decision is capable of changing the financial fortunes
of a business.” Do you agree? Give reasons for your answer?
4. Explain the factors affecting dividend decision?
5. Explain the term ‘Trading on Equity’? Why, when and how it can be used
by company.
6. ‘S’ Limited is manufacturing steel at its plant in India. It is enjoying a
buoyant demand for its products as economic growth is about 7–8 per
cent and the demand for steel is growing. It is planning to set up a new
steel plant to cash on the increased demand. It is estimated that it will
require about `5000 crores to set up and about `500 crores of working
capital to start the new plant.
a. Describe the role and objectives of financial management for this
company.
b. Explain the importance of having a financial plan for this company.
Give an imaginary plan to support your answer.
c. What are the factors which will affect the capital structure of this
company?
d. Keeping in mind that it is a highly capital-intensive sector, what factors
will affect the fixed and working capital. Give reasons in support of
your answer.
2019-2020

Ch_9.indd 255 27-Feb-19 5:05:06 PM
chapter
10
Financial Markets
SENSEX — The Bombay Stock
Learning Objectives Exchange Sensitive Index
Have you counted the number of
After studying this chapter, times newspaper headlines in the past
you should be able to: few weeks have been discussing the
SENSEX? It goes up and down all the
time and seems to be a very important
¾¾ explain the meaning of part of business and economic news.
Has that made you wonder what the
Financial Market;
SENSEX actually is?
The SENSEX is the benchmark
index of the BSE. Since the BSE has
¾¾ explain the meaning of been the leading exchange of the
Money Market and describe Indian secondary market, the SENSEX
its major Instruments; has been an important indicator of
the Indian stock market. It is the
most frequently used indicator while
¾¾ explain the nature and reporting on the state of the market.
types of Capital Market; An index has just one job: to capture
the price movement. So a stock index
will reflect the price movements of
shares while a bond index captures the
¾¾ d i s t i n g u i s h b e t w e e n
manner in which bond prices go up or
Money Market and Capital down. If the SENSEX rises, it indicates
Market; the market is doing well. Since stocks
are supposed to reflect what companies
expect to earn in the future, a rising
¾¾ e x p l a i n t h e m e a n i n g index indicates that investors expect
and functions of Stock better earnings from companies. It
Exchange; is also a measure of the state of the
Indian economy. If Indian companies
are expected to do well, obviously the
economy should do well too.
¾¾ describe the functioning of
NSEI and OTCEI; and The SENSEX, launched in 1986
is made up of 30 of the most actively
traded stocks in the market. In fact,
they account for half the BSE’s market
¾¾ describe the role of SEBI in capitalisation. They represent 13 sectors
investor protection. of the economy and are leaders in their
respective industries.
2019-2020

Ch_10.indd 256 28-Feb-19 3:04:41 PM
financial markets
257
Introduction sectors – households which save

funds and business firms which
You all know that a business needs
invest these funds. A financial market
finance from the time an entrepreneur
helps to link the savers and the
makes the decision to start it. It needs
investors by mobilizing funds between
finance both for working capital
them. In doing so it performs what is
requirements such as payments for raw known as an allocative function. It
materials and salaries to its employees, allocates or directs funds available for
and fixed capital expenditure such as investment into their most productive
the purchase of machinery or building investment opportunity. When the
or to expand its production capacity. allocative function is performed well,
The above example gives a fair picture two consequences follow:
of how companies need to raise funds • The rate of return offered to
from the capital markets. Idea Cellular households would be higher
decided to enter the Indian capital
• Scarce resources are allocated to
market for its needs of expansion. In
those firms which have the highest
this chapter you will study concepts
productivity for the economy.
like private placement, Initial public
Offer (IPO) and capital markets which There are two major alternative
you come across in the example of mechanisms through which allocation
Idea Cellular. Business can raise of funds can be done: via banks or
these funds from various sources and via financial markets. Households
in different ways through financial can deposit their surplus funds with
markets. This chapter provides a brief banks, who in turn could lend these
description of the mechanism through funds to business firms. Alternately,
which finances are mobilised by a households can buy the shares and
business organisation for both short debentures offered by a business
using financial markets. The process
term and long term requirements. It also
by which allocation of funds is done is
explains the institutional structure and
called financial intermediation. Banks
the regulatory measures for different
and financial markets are competing
financial markets.
intermediaries in the financial system,
and give households a choice of where
Concept of Financial Market
they want to place their savings.
A business is a part of an economic A financial market is a market
system that consists of two main for the creation and exchange of
HOUSEHOLDS BUSINESS FIRMS

BANKS
FINANCIAL MARKETS
SAVERS INVESTORS
2019-2020

Ch_10.indd 257 28-Feb-19 3:04:41 PM
BUSINESS STUDIES
258
Financial System
financial assets. Financial markets Productive Uses: A financial market

exist wherever a financial transaction facilitates the transfer of savings from
occurs. Financial transactions could savers to investors. It gives savers the
be in the form of creation of financial choice of different investments and
assets such as the initial issue of thus helps to channelise surplus funds
shares and debentures by a firm or the into the most productive use.
purchase and sale of existing financial 2. Facilitating Price Discovery: You
assets like equity shares, debentures all know that the forces of demand
and bonds. and supply help to establish a price
for a commodity or service in the
Functions of Financial Market market. In the financial market, the
Financial markets play an important households are suppliers of funds and
role in the allocation of scarce resources business firms represent the demand.
in an economy by performing the The interaction between them helps
following four important functions. to establish a price for the financial
1. Mobilisation of Savings and asset which is being traded in that
Channeling them into the most particular market.
2019-2020

Ch_10.indd 258 28-Feb-19 3:04:42 PM
financial markets
259
3. Providing Liquidity to Financial than one year are traded in the money
Assets: Financial markets facilitate market. Instruments with longer
easy purchase and sale of financial maturity are traded in the capital
assets. In doing so they provide market.
liquidity to financial assets, so that
they can be easily converted into Money Market
cash whenever required. Holders of
assets can readily sell their financial The money market is a market for short
assets through the mechanism of the term funds which deals in monetary
financial market. assets whose period of maturity is
upto one year. These assets are close
4.Reducing the Cost of Transactions:
Financial markets provide valuable substitutes for money. It is a market
information about securities being where low risk, unsecured and short
traded in the market. It helps to save term debt instruments that are highly
time, effort and money that both liquid are issued and actively traded
buyers and sellers of a financial asset everyday. It has no physical location,
would have to otherwise spend to try but is an activity conducted over the
and find each other. The financial telephone and through the internet. It
market is thus, a common platform enables the raising of short-term funds
where buyers and sellers can meet for for meeting the temporary shortages of
fulfillment of their individual needs. cash and obligations and the temporary
Financial markets are classified deployment of excess funds for earning
on the basis of the maturity of returns. The major participants in
financial instruments traded in them. the market are the Reserve Bank of
Instruments with a maturity of less India (RBI), Commercial Banks, Non-
Classification of Financial Markets
FINANCIAL MARKET
MONEY MARKET CAPITAL MARKET
Primary market Secondary Market
Debt Equity Debt Equity
2019-2020

Ch_10.indd 259 28-Feb-19 3:04:42 PM
BUSINESS STUDIES
260
Banking Finance Companies, State delivery with a fixed maturity period.

Governments, Large Corporate Houses It is issued by large and creditworthy
and Mutual Funds. companies to raise short-term funds
at lower rates of interest than market
Money Market Instruments rates. It usually has a maturity period
of 15 days to one year. The issuance
1. Treasury Bill: A Treasury bill is
of commercial paper is an alternative
basically an instrument of short-term
to bank borrowing for large companies
borrowing by the Government of India
that are generally considered to be
maturing in less than one year. They financially strong. It is sold at a
are also known as Zero Coupon Bonds discount and redeemed at par. The
issued by the Reserve Bank of India original purpose of commercial paper
on behalf of the Central Government was to provide short-terms funds
to meet its short-term requirement for seasonal and working capital
of funds. Treasury bills are issued in needs. For example companies use
the form of a promissory note. They this instrument for purposes such as
are highly liquid and have assured bridge financing.
yield and negligible risk of default.
Example: Suppose a company needs
They are issued at a price which is
long-term finance to buy some
lower than their face value and repaid
machinery. In order to raise the long
at par. The difference between the
term funds in the capital market
price at which the treasury bills are
the company will have to incur
issued and their redemption value is
floatation costs (costs associated with
the interest receivable on them and
floating of an issue are brokerage,
is called discount. Treasury bills are
commission, printing of applications
available for a minimum amount of Rs
and advertising etc.). Funds raised
25,000 and in multiples thereof. through commercial paper are used
Example: Suppose an investor to meet the floatation costs. This is
purchases a 91 days Treasury bill known as Bridge Financing.
with a face value of Rs. 1,00,000 for 3. Call Money: Call money is short
Rs. 96,000. By holding the bill until term finance repayable on demand, with
the maturity date, the investor receives a maturity period of one day to fifteen
Rs. 1,00,000. The difference of days, used for inter-bank transactions.
Rs. 4,000 between the proceeds Commercial banks have to maintain a
received at maturity and the amount minimum cash balance known as cash
paid to purchase the bill represents reserve ratio. The Reserve Bank of India
the interest received by him. changes the cash reserve ratio from
2. Commercial Paper: Commercial time to time which in turn affects the
paper is a short-term unsecured amount of funds available to be given
promissory note, negotiable and as loans by commercial banks. Call
transferable by endorsement and money is a method by which banks
2019-2020

Ch_10.indd 260 28-Feb-19 3:04:42 PM
financial markets
261
borrow from each other to be able to buyer (drawee) accepts it. On being
maintain the cash reserve ratio. The accepted, the bill becomes a marketable
interest rate paid on call money loans instrument and is called a trade bill.
is known as the call rate. It is a highly These bills can be discounted with a
volatile rate that varies from day-to- bank if the seller needs funds before
day and sometimes even from hour-to- the bill matures. When a trade bill is
hour. There is an inverse relationship accepted by a commercial bank it is
between call rates and other short-term known as a commercial bill.
money market instruments such as
certificates of deposit and commercial Capital Market
paper. A rise in call money rates
makes other sources of finance such The term capital market refers to
as commercial paper and certificates facilities and institutional arrangements
of deposit cheaper in comparison for through which long-term funds,
banks raise funds from these sources. both debt and equity are raised and
invested. It consists of a series of
4. Certificate of Deposit: Certificates
channels through which savings of
of deposit (CD) are unsecured,
the community are made available for
negotiable, short-term instruments
industrial and commercial enterprises
in bearer form, issued by commercial
and for the public in general. It
banks and development financial
directs these savings into their most
institutions. They can be issued
productive use leading to growth and
to individuals, corporations and
development of the economy. The
companies during periods of tight
capital market consists of development
liquidity when the deposit growth of
banks, commercial banks and stock
banks is slow but the demand for
exchanges.
credit is high. They help to mobilise
An ideal capital market is one where
a large amount of money for short
finance is available at reasonable cost.
periods.
The process of economic development
5. Commercial Bill: A commercial is facilitated by the existence of a
bill is a bill of exchange used to finance well functioning capital market. In
the working capital requirements of fact, development of the financial
business firms. It is a short-term, system is seen as a necessary
negotiable, self-liquidating instrument condition for economic growth. It is
which is used to finance the credit essential that financial institutions are
sales of firms. When goods are sold sufficiently developed and that market
on credit, the buyer becomes liable operations are free, fair, competitive
to make payment on a specific date and transparent. The capital market
in future. The seller could wait till should also be efficient in respect of the
the specified date or make use of a information that it delivers, minimise
bill of exchange. The seller (drawer) transaction costs and allocate capital
of the goods draws the bill and the most productively.
2019-2020

Ch_10.indd 261 28-Feb-19 3:04:42 PM
BUSINESS STUDIES
262
The Capital Market can be divided small savings to subscribe to these

into two parts: a. Primary Market securities. In the money market,
b. Secondary Market transactions entail huge sums of
money as the instruments are quite
Distinction between Capital Market expensive.
and Money Market (iv) Duration: The capital market
The major points of distinction between deals in medium and long term
the two markets are as follows: securities such as equity shares
and debentures. Money market
(i) P articipants: The participants in
instruments have a maximum
the capital market are financial
tenure of one year, and may even
institutions, banks, corporate
be issued for a single day.
entities, foreign investors and
ordinary retail investors from (v) Liquidity: Capital market securities
members of the public. Participation are considered liquid investments
in the money market is by and because they are marketable on
large undertaken by institutional the stock exchanges. However, a
participants such as the RBI, share may not be actively traded,
banks, financial institutions and i.e. it may not easily find a buyer.
finance companies. Individual Money market instruments on
investors although permitted to the other hand, enjoy a higher
transact in the secondary money degree of liquidity as there is
market, do not normally do so. formal arrangement for this. The
Discount Finance House of India
(ii) Instruments: The main instruments (DFHI) has been established for
traded in the capital market are the specific objective of providing
– equity shares, debentures, a ready market for money market
bonds, preference shares etc. The instruments.
main instruments traded in the
(vi) Safety: Capital market instruments
money market are short term debt
are riskier both with respect to
instruments such as T-bills, trade
returns and principal repayment.
bills reports, commercial paper and
Issuing companies may fail to
certificates of deposit.
perform as per projections and
(iii) Investment Outlay: Investment in promoters may defraud investors.
the capital market i.e. securities But the money market is generally
does not necessarily require a huge much safer with a minimum
financial outlay. The value of units risk of default. This is due to the
of securities is generally low i.e. shorter duration of investing and
Rs 10, Rs 100 and so is the case also to financial soundness of the
with minimum trading lot of shares issuers, which primarily are the
which is kept small i.e. 5, 50, 100 government, banks and highly
or so. This helps individuals with rated companies.
2019-2020

Ch_10.indd 262 28-Feb-19 3:04:42 PM
financial markets
263
(vii)Expected return: The investment in method of raising funds by public

capital markets generally yield a companies in the primary market.
higher return for investors than the This involves inviting subscription
money markets. The possibility of from the public through issue of
earnings is higher if the securities prospectus. A prospectus makes a
are held for a longer duration. First, direct appeal to investors to raise
there is the scope of earning capital capital, through an advertisement
gains in equity share. Second, in in newspapers and magazines. The
the long run, the prosperity of a issues may be underwritten and also
company is shared by shareholders are required to be listed on at least one
by way of high dividends and stock exchange. The contents of the
bonus issues. prospectus have to be in accordance
with the provisions of the Companies
Primary Market Act and SEBI disclosure and investor
The primary market is also known as protection guidelines.
the new issues market. It deals with 2. Offer for Sale: Under this method
new securities being issued for the securities are not issued directly to the
first time. The essential function of public but are offered for sale through
a primary market is to facilitate the intermediaries like issuing houses or
transfer of investible funds from savers stock brokers. In this case, a company
to entrepreneurs seeking to establish sells securities enbloc at an agreed
new enterprises or to expand existing price to brokers who, in turn, resell
ones through the issue of securities them to the investing public.
for the first time. The investors in
this market are banks, financial 3 . P r i v a t e P l a c e m e n t : Private
institutions, insurance companies, placement is the allotment of securities
mutual funds and individuals. by a company to institutional investors
A company can raise capital and some selected individuals. It
through the primary market in the form helps to raise capital more quickly
of equity shares, preference shares, than a public issue. Access to the
debentures, loans and deposits. Funds primary market can be expensive
raised may be for setting up new on account of various mandatory
projects, expansion, diversification, and non-mandatory expenses. Some
modernisation of existing projects, companies, therefore, cannot afford a
mergers and takeovers etc. public issue and choose to use private
placement.
Methods of Floatation 4. Rights Issue: This is a privilege
There are various methods of floating given to existing shareholders to
new issues in the primary market : subscribe to a new issue of shares
1. Offer through Prospectus: Offer according to the terms and conditions
through prospectus is the most popular of the company. The shareholders are
2019-2020

Ch_10.indd 263 28-Feb-19 3:04:42 PM
BUSINESS STUDIES
264
offered the ‘right’ to buy new shares than the exchange through which it
in proportion to the number of shares has offered its securities. The lead
they already possess. manager coordinates all the activities
5. e-IPOs: A company proposing to amongst intermediaries connected
issue capital to the public through the with the issue.
on-line system of the stock exchange
has to enter into an agreement with the Secondary Market
stock exchange. This is called an Initial The secondary market is also known
Public Offer (IPO). SEBI registered as the stock market or stock exchange.
brokers have to be appointed for the It is a market for the purchase and
purpose of accepting applications and sale of existing securities. It helps
placing orders with the company. The existing investors to disinvest and fresh
issuer company should also appoint a investors to enter the market. It also
registrar to the issue having electronic provides liquidity and marketability to
connectivity with the exchange. The existing securities. It also contributes
issuer company can apply for listing to economic growth by channelising
of its securities on any exchange other funds towards the most productive
Primary and Secondary Markets — A Comparison
Primary Market Secondary Market

(New Issue Market) (Stock Exchange)
(i) There is sale of securities by new (i) There is trading of existing shares
companies or further (new issues of only.
securities by existing companies to
investors).
(ii) Securities are sold by the company (ii) Ownership of existing securities is
to the investor directly (or through exchanged between investors. The
an intermediary). company is not involved at all.
(iii) The flow of funds is from savers to (iii) Enhances encashability (liquidity)
investors, i.e. the primary market of shares, i.e. the secondary market
directly promotes capital formation. indirectly promotes capital formation.
(iv) Only buying of securities takes place (iv) Both the buying and the selling of
in the primary market, securities securities can take place on the stock
cannot be sold there. exchange.
(v) Prices are determined and decided by (v) Prices are determined by demand and
the management of the company. supply for the security.
(vi) There is no fixed geographical (vi) Located at specified places.
location.
2019-2020

Ch_10.indd 264 28-Feb-19 3:04:42 PM
financial markets
265
investments through the process liquidity and safety of investment to

of disinvestment and reinvestment. the investors and enhance the credit
Securities are traded, cleared and worthiness of individual companies.
settled within the regulatory framework
prescribed by SEBI. Advances in Meaning of Stock Exchange
information technology have made According to Securities Contracts
trading through stock exchanges (Regulation) Act 1956, stock exchange
accessible from anywhere in the means any body of individuals, whether
country through trading terminals. incorporated or not, constituted for the
Along with the growth of the primary purpose of assisting, regulating or
market in the country, the secondary controlling the business of buying and
market has also grown significantly selling or dealing in securities.
during the last ten years.
Functions of a Stock Exchange
Stock Exchange
The efficient functioning of a stock
A stock exchange is an institution exchange creates a conducive climate
which provides a platform for buying for an active and growing primary
and selling of existing securities. market for new issues. An active
As a market, the stock exchange and healthy secondary market in
facilitates the exchange of a security existing securities leads to positive
(share, debenture etc.) into money environment among investors. The
and vice versa. Stock exchanges help following are some of the important
companies raise finance, provide functions of a stock exchange.
History of the Stock Market in India

The history of the stock market in India goes back to the end of the eighteenth
century when long-term negotiable securities were first issued. In 1850 the
Companies Act was introduced for the first time bringing with it the feature
of limited liability and generating investor interest in corporate securities. The
first stock exchange in India was set-up in 1875 as The Native Share and Stock
Brokers Association in Bombay. Today it is known as the Bombay Stock Exchange
(BSE). This was followed by the development of exchanges in Ahmedabad (1894),
Calcutta(1908) and Madras(1937). It is interesting to note that stock exchanges
were first set up in major centers of trade and commerce.
Until the early 1990s, the Indian secondary market comprised regional
stock exchanges with BSE heading the list. After the reforms of 1991, the Indian
secondary market acquired a three tier form. This consists of:
• Regional Stock Exchanges
• National Stock Exchange (NSE)
• Over the Counter Exchange of India (OTCEI)
2019-2020

Ch_10.indd 265 28-Feb-19 3:04:42 PM
BUSINESS STUDIES
266
4. Contributes to Economic Growth:

A stock exchange is a market in
which existing securities are resold
or traded. Through this process of
disinvestment and reinvestment
savings get channelised into their
most productive investment avenues.
This leads to capital formation and
economic growth.
5. Spreading of Equity Cult: The
stock exchange can play a vital role
in ensuring wider share ownership
by regulating new issues, better
trading practices and taking effective
Bombay Stock Exchange steps in educating the public about
investments.
1. Providing Liquidity and Market-
ability to Existing Securities: The 6. Providing Scope for Speculation:
basic function of a stock exchange is the The stock exchange provides sufficient
creation of a continuous market where scope within the provisions of law for
securities are bought and sold. It gives speculative activity in a restricted
investors the chance to disinvest and and controlled manner. It is generally
reinvest. This provides both liquidity accepted that a certain degree of
and easy marketability to already healthy speculation is necessary to
existing securities in the market. ensure liquidity and price continuity
2. Pricing of Securities: Share prices in the stock market.
on a stock exchange are determined
by the forces of demand and supply. Trading and Settlement Procedure
A stock exchange is a mechanism of Trading in securities is now executed
constant valuation through which the through an on-line, screen-based
prices of securities are determined. electronic trading system. Simply
Such a valuation provides important put, all buying and selling of shares
instant information to both buyers and and debentures are done through a
sellers in the market. computer terminal.
3. Safety of Transaction: The There was a time when in the open
membership of a stock exchange is outcry system, securities were bought
well- regulated and its dealings are and sold on the floor of the stock
well defined according to the existing exchange. Under this auction system,
legal framework. This ensures that the deals were struck among brokers,
investing public gets a safe and fair prices were shouted out and the shares
deal on the market. sold to the highest bidder. However,
2019-2020

Ch_10.indd 266 28-Feb-19 3:04:42 PM
financial markets
267
now almost all exchanges have gone business hours of the stock exchange.
electronic and trading is done in the The computer in the brokers office is
broker’s office through a computer constantly matching the orders at the
terminal. A stock exchange has its best bid and offer price. Those that are
main computer system with many not matched remain on the screen and
terminals spread across the country. are open for future matching during
Trading in securities is done through the day.
brokers who are members of the stock Electronic trading systems or
exchange. Trading has shifted from the screen-based trading has certain
stock market floor to the brokers office. advantages:
Every broker has to have access to 1. It ensures transparency as it
a computer terminal that is connected allows participants to see the
to the main stock exchange. In this prices of all securities in the
screen-based trading, a member logs market while business is being
on to the site and any information about transacted. They are able to see
the shares (company, member, etc.) he the full market during real time.
wishes to buy or sell and the price is 2. It increases efficiency of
fed into the computer. The software is information being passed on, thus
so designed that the transaction will helping in fixing prices efficiently.
be executed when a matching order is The computer screens display
found from a counter party. The whole information on prices and also
transaction is carried on the computer capital market developments that
screen with both the parties being able influence share prices.
to see the prices of all shares going up 3. It increases the efficiency of
and down at all times during the time operations, since there is reduction
that business is transacted and during in time, cost and risk of error.
4. People from all over the country
and even abroad who wish to
participate in the stock market
can buy or sell securities through
brokers or members without
knowing each other. That is, they
can sit in the broker’s office, log
on to the computer at the same
time and buy or sell securities.
This system has enabled a large
number of participants to trade
with each other, thereby improving
the liquidity of the market.
5. A single trading platform has
Electronic Trading System
been provided as business is
2019-2020

Ch_10.indd 267 28-Feb-19 3:04:43 PM
BUSINESS STUDIES
268
transacted at the same time in all trades were to be settled on specified

the trading centres. Thus, all the dates, this gave rise to speculation and
trading centres spread all over the price of shares used to rise and fall
country have been brought onto suddenly due to trading and defaults
one trading platform, i.e., the by brokers. A new system, i.e, rolling
stock exchange, on the computer. settlement, was introduced in 2000,
Now, screen-based trading or on-line so that whenever a trade took place it
trading is the only way in which you would be settled after some days. Since
can buy or sell shares. Shares can 2003, all shares have to be covered
be held either in physical form or an under the rolling settlement system
electronic book entry form of holding on a T+2 basis, meaning thereby
and transferring shares can also be that transactions in securities are
adopted. This electronic form is called settled within 2 days after the trade
dematerialised form. date. Since rolling settlement implies
fast movement of shares, it requires
Steps in the Trading and Settlement effective implementation of electronic
Procedure fund transfer and dematerialisation
It has been made compulsory to of shares.
settle all trades within 2 days of The following steps are involved in
the trade date, i.e., on a T+2 basis, the screen-based trading for buying
since 2003. Prior to the reforms, and selling of securities:
securities were bought and sold, i.e., 1. If an investor wishes to buy or sell any
traded and all positions in the stock security he has to first approach a
exchange were settled on a weekly/ registered broker or sub-broker
fortnightly settlement cycle whether it and enter into an agreement
was delivery of securities or payment with him. The investor has to
of cash. This system prevailed for a sign a broker-client agreement
long time as it increased the volume of and a client registration form
trading on the exchange and provided before placing an order to buy
liquidity to the system. However, since or sell securities. He has also to
Project Work
1. Study the website of Mumbai Stock Exchange, i.e., www.bseindia.com and
compile information which you find useful. Discuss it in your class and find out
how it can help you should you decide to invest in the stock market. Prepare
a report on your findings with the help of your teacher.
2. Prepare a report on the role of SEBI in regulating the Indian stock market.
You can get this information on its website namely www.sebi.gov.in. Do you
think something else should be done to increase the number of investors in
the stock market?
2019-2020

Ch_10.indd 268 28-Feb-19 3:04:43 PM
financial markets
269
provide certain other details and 4. T he broker then will go on-line

information. These include: and connect to the main stock
• PAN number exchange and match the share and
(This is mandatory) best price available.
5. When the shares can be bought or
• Date of birth and address.
sold at the price mentioned, it will
• Educational qualification and be communicated to the broker’s
occupation. terminal and the order will be
• Residential status (Indian/ executed electronically. The broker
NRI). will issue a trade confirmation slip
to the investor.
• Bank account details.
6. After the trade has been executed,
• Depository account details.
within 24 hours the broker issues
• Name of any other broker with a Contract Note. This note contains
whom registered. details of the number of shares
• Client code number in the bought or sold, the price, the
client registration form. date and time of deal, and the
brokerage charges. This is an
The broker then opens a trading
important document as it is legally
account in the name of the enforceable and helps to settle
investor. disputes/claims between the
2. The investor has to open a ‘demat’ investor and the broker. A Unique
account or ‘beneficial owner’ Order Code number is assigned
(BO) account with a depository to each transaction by the stock
participant (DP) for holding and exchange and is printed on the
transferring securities in the demat contract note.
form. He will also have to open a
7. Now, the investor has to deliver the
bank account for cash transactions
shares sold or pay cash for the
in the securities market.
shares bought. This should be
3. The investor then places an order done immediately after receiving
with the broker to buy or sell
the contract note or before the
shares. Clear instructions have
day when the broker shall make
to be given about the number of
shares and the price at which the payment or delivery of shares to the
shares should be bought or sold. exchange. This is called the pay-in
The broker will then go ahead with day.
the deal at the above mentioned 8. C ash is paid or securities are
price or the best price available. An delivered on pay-in day, which is
order confirmation slip is issued to before the T+2 day as the deal has
the investor by the broker. to be settled and finalised on the
2019-2020

Ch_10.indd 269 28-Feb-19 3:04:43 PM
BUSINESS STUDIES
270
T+2 day. The settlement cycle is For this, the investor has to open a
on T+2 day on a rolling settlement demat account with an organisation
basis, w.e.f. 1 April 2003. called a depository. In fact, now all
9. O n the T+2 day, the exchange Initial Public Offers (IPOs) are issued
will deliver the share or make in dematerialisation form and more
payment to the other broker. This than 99% of the turnover is settled by
is called the pay-out day. The delivery in the demat form.
broker then has to make payment The Securities and Exchange Board
to the investor within 24 hours of India (SEBI) has made it mandatory
of the pay-out day since he has for the settlement procedures to take
already received payment from the place in demat form in certain select
exchange. securities. Holding shares in demat
form is very convenient as it is just
10. The broker can make delivery like a bank account. Physical shares
of shares in demat form directly can be converted into electronic
to the investor’s demat account. form or electronic holdings can be
The investor has to give details of reconverted into physical certificates
his demat account and instruct (rematerialisation). Dematerialisation
his depository participant to take enables shares to be transferred to
delivery of securities directly in his some other account just like cash
beneficial owner account. and ensures settlement of all trades
through a single account in shares.
Dematerialisation and Depositories These demat securities can even be
pledged or hypothecated to get loans.
All trading in securities is now done
There is no danger of loss, theft or
through computer terminals. Since all forgery of share certificates. It is the
systems are computerised, buying and broker’s responsibility to credit the
selling of securities are settled through investor’s account with the correct
an electronic book entry form. This is number of shares.
mainly done to eliminate problems like
theft, fake/forged transfers, transfer Working of the Demat System
delays and paperwork associated with
share certificates or debentures held 1. A depository participant (DP), either
in physical form. a bank, broker, or financial services
This is a process where securities company, may be identified.
held by the investor in the physical 2. A n account opening form and
form are cancelled and the investor is documentation (PAN card details,
given an electronic entry or number so photograph, power of attorney)
that she/he can hold it as an electronic may be completed.
balance in an account. This process 3. T he physical certificate is to be
of holding securities in an electronic given to the DP along with a
form is called dematerialisation. dematerialisation request form.
2019-2020

Ch_10.indd 270 28-Feb-19 3:04:43 PM
financial markets
271
4. If shares are applied in a public In India, there are two depositories.

offer, simple details of DP and National Securities Depositories
demat account are to be given and Limited (NSDL) is the first and largest
the shares on allotment would depository presently operational in
automatically be credited to the India. It was promoted as a joint
demat account. venture of the IDBI, UTI, and the
5. If shares are to be sold through a National Stock Exchange.
broker, the DP is to be instructed to The Central Depository Services
debit the account with the number Limited (CDSL) is the second
of shares. depository to commence operations
and was promoted by the Bombay
6. The broker then gives instruction to
Stock Exchange and the Bank of India.
his DP for delivery of the shares to
Both these national level depositories
the stock exchange.
operate through intermediaries who
7. The broker then receives payment are electronically connected to the
and pay the person for the shares depository and serve as contact points
sold. with the investors and are called
8. A ll these transactions are to be depository participants.
completed within 2 days, i.e., The depository participant (DP)
delivery of shares and payment serves as an intermediary between the
received from the buyer is on a T+2 investor and the Depository (NSDL or
basis, settlement period. CSDL) who is authorised to maintain
the accounts of dematerialised shares.
Depository Financial institutions, banks, clearing
corporations, stock brokers and
Just like a bank keeps money in safe
non-banking finance corporations
custody for customers, a depository
are permitted to become depository
also is like a bank and keeps securities
participants. If the investor is buying
in electronic form on behalf of the
and selling the securities through the
investor. In the depository a securities
broker or the bank or a non-banking
account can be opened, all shares can
finance corporation, it acts as a DP
be deposited, they can be withdrawn/
for the investor and complete the
sold at any time and instruction to
formalities.
deliver or receive shares on behalf
of the investor can be given. It is a
National Stock Exchange of India
technology driven electronic storage
(NSE)
system. It has no paper work relating
to share certificates, transfer, forms, The National Stock Exchange is the
etc. All transactions of the investors are latest, most modern and technology
settled with greater speed, efficiency driven exchange. It was incorporated
and use as all securities are entered in 1992 and was recognised as a stock
in a book entry mode. exchange in April 1993. It started
2019-2020

Ch_10.indd 271 28-Feb-19 3:04:43 PM
BUSINESS STUDIES
272
operations in 1994, with trading on Objectives of NSE

the wholesale debt market segment.
NSE was set up with the following
Subsequently, it launched the capital
objectives:
market segment in November 1994
as a trading platform for equities and a. Establishing a nationwide trading
the futures and options segment facility for all types of securities.
in June 2000 for various derivative b. Ensuring equal access to investors
instruments. NSE has set up a all over the country through
nationwide fully automated screen an appropriate communication
based trading system. network.
The NSE was set up by leading c. Providing a fair, efficient and
financial institutions, banks, transparent securities market
insurance companies and other using electronic trading system.
financial intermediaries. It is managed d. Enabling shorter settlement cycles
by professionals, who do not directly and book entry settlements.
or indirectly trade on the exchange. e. Meeting international benchmarks
The trading rights are with the trading and standards.
members who offer their services Within a span of ten years, NSE
to the investors. The Board of NSE has been able to achieve its objectives
comprises senior executives from for which it was set up. It has been
promoter institutions and eminent playing a leading role as a change
professionals, without having any agent in transforming the Indian
representation from trading members. capital market. NSE has been able
Stock Market Index

A stock market index is a barometer of market behaviour. It measures overall
market sentiment through a set of stocks that are representative of the market.
It reflects market direction and indicates day-to-day fluctuations in stock prices.
An ideal index must represent changes in the prices of securities and reflect price
movements of typical shares for better market representation. In the Indian markets
the BSE, SENSEX and NSE, NIFTY are important indices. Some important global
stock market indices are:
• Dow Jones Industrial Average is among the oldest quoted stock market index
in the US.
• NASDAQ Composite Index is the market capitalisation weightages of prices for
stocks listed in the NASDAQ stock market.
• S and P 500 Index is made up of 500 biggest publicly traded companies in the
US. The S and P 500 is often treated as a proxy for the US stock market.
• FTSE 100 consists of the largest 100 companies by full market value listed
on the London Stock Exchange. The FTSE 100 is the benchmark index of the
European market.
2019-2020

Ch_10.indd 272 28-Feb-19 3:04:43 PM
financial markets
273
to take the stock market to the door (ii) Capital Market Segment: The capital
step of the investors. It has ensured market segment of NSE provides an
that technology has been harnessed efficient and transparent platform
to deliver the services to the investors for trading in equity, preference,
across the country at the lowest cost. debentures, exchange traded
It has provided a nation wide screen funds as well as retail Government
based automated trading system with securities.
a high degree of transparency and
equal access to investors irrespective BSE (Bombay Stock Exchange Ltd.)
of geographical location.
BSE Ltd (formerly known as Bombay
Stock Exchange Ltd) was established
Market Segments of NSE
in 1875 and was Asia’s first Stock
The Exchange provides trading in the Exchange. It was granted permanent
following two segments. recognition under the Securities
(i) Whole Sale Debt Market Segment: Contract (Regulation) Act, 1956. It
This segment provides a trading has contributed to the growth of
platform for a wide range of fixed the corporate sector by providing
income securities that include a platform for raising capital. It is
central government securities, known as BSE Ltd but was established
treasury bills, state development as the Native Share Stock Brokers
loans, bonds issued by public Association in 1875. Even before
sector undertakings, floating the actual legislations were enacted,
rate bonds, zero coupon bonds, BSE Ltd already had a set of Rules
index bonds, commercial paper, and Regulations to ensure an orderly
certificate of deposit, corporate growth of the securities market. As
debentures and mutual funds. discussed earlier, a stock exchange
Some Common Stock Market Terms

You would have often come across the following terms in magazines or newspapers
when you read about the stock market.
BOURSES is another word for the stock market
BULLS and BEARS – The term does not refer to animals but to market sentiment of
the investors. A Bullish phase refers to a period of optimism and a Bearish phase to
a period of perssimism on the Bourses.
BADLA – This refers to a carry forward system of settlement, particularly at the BSE.
It is a facility that allows the postponement of the delivery or payment of a transaction
from one settlement period to another.
ODD LOT TRADING – Trading in multiples of 100 stocks or less.
PENNY STOCKS – These are securities that have no value on the stock exchange but
whose trading contributes to speculation.
2019-2020

Ch_10.indd 273 28-Feb-19 3:04:43 PM
BUSINESS STUDIES
274
can be set up as a corporate entity Securities and Exchange Board of

with different individuals (who are not India (SEBI)
brokers) as members or shareholders.
The Securities and Exchange Board
BSE is one such exchange set up
of India was established by the
as a corporate entity with a broad
Government of India on 12 April
shareholder base. It has the following 1988 as an interim administrative
objectives: body to promote orderly and healthy
(a) T o p r o v i d e a n e f f i c i e n t a n d growth of securities market and for
transparent market for trading investor protection. It was to function
in equity, debt instruments, under the overall administrative
derivatives, and mutual funds. control of the Ministry of Finance of
(b) To provide a trading platform for the Government of India. The SEBI
equities of small and medium was given a statutory status on 30
enterprises. January 1992 through an ordinance.
The ordinance was later replaced by
(c) To ensure active trading and
an Act of Parliament known as the
safeguard market integrity through
Securities and Exchange Board of
an electronically-driven exchange. India Act, 1992.
(d) To provide other services to capital
market participants, like risk Reasons for the Establishment of
management, clearing, settlement, SEBI
market data, and education. The capital market has witnessed a
(e) To conform to international tremendous growth during 1980’s,
standards. characterised particularly by the
increasing participation of the
Besides having a nation-wide
public. This ever expanding investors
presence, BSE has a global reach with
population and market capitalisation
customers around the world. It has
led to a variety of malpractices on the
stimulated innovation and competition
part of companies, brokers, merchant
across all market segments. It has bankers, investment consultants
established a capital market institute, and others involved in the securities
called the BSE Institute Ltd, which market. The glaring examples of these
provides education on financial malpractices include existence of self
markets and vocational training to a – styled merchant bankers unofficial
number of people seeking employment private placements, rigging of prices,
with stock brokers. The exchange has unofficial premium on new issues,
about 5000 companies listed from non-adherence of provisions of the
all over the country and outside, and Companies Act, violation of rules and
has the largest market capitalisation regulations of stock exchanges and
in India. listing requirements, delay in delivery
2019-2020

Ch_10.indd 274 28-Feb-19 3:04:43 PM
financial markets
275
of shares etc. These malpractices and accurate and authentic information

unfair trading practices have eroded and disclosure of information on a
investor confidence and multiplied continuous basis.
investor grievances. The Government • To the intermediaries, it should offer
and the stock exchanges were rather a competitive, professionalised and
helpless in redressing the investor’s expanding market with adequate
problems because of lack of proper and efficient infrastructure so
penal provisions in the existing that they are able to render better
legislation. In view of the above, the service to the investors and issuers.
Government of India decided to set-
up a separate regulatory body known Objectives of SEBI
as Securities and Exchange Board of
India. The overall objective of SEBI is to
protect the interests of investors and
Purpose and Role of SEBI to promote the development of, and
regulate the securities market. This
The basic purpose of SEBI is to may be elaborated as follows:
create an environment to facilitate 1. To regulate stock exchanges and the
efficient mobilisation and allocation securities industry to promote their
of resources through the securities orderly functioning.
markets. It also aims to stimulate
2. To protect the rights and interests of
competition and encourage innovation.
investors, particularly individual
This environment includes rules
investors and to guide and educate
and regulations, institutions and
them.
their interrelationships, instruments,
practices, infrastructure and policy 3. To prevent trading malpractices and
framework. achieve a balance between self
This environment aims at meeting regulation by the securities industry
the needs of the three groups which and its statutory regulation.
basically constitute the market, viz, 4. T o regulate and develop a code
the issuers of securities (Companies), of conduct and fair practices
the investors and the market by intermediaries like brokers,
intermediaries. merchant bankers etc., with a view
• To the issuers, it aims to provide to making them competitive and
a market place in which they can professional.
confidently look forward to raising
finances they need in an easy, fair Functions of SEBI
and efficient manner. Keeping in mind the emerging nature
• To the investors, it should provide of the securities market in India, SEBI
protection of their rights and was entrusted with the twin task of
inte re s t s thro u g h ad equ ate, both regulation and development of the
2019-2020

Ch_10.indd 275 28-Feb-19 3:04:43 PM
BUSINESS STUDIES
276
securities market. It also has certain Protective Functions

protective functions.
1. Prohibition of fraudulent and unfair
trade practices like making mis-
Regulatory Functions
leading statements, manipulations,
1. Registration of brokers and sub- price rigging etc.
brokers and other players in the
2. C ontrolling insider trading and
market.
imposing penalties for such
2. Registration of collective investment practices.
schemes and Mutual Funds. 3. U ndertaking steps for investor
3. R e g u l a t i o n o f s t o c k b r o k e r s , protection.
portfolio exchanges, underwriters 4. Promotion of fair practices and code
and merchant bankers and the of conduct in securities market.
business in stock exchanges and
any other securities market.
The Organisation Structure of SEBI
4. Regulation of takeover bids by
companies. As SEBI is a statutory body there has
been a considerable expansion in the
5. Calling for information by under-
range and scope of its activities. Each of
taking inspection, conducting the activities of the SEBI now demands
enquiries and audits of stock more careful, closer, co-ordinated
exchanges and intermediaries. and intensive attention to enable it
6. Levying fee or other charges for to attain its objectives. Accordingly,
carrying out the purposes of the SEBI has been restructured and
Act. rationalised in tune with its expanded
7. P erforming and exercising such scope. It has decided its activities into
power under Securities Contracts five operational departments. Each
(Regulation) Act 1956, as may be department is headed by an executive
delegated by the Government of director. Apart from its head office at
India. Mumbai, SEBI has opened regional
offices in Kolkalta, Chennai, and Delhi
Development Functions to attend to investor complaints and
liaise with the issuers, intermediaries
1. Training of intermediaries of the and stock exchanges in the concerned
securities market. region.
2. Conducting research and publishing The SEBI also formed two advisory
information useful to all market committees. They are the Primary
participants. Market Advisory Committee and
3. Undertaking measures to develop the Secondary Market Advisory
the capital markets by adapting a Committee. These committees consist
flexible approach. of the market players, the investors
2019-2020

Ch_10.indd 276 28-Feb-19 3:04:43 PM
financial markets
277
associations recognised by the SEBI d. To advise for changes in legal

and the eminent persons in the capital framework to introduce
market. They provide important inputs simplification and transparency
to the SEBI’s policies. in the primary market.
The objectives of the two e. To advise the board in matters
Committees are as follows: relating to the development and
regulation of the secondary market
a. To advise SEBI on matters relating
in the country.
to the regulation of intermediaries
The committees are however non-
for ensuring investors protection
statutory in nature and the SEBI is not
in the primary market.
bound by the advise of the committee.
b. To advise SEBI on issues related to These committees are a part of SEBI’s
the development of primary market constant endeavor to obtain a feedback
in India. from the market players on various
c. To advise SEBI on disclosure issues relating to the regulations and
requirements for companies. development of the market.
Key Terms
Financial Market Money Market Treasury Bills
Commercial Paper Call Money Certificate of Deposit
Commercial Bill Money Market Mutual Fund Capital
Market Primary Market Secondary Market
Stock Exchange SEBI, NSE OTCEI
Summary
Financial Market is a market for creation and exchange of financial assets.
It helps in mobilisation and channelising the savings into most productive
uses. Financial markets also helps in price discovery and provide liquidity to
financial assets.
Money Market is a market for short-term funds. It deals in monetory assets
whose period of maturity is less than one year. The instruments of money market
includes treasury bills, commercial paper, call money, Certificate of deposit,
commercial bills, participation certificates and money market mutual funds.
Capital Market is a place where long-term funds are mobilised by the corporate
undertakings and Government. Capital Market may be devided into primary
market and secondary market. Primary market deals with new securities which
2019-2020

Ch_10.indd 277 28-Feb-19 3:04:43 PM
BUSINESS STUDIES
278
were not previously tradable to the public. Secondary market is a place where
existing securities are bought and sold.
Stock Exchanges are the organisations which provide a platform for buying
and selling of existing securities. Stock exchanges provide continuous market
for securities, helps in price discovery, widening share ownership and provide
scope for speculation.
Securities and Exchange Board of India was established in 1988 and was
given statutory status through an Act in 1992. The SEBI was set-up to protect
the interests of investors, development and regulation of securities market.
Exercises

1. What is a Treasury Bill?
2. Name the segments of the National Stock Exchange (NSE).
3. State any two reasons why investing public can expect a safe and fair
deal in the stock market. (Point w.r.t safety of Transactions – Functions
of the Stock Exchange).
4. What is the common name for Beneficiary Owner Account, which is to
be opened by the investors for trading in securities?
5. Name any two details that need to be provided by the investor to the
broker while filling a client registration form.
Short Answer Type

1. What are the functions of Financial Market?
2. “Money Market is essentially a Market for short term funds.” Discuss.
3. Distinguish between Capital Market and Money Market.
4. What are the functions of the Stock Exchange?
5. What are the objectives of SEBI?
6. State the objective of NSE?
7. Name the document prepared in the process of online trading of securities
that is legally enforceable and helps to settle disputes/claims between
the investor and the broker.
2019-2020

Ch_10.indd 278 28-Feb-19 3:04:43 PM
financial markets
279
Long Answer Type

1. Explain the various Money Market instruments.
2. Explain the recent Capital Market reforms in India.
3. Explain the objectives and functions of the SEBI.
4. India’s largest domestic investor Life Insurance Corporation of India has
once again come to government’s rescue by subscribing 70% of Hindustan
Aeronautics’ `4,200-crore initial public offering.
a. Which market is being reflected in the above case?
b. State which method of floatation in the above identified market is
being highlighted in the case? (Primary Market)
c. Explain any two other methods of floatation. (Private Placement, Offer
through prospectus, offer for sale).
5. Lalita wants to buy shares of Akbar Enterprises, through her broker
Kushvinder. She has a Demat Account and a bank account for cash
transactions in the securities market. Discuss the subsequent steps
involved in the screen-based trading for buying and selling of securities
in this case.
2019-2020

Ch_10.indd 279 28-Feb-19 3:04:43 PM
chapter
11
Marketing
Learning Objectives Where do Companies do their Business?
In the Markets or in the Society?
After studying this chapter, It is an undisputed fact that a company’s survival
you should be able to: does not depend upon its consumers alone, but a
diverse set of stakeholders like the government,
¾¾ explain the meaning of religious leaders, social activists, NGOs, media,
‘marketing’; etc. Hence, earning the satisfaction of these
segments is also as imperative as they add to the
¾¾ distinguish between power of the brand by word of mouth.
‘marketing’ and The social concern adds to the strength of the
‘selling’; brand. Corporates that embraced the deepest
social values, have been successful in building
¾¾ l i s t o u t i m p o r t a n t powerful brand, and, eventually, robust customer
functions of marketing; relationship. The area of corporate social justice
fall under two broad categories. The issues such
¾¾ examine the role of as the nutrition of children, child care, old-age
marketing in the homes, amelioration of hunger, offering aid to
those affected by natural calamities, etc. needing
development of an
instant attention with humanitarian perspective,
economy in a firm,
comes under the first category.
to the society and to The issues that contribute to making society a
consumers; pleasant place to live in the long run, may be grouped
under the second category. The issues which come
¾¾ explain the elements of under this category are health awareness and aid,
marketing-mix; education, environmental protection, women’s
employment and empowerment, preventing unjust
¾¾ classify products into discriminations (on the basis of caste, community,
different categories; religion, ethnicity, race, and sex), eradication
of poverty through employment, preservation
¾¾ analyse the factors of culture, values, and ethics, contribution to
affecting price of a research, etc.
product; Procter and Gamble’s (P&G) philosophy is that it
should lead the industry in implementing a global
¾¾ l i s t o u t t h e t y p e s environmental programme. P&G is one of the
of channels of first companies in the world to actively study the
distribution; and influence of consumer products on the environment
and introduce concentrated products, recycled
¾¾ e x p l a i n t h e m a j o r plastic bottles, and refill packages to the industry.
tools of promotion, viz. P&G contributes to sustainable development
advertising, personal and addresses environmental and social issues
connected with its products and services.
selling, sales promotion
and publicity. Source: Adapted from ‘Effective Executive’,
Feb. 2006
2019-2020

Ch_11.indd 280 28-Feb-19 3:05:56 PM
Marketing
281
Let us consider a typical day in our products. These activities are referred
life. Right from the time we get up in to as marketing activities.
the morning to the time we go to bed, For a proper understanding of
we use number of products to satisfy marketing, number of questions need
our different needs. Beginning with the to be answered. These include: What
breakfast, we take such items as bread, do we mean by a market? What can be
butter, milk, and rice, to satisfy our marketed? Is it products or services or
hunger; use the services of a bus or an something more? Who is a marketer?
auto or a cycle to reach to our school or What is marketing management?
place of work; read books, magazines These points have been taken up for
and newspapers, to keep ourselves discussion in the following sections.
informed and acquire knowledge; use
What is a Market
computers, cell phone, television and
other gadgets for communication/ In the traditional sense, the term
entertainment; and purchase many ‘market’ refers to the place where
other products like gifts, shoes, buyers and sellers gather to enter into
clothing, furniture, etc., from market transactions involving the exchange
to satisfy our different needs. of goods and services. It is in this
Who makes these products and sense that this term is being used
why? These products are manufactured in day to day language, even today.
and marketed by different firms. For The other ways in which this term
example, Lifebouy soap, Closeup is being used is in the context of a
toothpaste, Surf detergent powder are product market (cotton market, gold
manufactured by Hindustan Lever; or share market), geographic market
(national and international market),
Ariel detergent powder by Procter
type of buyers (consumer market and
and Gamble, Dairy Milk Chocolate
industrial market) and the quantity of
by Nestle, Atlas Cycles by Atlas
goods transacted (retail market and
cycle company, Kwality Ice-creams
wholesale market).
by Kwality Walls, LG Televisions by But in modern marketing sense, the
LG Electronics and so on. These term market has a broader meaning. It
firms are called marketers. These refers to a set of actual and potential
firms undertake various activities buyers of a product or service. For
to stimulate the demand for their example, when a fashion designer
products and earn profit by satisfying designs a new dress and offers it for
customer’s needs and wants. People exchange, all the people who are willing
purchase products because these to buy and offer some value for it can be
satisfy some of their needs. stated to be the market for that dress.
Number of activities are performed Similarly, market for fans or bicycles
by the marketers to facilitate exchange or electric bulbs or shampoos refers to
o f go o ds a nd services b etw een all the actual and potential buyers for
producers and the users of such these products.
2019-2020

Ch_11.indd 281 28-Feb-19 3:05:56 PM
BUSINESS STUDIES
282
“Business is not financial science, it’s about trading, buying and selling. It’s about
creating a product or service so good that people will pay for it.”
— Anta Roddick
“Marketing takes a day to learn. Unfortunately it takes time to master.”
— Philip Kotler
What is Marketing selling, advertising and pricing are

required. All these activities are
The term marketing has been described
referred to as marketing activities.
by different people in different ways.
Thus, ‘merchandising’, ‘selling’ and
Some people believe that marketing is
distribution are all parts of a large
same as ‘shopping’. Whenever they go
number of activities undertaken by
out for shopping of certain products or
services, they describe it as marketing. a firm, which are collectively called
There are some other people who marketing.
confuse marketing with ‘selling’ and It may be noted here that
feel that marketing activity starts marketing is not merely a post-
after a product or service has been production activity. It includes many
produced. Some people describe it to activities that are performed even
mean ‘merchandising’ or designing a before goods are actually produced,
product. All these descriptions may be and continue even after the goods have
partly correct but marketing is a much been sold. For example, activities such
broader concept, which is discussed as identification of customer needs,
as follows: collection of information for developing
Traditionally, marketing has been the product, designing suitable product
described in terms of its functions or package and giving it a brand name are
activities. In this respect, marketing performed before commencement of
has been referred to as performance of the actual production. Similarly, many
business activities that direct the flow follow up activities are required for
of goods and services from producers maintaining good customer relations
to consumers. for procuring repeat sale.
As we know, most of the In modern times, emphasis is
manufacturing firms do not produce placed on describing marketing as a
goods for their own consumption but social process. It is a process whereby
for the consumption or use by others. people exchange goods and services
Therefore, to move the goods and for money or for something of value to
services from the producer to consumers, them. Taking the social perspective,
a number of activities, such as product Phillip Kolter has defined marketing as,
designing or merchandising, packaging, “a social process by which individual
warehousing, transportation, branding, groups obtain what they need and want
2019-2020

Ch_11.indd 282 28-Feb-19 3:05:56 PM
Marketing
283
through creating offerings and freely A marketer’s job in an organisation

exchanging products and services of is to identify needs of the target
value with others”. customers and develop products and
Thus, marketing is a social process services that satisfy such needs.
where in people interact with others, 2. Creating a Market Offering: On
in order to persuade them to act in the part of the marketers, the effort
a particular way, say to purchase involves creation of a ‘market offering.
a product or a service, rather than Market offering refers to a complete
forcing them to do so. A careful analysis
offer for a product or service, having
of the definition shows the following
given features like size, quality, taste,
important features of marketing:
etc; at a certain price; available at a
1. Needs and Wants: The process given outlet or location and so on. Let
of marketing helps individuals and us say the offer is for a cell phone,
groups in obtaining what they need available in four different versions,
and want. Thus, the primary reason or on the basis of certain features such
motivation for people to engage in the as size of memory, television viewing,
process of marketing is to satisfy some internet, camera, etc., for a given price,
of their needs or wants. In other words, say between Rs. 5,000 and Rs. 20,000
the focus of the marketing process is
(depending on the model selected),
on satisfaction of the needs and wants
available for sale at say firm’s exclusive
of individuals and organisations.
shops in and around all metropolitan
A need is a state of felt deprivation
cities in the country. A good ‘market
or feeling of being deprived of
offer’ is the one which is developed after
something. If unsatisfied, it leaves a
analysing the needs and preferences of
person unhappy and uncomfortable.
the potential buyers.
For example, on getting hungry, we
become uncomfortable and start 3. Customer Value: The process
looking for objects that are capable of of marketing facilitates exchange of
satisfying our hunger. products and services between the
Needs are basic to human beings buyers and the sellers. The buyers,
and do not pertain to a particular however, make buying decisions on
product. Wants, on the other hand, their perceptions of the value of the
are culturally defined objects that are product or service in satisfying their
potential satisfiers of needs. In other need, in relation to its cost. A product
words, human needs shaped by such will be purchased only if it is perceived
factors as culture, personality and to be giving greatest benefit or value
religion are called wants. A basic need for the money. The job of a marketer,
for food, for example, may take various therefore, is to add to the value of the
forms such as want for dosa and rice product so that the customers prefer it
for a South Indian and chapatti and in relation to the competing products
vegetables for a North Indian person. and decide to purchase it.
2019-2020

Ch_11.indd 283 28-Feb-19 3:05:56 PM
BUSINESS STUDIES
284
4. Exchange Mechanism: The process are not able to communicate with

of marketing works through the each other or if they can not deliver
exchange mechanism. The individuals something of value to the other.
(buyers and sellers) obtain what they (iv) each party should have freedom to
need and want through the process of accept or reject other party’s offer.
exchange. In other words, the process
(v) the parties should be willing to enter
of marketing involves exchange of
into transaction with each other.
products and services for money or
Thus, the acceptance or rejection
something considered valuable by
of the offer takes place on voluntary
the people. basis rather than on the bases of
Exchange refers to the process any compulsion.
through which two or more parties
come together to obtain the desired The points listed above are the
product or service from someone, necessary conditions for an exchange
offering the same by giving something to take place. Whether the exchange
in return. For example, a person actually takes place or not depends on
the suitability of the act of exchange
feeling hungry may get food by offering
to both the parties, whether it makes
to give money or some other product
the parties better off or at least not
or service in return to someone who
worse off.
is willing to accept the same for food.
Another important point to be
In the modern world, goods are
noted is that Marketing is not merely a
produced at different places and are
business phenomena or confined only
distributed over a wide geographical
to business organisations. Marketing
area through various middlemen, activities are equally relevant to non-
involving exchanges at different levels profit organisations such as hospitals,
of distribution. Exchange is, therefore, schools, sports clubs and social and
referred to as the essence of marketing. religious organisations. It helps these
For any exchange to take place, it is organisations in achieving their goals
important that the following conditions such as spreading the message of
are satisfied: family planning, improving the literacy
(i) involvement of at least two parties standards of people and providing
viz., the buyer and the seller. medication to the sick.
(ii) each party should be capable of
offering something of value to the What can be marketed?
other. For example, the seller offers The question commonly coming to the
a product and the buyer, money. mind is what can be marketed. Is it a
(iii) each party should have the ability product or service or something else. Let
to communicate and deliver the us first tunderstand what is a product?
product or service. No exchange can A product is a ‘bundle of utilities’
take place if the buyers and sellers or ‘source of satisfaction’, that can
2019-2020

Ch_11.indd 284 28-Feb-19 3:05:56 PM
Marketing
285
be used to satisfy human needs and and touched physically such as a

wants. It is not confined to physical pencil, a cycle or an intangible such
objects, such as motor cycle, biscuit, as services rendered by a doctor,
bulb and pencil but also refers to hairdresser or a lawyer.
other things of value such as services, Apart from the product, what can
ideas, places, etc., that can be offered be marketed is a service or a person
to the potential buyers for their use. (say political parties persuading to vote
In the marketing literature, anything for a particular candidate) or an idea
that can be of value to the buyer can (say Red Cross persuading to donate
be termed as a ‘product’. It can be blood) or a place (say Kerala Tourism
tangible, i.e., which can be felt, seen persuading people to visit Kerala for
What can be Marketed?

Physical Products : DVD player, Motor cycle, ipods, Cell phone, Footwear,
Television, Refrigerator.
Services : Insurance, Health Care, Business Process Outsourcing,
Security, Easy Bill service, Financial Services
(Investment),Computer Education, Online Trading.
Ideas : Polio Vaccination, Helpage, Family Planning, Donation of
Blood (Red cross), Donation of money on Flag Day (National
Foundation for Communal Harmony).
Persons : For Election of Candidates for Certain Posts.
Place : ‘Visit Agra – ‘City of Love’, ‘Udaipur – ‘The City of Lakes’,
‘Mysore – The City of Gardens’, ‘When Orisa celebrates,
Eleven the God Join In’.
Experience : Customised Experiences as Dinner with a cricketer (say
Dhoni); Lunch with a celebrity (say Bill Gates or Aishwarya
Roy) or experience of Baloon Riding, mountaineering, etc.
Properties : Intangible rights of ownership of real estate in financial
property (Shares, Debentures).
Events : Sports events (say Olympics, Cricket series), diwali mela,
fashion show, music concert, film festival, elephant race
(Kerala Tourism).
Information : Production packaging and distribution of information by
organisations such as by universities, research organisation,
providing information as market information (marketing
research agencies), technology information.
Organisations : For boosting their public image organisations such as
Hindustan Lever, Ranbaxy, Dabur, Proctor and Gamble,
communicate with people. Example, Phillips says, Let’s make
Things Better’.
2019-2020

Ch_11.indd 285 28-Feb-19 3:05:56 PM
BUSINESS STUDIES
286
health tourism). Thus, anything that is the activities which facilitate exchange
of value to the other can be marketed. of goods and services between
It can be a product or a service or a producers and consumers or users
person or a place or an idea or an event of products and services. Thus the
or an organisation or experience or focus of marketing management is on
properties. (see box) achieving desired exchange outcomes
Who is a marketer? Marketer refers with the target markets. Taking a
to any person who takes more active management perspective, the term
part in the process of exchange. marketing has been defined as “the
Normally it is the seller who is more process of planning and executing
active in the exchange process as he/ the conception, pricing, promotion
she analyses the needs of the potential and distribution of ideas, goods and
services to create exchanges that
buyers, develops a market offering
satisfy individual and organisational
and persuades the buyers to buy the
goals” by American Management
product. However, there may be certain
Association, similarly Philip Kotler
situations where the buyer may be
has defined Marketing management as
taking more active role in the exchange
the art and science of choosing target
process. Let us say in situations of
markets and getting, keeping and
rare supply, the buyer may be taking
growing customers through creating,
extra efforts in persuading the seller
delivering and communicating superior
to sell the product to him/her. This
customer values of management.
may be happening in defence deals
A careful analysis of the definition
or take a situation where a country reveals that the process of management
having installed a nuclear plant needs of marketing involves:
the supply of nuclear fuel or ‘Heavy
Water’. It may need to convince the (i) C hoosing a target market, say a
supplier of the products to supply the manufacturer may choose to make
readymade garments for children
same to it, by promising that it will
up to the age of 5 years;
be used for peaceful purposes only.
In this case, the buyer will be treated (ii) In respect of the target market
as the marketer. Thus, any body, who chosen, the focus of the process of
takes more active role in the exchange management is on getting, keeping
process will be taken as the marketer. as well as growing the customers.
That means the marketer has to
Marketing Management create demand for his products so
that the target customers purchase
Marketing management means the product, keep them satisfied
management of the marketing with the firm’s products and also
function. In other words, marketing attract more customers to the
management refers to planning, firm’s products so that the firm can
organising, directing and control of grow; and
2019-2020

Ch_11.indd 286 28-Feb-19 3:05:56 PM
Marketing
287
(iii) The mechanism for achieving seasonal products, (say fans, woollen
the objective is through creating, clothes) the marketer’s job is to change
developing and communicating the time pattern of demand through
superior values for the customers. such methods as providing short-term
That means, the primary job incentives, to the buyers. Thus, the
of a marketing manager is to marketing management in not only
create superior values so that concerned with creating demand but
the customers are attracted to with managing the demand effectively,
the products and services and as per the situation in the market.
communicate these values to the
prospective buyers and persuade Marketing and Selling
them to buy these products.
Many people confuse ‘selling’ for
Marketing management involves ‘marketing’. They consider these two
performance of various functions terms as one and the same. Marketing
such as analysing and planning the refers to a large set of activities of which
marketing activities, implementing selling is just one part. For example, a
marketing plans and setting control marketer of televisions, before making
mechanism. These functions are the sale, does a lot of other activities
to be performed in such a way that such as planning the type and model
organisation’s objectives are achieved of televisions to be produced, the
at the minimum cost. price at which it would be sold and
Marketing management generally selecting the distribution outlets at
is related to creation of demand. which the same would be available,
However, in certain situations, the etc. In short, marketing involves whole
manager has to restrict the demand. range of activities relating to planning,
For example, if there is a situation of pricing, promoting and distributing the
‘overfull demand’, i.e., the demand products that satisfy customer’s needs.
being more than what the company The function of selling, on the other
can or want to handle, (like what hand, is restricted to promotion of goods
the situation in our country was and services through salesmanship,
before the adoption of policies of advertising, publicity and short-term
liberalisation and globalisation, in incentives so that title of the product
early 90’s, in most consumer products is transferred from seller to buyer or
be it automobiles or electronics goods in other words product is converted
or other durable products. The job of into cash.
marketing mangers, in these situations The major differences between
would be to find ways to reduce the selling and marketing are listed as
demand temporarily by say reducing below:
the expenditure on promotion or (i) Part of the Process vs Wider Term:
increasing the prices. Similarly, if the Selling is only a part of the process
demand is ‘irregular’, such as in case of of marketing and is concerned
2019-2020

Ch_11.indd 287 28-Feb-19 3:05:57 PM
BUSINESS STUDIES
288
with promoting and transferring continue even after the product has
possession and ownership of been sold.
goods from the seller to the buyer. (v) Difference in the Emphasis: In
Marketing is a much wider term selling, the emphasis is on bending
consisting of number of activities the customer according to the
such as identification of the product while in marketing, the
customer’s needs, developing the attempt is to develop the product
products to satisfy these needs, and other strategies as per the
fixing prices and persuading the customer needs.
potential buyers to buy the same. (vi) Difference in the Strategies: Selling
Thus, selling is merely a part of involves efforts like promotion
marketing. and persuasion while marketing
(ii) T ransfer of T itle vs Satisfying uses integrated marketing efforts
Customer Needs: The main focus involving strategies in respect of
of selling is on affecting transfer product, promotion, pricing and
of title and possession of goods physical distribution.
from sellers to consumers or
users. In contrast, marketing Marketing Management Philosophies
activities put greater thrust on In order to achieve desired exchange
achieving maximum satisfaction of outcomes with target markets, it is
the customer’s needs and wants. important to decide what philosophy
(iii) Profit through Maximising Sales vs or thinking should guide the marketing
Customer Satisfaction: All selling efforts of an organisation. An
activities are directed at maximising understanding of the philosophy or
sales and, thereby, the profits of the the concept to be adopted is important
firm. In other words, the emphasis as it determines the emphasis or the
is on profit maximisation through weightage to be put on different factors, in
maximisation of sales. Marketing, achieving the organisational objectives.
on the other hand, is concerned For example, whether the marketing
with customer satisfaction and efforts of an organisation will focus on
thereby increasing profit in the long the product—say designing its features
run. A marketing organisation, etc or on selling techniques or on
thus, attaches highest importance customer’s needs or the social concerns.
to customer satisfaction as a route The concept or philosophy of
to profit maximisation. marketing has evolved over a period
of time, and is discussed as follows.
(iv) Start and End of the Activities:
Selling activities start after the
The Production Concept
product has been developed while,
marketing activities start much During the earlier days of industrial
before the product is produced and revolution, the demand for industrial
2019-2020

Ch_11.indd 288 28-Feb-19 3:05:57 PM
Marketing
289
goods started picking up but the became the key to profit maximisation
number of producers were limited. of a firm, under the concept of product
As a result, the demand exceeded orientation.
the supply. Selling was no problem.
Anybody who could produce the goods The Selling Concept
was able to sell. The focus of business With the passage of time, the marketing
activities was, therefore, on production environment underwent further
of goods. It was believed that profits change. The increase in the scale of
could be maximised by producing business further improved the position
at large scale, thereby reducing the with respect to supply of goods,
average cost of production. It was resulting in increased competition
also assumed that consumers would among sellers. The product quality
favour those products which were and availability did not ensure the
widely available at an affordable price. survival and growth of firms because
Thus, availability and affordability of the large number of sellers selling
of the product were considered to quality products. This led to greater
be the key to the success of a firm. importance to attracting and persuading
Therefore, greater emphasis was customers to buy the product. The
placed on improving the production business philosophy changed. It was
and distribution efficiency of the assumed that the customers would
firms. not buy, or not buy enough, unless
they are adequately convinced and
The Product Concept motivated to do so. Therefore, firms
As a result of emphasis on production must undertake aggressive selling
capacity during the earlier days, the and promotional efforts to make
position of supply increased over customers buy their products. The
period of time. Mere availability and use of promotional techniques such as
low price of the product could not advertising, personal selling and sales
ensure increased sale and as such promotion were considered essential
the survival and growth of the firm. for selling of products. Thus, the focus
Thus, with the increase in the supply of business firms shifted to pushing
of the products, customers started the sale of products through aggressive
looking for products which were selling techniques with a view to
superior in quality, performance and persuade, lure or coax the buyers
features. Therefore, the emphasis to buy the products. Making sale
of the firms shifted from quantity of through any means became important.
production to quality of products. The It was assumed that buyers can be
focus of business activity changed to manipulated but what was forgotten
bringing continuous improvement in was that in the long run what matters
the quality, incorporating new features most is the customer satisfaction,
etc. Thus, product improvement rather than anything else.
2019-2020

Ch_11.indd 289 28-Feb-19 3:05:57 PM
BUSINESS STUDIES
290
The Marketing Concept want. If the customers want features

like double door in a refrigerator or a
Marketing orientation implies that
separate provision for water cooler in
focus on satisfaction of customer’s
needs is the key to the success of any it, the organisation would produce a
organisation in the market. It assumes refrigerator with these features, would
that in the long run an organisation can price it at a level which the customers
achieve its objective of maximisation are willing to pay and so on. If all
of profit by identifying the needs of marketing decisions are taken with
its present and prospective buyers this prospective, selling will not be any
and satisfying them in an effective problem. It will automatically follow.
way. All the decisions in a firm are The basic role of a firm then is to
taken from the point of view of the ‘identify a need and fill it’. The concept
customers. In other words, customer’s implies that products ad-services are
satisfaction become the focal point of bought not merely because of their
all decision making in the organisation. quality, packing or brand name, but
For example, what product will be because they satisfy a specific need
produced, with what features and at of a customer. A pre-requisite for the
what price shall it be sold, or where success of any organisation, therefore,
shall it be made available for sale will is to understand and respond to
depend on what do the customers customer needs.
Differences in the Marketing Management Philosophies
Philosophies/ Production Product Selling Marketing Societal
Bases Concept Concept Concept Concept Concept
1. Starting Factory Factory Factory Market Market,
Point Society
2. Main Quantity of Quality, Existing Customer Customer
Focus product performance, product needs needs and
features of society’s
product well being
3. Means Availability Product Selling Integrated Integrated
and improve- and marketing marketing
affordability ments promoting
of product
4. Ends Profit through Profit through Profit Profit Profit
volume of product through through through
production quality sales customer customer
volume satisfaction
satisfaction
and social
welfare
2019-2020

Ch_11.indd 290 28-Feb-19 3:05:57 PM
Marketing
291
To sum up, the marketing concept is to identify the needs and wants
is based on the following pillars: of the target market and deliver the
(i) I d e n t i f i c a t i o n o f m a r k e t o r desired satisfaction in an effective
customer who are chosen as the and efficient manner so that the long-
target of marketing effort. term well-being of the consumers and
the society is taken care of. Thus,
(ii) Understanding needs and wants
the societal marketing concept is the
of customers in the target market.
extension of the marketing concept
(iii) Development of products or as supplemented by the concern for
services for satisfying needs of the the long-term welfare of the society.
target market. Apart from the customer satisfaction,
(iv) Satisfying needs of target market it pays attention to the social, ethical
better than the competitors. and ecological aspects of marketing.
(v) Doing all this at a profit. There are large number of such issues
that need to be attended.
Thus, the focus of the marketing
concept is on customer needs and the
customer satisfaction becomes the
Functions of Marketing
means to achieving the firms’ objective Marketing is concerned with exchange
of maximising profit. The purpose of of goods and services from producers
marketing is to generate customer to consumers or users in such a way
value at a profit. that maximises the satisfaction of
customers’ needs. From the view point
The Societal Marketing Concept of management function, number of
The marketing concept, as described activities are involved, which have
in the preceeding section cannot be been described as below:
considered as adequate if we look 1. Gathering and Analysing Market
at the challenges posed by social Information: One of the important
problems like environmental pollution, functions of a marketer is to gather
deforestation, shortage of resources, and analyse market information. This
population explosion and inflation. It is is necessary to identify the needs
so because any activity which satisfies of the customers and take various
human needs but is detrimental to the decisions for the successful marketing
interests of the society at large cannot of the products and services. This
be justified. The business orientation is important for making an analysis
should, therefore, not be short-sighted to of the available opportunities and
serve only consumers’ needs. It should threats as well as strengths and
also consider large issues of long-term weaknesses of the organisation and
social welfare, as illustrated above. help in deciding what opportunities
The societal marketing concept can best be pursued by it. For example,
holds that the task of any organisation rapid growth is predicted in several
2019-2020

Ch_11.indd 291 28-Feb-19 3:05:57 PM
BUSINESS STUDIES
292
areas in the Indian economy, say in 3. Product Designing and

the use of the Internet, market for cell Development: Another important
phones and several other areas. Which marketing activity or decision area
of these areas a particular organisation relates to product designing and
should enter, or in which area should development. The design of the product
it expand, requires a careful scanning contributes to making the product
of the strengths and weaknesses of the attractive to the target customers. A
organisation, which is done with the good design can improve performance of
help of careful market analysis. a product and also give it a competitive
With the growth of computers, advantage in the market. For example,
a new trend has emerged in the when we plan to buy any product say a
collection of market information. motorbike, we not only see its features
More and more companies are using like cost, mileage, etc. but also the
interactive sites on the internet, to design aspects like its shape, style, etc.
gather customer views and opinions, 4. Standardisation and Grading:
before taking important business Standardisation refers to producing
decisions. One of the popular TV goods of predetermined specifications,
News Channel (in Hindi) seeks viewers which helps in achieving uniformity
choice (through SMS) on which of the and consistency in the output.
given four or five main news stories Standardisation ensures the
of the day would be broadcasted as buyers that goods conform to the
detailed story at the prime time, to predetermined standards of quality,
ensure that the viewers get to listen to price and packaging and reduces
the story of their own choice. the need for inspection, testing and
2. Marketing Planning: Another evaluation of the products.
important activity or area of work of Grading is the process of
a marketer is to develop appropriate classification of products into different
marketing plans so that the marketing groups, on the basis of some of its
objectives of the organisation can be important characteristics such as
achieved. For example a marketer of quality, size, etc. Grading is particularly
colour TV, having 10 per cent of the necessary for products which are not
current market share in the country, produced according to predetermined
aims at enhancing his market share specifications, such as in the case
to 20 per cent, in the next three years. of agricultural products, say wheat,
He will have to develop a complete oranges, etc. Grading ensures that
marketing plan covering various goods belong to a particular quality
important aspects including the plan and helps in realising higher prices for
for increasing the level of production, high quality output.
promotion of the products, etc. and 5. Packaging and Labelling: Packaging
specify the action programmes to refers to designing and developing the
achieve these objectives. package for the products. Labelling
2019-2020

Ch_11.indd 292 28-Feb-19 3:05:57 PM
Marketing
293
refers to designing and developing the Selection of the brand name plays
label to be put on the package. The an important role in the success
label may vary from a simple tag to of a product.
complex graphics. 7. Customer Support Services: A very
Packaging and labelling have important function of the marketing
become so important in modern day management relates to developing
marketing that these are considered customer support services such as
as the pillars of marketing. Packaging after sales services, handling customer
is important not only for protection complaints and adjustments, procuring
of the products but also serves as credit services, maintenance services,
a promotional tool. Sometimes, the technical services and consumer
quality of the product is assessed by information. All these services aim
the buyers form packaging. We have at providing maximum satisfaction
seen that in the success of many of the to the customers, which is the key to
consumer brands in recent times such marketing success in modern days.
as Lays or Uncle Chips potato wafers Customer support services are very
Clinic Plus shampoos, and Colgate effective in bringing repeat sales from
Toothpaste, etc., packaging has played the customers and developing brand
an important role. loyality for a product.
6. Branding: A very important decision 8. Pricing of Product: Price of
area for marketing of most consumer product refers to the amount of money
products is whether to sell the product customers have to pay to obtain a
in its generic name (name of the product. Price is an important factor
category of the product, say Fan, Pen, affecting the success or failure of a
etc.) or to sell them in a brand name product in the market. The demand
(such as Pollar Fan or Rottomac Pen). for a product or service is related to
Brand name helps in creating product its price. Generally lower the price,
differentiation, i.e., providing basis for higher would be the demand for the
distinguishing the product of a firm product and vice-versa. The marketers
with that of the competitor, which in haveto properly analyse the factors
turn, helps in building customer’s determining the price of a product and
loyality and in promoting its sale. take several crucial decisions in this
The important decision areas in respect, including setting the pricing
respect of branding include deciding objectives, determining the pricing
the branding strategy, say whether strategies, determining the price and
each product will be given a separate changing the prices.
brand name or the same brand name 9. Promotion: Promotion of products
will be extended to all products of the and services involves informing the
company, say Phillips bulbs, tubes customers about the firm’s product,
and television or Videocon washing its features, etc. and persuading them
machine, television, and refrigerator. to purchase these products. The four
2019-2020

Ch_11.indd 293 28-Feb-19 3:05:57 PM
BUSINESS STUDIES
294
important methods of promotion Jammu and Kashmir and Haryana,

include advertising, Personal Selling, Rajasthan, where it is consumed.
Publicity and Sales Promotion. A A marketing firm has to analyse
marketer has to take several crucial, its transportation needs after taking
decisions in respect of promotion of into consideration various factors
the products and services such as such as nature of the product, cost
deciding the promotion budget, the and location of target market and
promotion mix, i.e., the combination take decisions in respect of mode of
of the promotional tools that will be transportation to be chosen and other
use, the promotion budget, etc. related aspects.
10. Physical Distribution: Managing 12. Storage or Warehousing: Usually
physical distribution is another very there is a time gap between the
important function in the marketing production or procurement of goods
of goods and services. The two major and their sale or use. It may be
decision areas under this function because of irregular demand for the
include (a) decision regarding channels products such as in the case of woollen
of distribution or the marketing garments or Raincoats or there may be
intermediaries (like whole salers, irregular supply because of seasonal
retailers) to be used and (b) physical production such as in the case of
movement of the product from where it is agricultural products (sugarcane,
produced to a place where it is required rice, wheat, cotton, etc.). In order to
by the customers for their consumption maintain smooth flow of products in
or use. The important decision areas the market, there is a need for proper
under physical distribution include storage of the products. Further, there
managing inventory (levels of stock of is a need for storage of adequate stock
goods), storage and warehousing and of goods to protect against unavoidable
transportation of goods from one place delays in delivery or to meet out
to the other. contingencies in the demand. In the
11. Transportation: Transportation process of marketing, the function
involves physical movement of goods of storage is performed by different
from one place to the other. As generally agencies such as manufacturers,
the users of products, particularly wholesalers and retailers.
consumer products are wide spread
and geographically separated from Role of Marketing
the place these are produced, it is
necessary to move them to the place All marketing organisations operate
where it is needed for consumption either to earn profit or pursue some
or use, For example, tea produced other goals such as community
in Assam has to be transported not service, improvement of quality of life
only within the state but to other far or promotion of a cause, say UNICEF
off places like Tamil Nadu, Punjab, working for the welfare of children
2019-2020

Ch_11.indd 294 28-Feb-19 3:05:57 PM
Marketing
295
or ‘Helpage’ working for the cause can afford. In other words, marketing
of senior citizens. Whether it is a as a business philosophy helps in
profit organisation or a non-profit serving the customers by satisfying
organisation, marketing plays their needs. It is a well known fact
an important role in achieving its that a satisfied customer is the most
objectives. It helps the individual valuable asset of any firm. Thus,
consumers in raising their standard of marketing plays a crucial role in the
living by making available the products survival and growth of a firm.
and services that satisfy their needs
and wants. It also plays a significant Role in the Economy
role in the economic development of Marketing plays a significant role in the
a nation. The role of marketing in development of an economy. It acts as
different situations may be described a catalyst in the economic development
in brief as follows. of a country and helps in raising the
standards of living of the people.
Role in a Firm Development of a nation can be
The modern concept of marketing judged by the level of standard of
plays a significant role in achieving living of its people. Another important
the objectives of a firm. It emphasises criteria, which is related to the first one,
that customer satisfaction is the is the per capita income of an average
key to the survival and growth of an citizen of a country. On this basis,
organisation in the contemporary an underdeveloped country may be
competitive marketing environment. stated to be one which is characterised
By adopting marketing orientation, by factors like poverty, scarcity of
an organisation whether profit making goods and services, predominance of
or non-profit making, can achieve its agriculture, etc.
goals in the most effective manner. It Marketing can play a significant
helps in focusing the activities of an role in the economic development
organisation on the needs and wants of a nation. It can inspire people to
of the customers. For example, what undertake new activities and to set
products or services will be marketed up enterprises for producing goods
by a firm will depend upon what do its that are needed by the customers.
customers need. Thus, an analysis of Marketing can help in overcoming
the needs of the customers shall be obstacles posed by high prices due to
undertaken in order to decide what imbalances in the levels of production
to produce and sell. The product will and consumption. It can also ensure
then be designed according to the smooth flow of goods through efficient
needs of the potential buyers and be physical distribution arrangements.
made available through the outlets In other words, marketing can
convenient to customers and be priced help in finding out right type of
at a level which the target customers products and services that a firm
2019-2020

Ch_11.indd 295 28-Feb-19 3:05:57 PM
BUSINESS STUDIES
296
should manufacture, the places be the name (brand name) of the drink;
where it should make such products at what price it will be sold, (at par with
available for sale, the price at which the price at which other competitive
the products should be sold and the brands are sold or below it or above
channels that should be used for it); what distribution network will be
moving the products to the ultimate used to make the product available
place of consumption or use. This (e.g., hotels, restaurants, groceries
linkage between the business and shops, kiosks selling cigarette, paan,
consumption centres, accelerates the etc.) to the buyers whether the new
economic activity leading to higher soft drink will be promoted by putting
incomes, more consumption and up advertisements in newspaper or
increased savings and investment. magazine or on radio or television; or
say if newspaper, whether in a local
Marketing Mix newspaper or a national daily; whether
As stated in an earlier section, the in a paper of regional language or an
process of marketing involves creating English daily, etc. is decided at the
a market offering, to satisfy the needs level of marketing manager of the firm.
and wants of the present and potential However, there are certain other
buyers. The real question is how to factors which affect the decision but
create a market offering. Let us say a are not controllable at the firm’s
profitable business opportunity is seen level. These are called environmental
by some firm in the field of producing variables. For example, the political
soft drinks. To develop and market a factors such as the government policy
new brand of soft drinks, a number on whether to allow any technical or
of important decisions will have to financial collaboration in the area of
be taken for example whether to go soft drinks, production or economic
for any collaboration with a foreign factors such as rate of inflation
manufacturer of soft drinks, whether prevailing in a given period or a credit
to produce for the local market or for a policy of the central bank affecting
wider market, what will be the features the total availability of money in the
of the new product, and so on. market, all of which affect the sale
There are large number of factors of a particular product but can not
affecting marketing decisions. These be controlled or influenced by the
can broadly be divided into two decisions at the level of a firm. To be
categories: (i) controllable factors, and successful, the decisions regarding
(ii) non-controllable factors. Controllable ‘controllable factors’ are to be taken
factors are those factors which can be keeping the environmental variables
influenced at the level of the firm. In into consideration.
the previous illustration, for example, The controllable variables become
whether the drink will be packed in marketing tools, which are constantly
glass bottles or plastic cans; what will shaped and reshaped by marketing
2019-2020

Ch_11.indd 296 28-Feb-19 3:05:57 PM
Marketing
297
managers, to achieve marketing Elements of Marketing Mix

success. For example, a firm can
The marketing mix consists of various
reshape a market offering by bringing elements, which have broadly been
in a change in any of the variable classified into four categories, popularly
under its own control, say introducing known as four Ps of marketing. These
a change in the price or promotion offer are: (i) Product, (ii) Price, (iii) Place,
or product features or channel used to and (iv) Promotion. These are briefly
make the product available to buyers. discussed as follows:
Thus, from a number of alternatives
1. Product: Product means goods
available a firm chooses a particular or services or ‘anything of value’,
combination to develop a market which is offered to the market for
offering. The combination of variables sale. For example, Hindustan lever
chosen by a firm to prepare its market offers number of consumer products
offering is also called marketing mix. like toiletries (Close-Up toothpaste,
Thus, marketing mix is described as Lifebuoy soap, etc.), detergent powder
the set of marketing tools that a firm (Surf, Wheel), food products (Refined
uses to pursue its marketing objectives Vegetable Oil); Tata offers Tata Steel,
in a target market. Trucks, Salt and a large number
Marketing Mix: Elements
Product Price
Product Mix Price Level
Product Quality Margins
New Product Pricing Policy
Design and Development Pricing Strategies
Packaging Price Change
Labelling
Branding
Place Promotion
Channel Strategy Promotion Mix
Channel Selection Advertising
Channel Conflict Personal Selling
Channel Cooperation Sales Promotion
Physical Distribution Publicity
Public Relations
2019-2020

Ch_11.indd 297 28-Feb-19 3:05:57 PM
BUSINESS STUDIES
298
of other products; LG Electronics 3. Place: Place or Physical Distribution

offers televisions, refrigerators, colour include activities that make firm’s
monitors for computers, etc; Amul products available to the target
offers a number of food products customers. Important decision areas
(Amul milk, ghee, butter, cheese, in this respect include selection of
chocolates, etc.). dealers or intermediaries to reach the
The concept of product relates customers, providing support to the
to not only the physical product as intermediaries (by way of discounts,
mentioned in the above examples but promotional campaigns, etc.). The
also the benefits offered by it from intermediaries in turn keep inventory
customer’s view point (for example of the firm’s products, demonstrate
toothpaste is bought for whitening them to potential buyers, negotiate
teeth, strengthening gums, etc.). price with buyers, close sales and
The concept of product also include also service the products after the
the extended product or what is sale. The other decision areas relate
offered to the customers by way to managing inventory, storage and
of after sales services, handling warehousing and transportation of
complaints, availability of spare parts goods from the place it is produced to
etc.These aspects are very important, the place it is required by the buyers.
particularly in the marketing of 4. Promotion: Promotion of products
consumer durable products (like and services include activities that
Automobiles, Refrigerators, etc.). The communicate availability, features,
important product decisions include merits, etc. of the products to the
deciding about the features, quality, target customers and persuade them to
packaging, labelling and branding of buy it. Most marketing organisations,
the products. undertake various promotional
2. Price: Price is the amount of money activities and spend substantial
customers have to pay to obtain amount of money on the promotion
the product. In case of most of the of their goods through using number
products, level of price affects the level of tools such as advertising, personal
of their demand. The marketers have selling and sales promotion techniques
not only to decide about the objectives (like price discounts, free samples,
of price setting but to analyse the etc.). A large number of decisions
factors determining the price and fix a are to be taken in each of the area
price for the firm’s products. Decisions specified above. For example, in the
have also to be taken in respect of respect of advertising it is important
discounts to customers, traders and to decide about the message, the
credit terms, etc. so that customers media to be used (example, print-
perceive the price to be in line with the media–newspaper, magazines, etc. the
value of the product. objections of customers, etc.).
2019-2020

Ch_11.indd 298 28-Feb-19 3:05:57 PM
Marketing
299
The success of a market offer will customer needs. Besides physical

depend on how well these ingredients objects, we also include services, ideas,
are mixed to create superior value for persons, and places in the concept of
the customers and simultaneously product. Thus, product may be defined
achieve their sale and profit objectives. as anything that can be offered to a
Let us say a firm would like to achieve market to satisfy a want or need. It is
necessary volume of sale at a cost that offered for attention, acquisition, use
will permit a desired level of profit. or consumption.
But so many alternative mixes can From the customer’s point of view,
be adopted by a firm to achieve this a product is a bundle of utilities, which
objectives. The issue before a firm then is purchased because of its capability
is to decide what would be the most to provide satisfaction of certain need.
effective combination of elements to A buyer buys a product or service for
achieve the given objectives. what it does for her or the benefit it
provides to her. There can be three
Product types of benefits a customer may
seek to satisfy from the purchase of a
In common parlance, the word
product, viz., (i) functional benefits, (ii)
‘product’, is used to refer only to the
psychological benefits, and (iii) social
physical or tangible attributes of a
benefits. For example, the purchase of
product. For example, we say we have
a motorcycle provides functional utility
bought a car or a pen or a Cell phone
of transportation, but at the same
or a tractor.
time satisfies the need for prestige and
Our decision to buy a product
esteem and provides social benefit by
is not only affected by its physical
the way of acceptance from a group,
qualities, but also by certain non-
by riding a motorbike. Thus, all these
tangible and psychological factors, e.g.,
aspects should be considered while
brand name, reputation, guaranty,
planning for a product.
packaging etc. Let us say, when a
It is customer for companies to
person buys a car, he/she is not
review the progress of their present
just buying a few nuts and bolts,
products and constantly look for
an engine, four wheels and so on.
opportunities of diversifying into
Rather he/she is buying a means of
never areas.
transport, a status symbol, guarantees
and warranties accompanying the
Let Us Do It
product, image of the company and
many other such attributes. Thus, Enlist the functional, psychological
in marketing, product is a mixture and social benefits that can
of tangible and intangible attributes, be achieved by the purchase of
which are capable of being exchanged (i) Personal computer, (ii) Colour
for a value, with ability to satisfy television, (iii) Wrist watch.
2019-2020

Ch_11.indd 299 28-Feb-19 3:05:57 PM
BUSINESS STUDIES
300
Classification of Products important factors: (A) the extent of

shopping efforts involved, and (B)
Products may broadly be classified
durability of the product. These have
into two categories — (i) consumers’
been explained as below:
products, and (ii) industrial products.
The consumer products may further A. Shopping Efforts Involved
be classified into different groups, as On the basis of the time and effort
detailed below: buyers are willing to spend in the
purchase of a product, we can classify
Consumer Products the consumer product into the following
Products, which are purchased by three categories as here under:
the ultimate consumers or users for 1. Convenience Products: Those
satisfying their personal needs and consumer products, which are
desires are referred to as consumer purchased frequently, immediately and
products. For example, soap, edible with least time and efforts are referred
oil, eatables, textiles, toothpaste, fans, to as convenience goods. Examples
etc. which we use for our personal and of such products are cigarettes,
non-business use are consumer goods. ice creams, medicines, newspaper,
The consumer products have stationery items toothpaste. etc. These
been classified on the basis of two products have low unit-value and are
Products
Consumer Products Industrial Products
Durability Basis Shopping Efforts Involved
Non- Durable Services Conven- Shopping Speciality

Durable ience Products Products
Products
Classification of Products
2019-2020

Ch_11.indd 300 28-Feb-19 3:05:57 PM
Marketing
301
bought in small qualities. Some of (e) The competition in these products

the important characteristics of such is high as the supply is greater
products are: than the demand. The marketers
(a) These products are purchased at have, therefore, to heavily advertise
convenient locations, with least for these products; and
efforts and time; (f) Sales promotion schemes or short-
(b) Convenience products have a term incentives such as sales
regular and continuous demand, contests, discount offers, etc play
as these generally come under the an important role in the marketing
category of essential products; of such products.
(c) These products have small unit 2. Shopping Products: Shopping
of purchase and low prices. For products are those consumer goods, in
example the eggs are sold at Rs. the purchase of which buyers devote
28 per dozen and the customers considerable time, to compare the
purchase them in small numbers; quality, price, style, suitability, etc.,
(d) C o n v e n i e n c e p r o d u c t s h a v e at several stores, before making final
standardised price as most of these purchase. Some of the examples of
products are branded products; shopping products are clothes, shoes,
Convenience Products
2019-2020

Ch_11.indd 301 28-Feb-19 3:05:58 PM
BUSINESS STUDIES
302
jewellery, furniture, radio, television, persuasive effort is needed to

etc. The important characteristics of convince the buyers to purchase
shopping products are as below: them.
(a) T h e s h o p p i n g p r o d u c t s a r e 3. Speciality Products: Speciality
generally of durable nature, i.e., products are those consumer goods
they normally survive many uses; which have certain special features
(b) The unit price as well as profit because of which people make special
margin of shopping products is efforts in their purchase. These
generally high; products are such, which have reached
(c) As these products have high unit a brand loyalty of the highest order,
price, customers compare the with a significant number of buyers.
products of different companies The buyers are willing to spend a lot
before making selection; of time and efforts on the purchase of
Shopping Products
(d) Purchases of shopping products such products. For example, if there

are generally pre-planned and is a rare collection of artwork or of
there is little degree of impulse antiques, some people may be willing to
buying in these products; and spend a lot of shopping effort and travel
(e) R e t a i l e r s g e n e r a l l y p l a y a n long distance to buy such products. In
important role in the sale our day-to-day life, we see people going
of shopping products as lot of to a particular hair-cutting saloon or
2019-2020

Ch_11.indd 302 28-Feb-19 3:05:58 PM
Marketing
303
restaurant, or a tailor. The demand B. Durability of Products

for these goods is relatively inelastic, On the basis of their durability,
i.e., even if the price is increased, the the consumer products have been
demand does not come down. Some classified into three categories—
of the important characteristics of the Durable, Non-durable and Services.
speciality products may be summed 1. N o n - d u r a b l e P r o d u c t s : The
up as follows: consumer products which are normally
(a) The demand for speciality products consumed in one or few uses are
is limited as relatively small number called non-durable products. For
of people buy these products; example, we purchase products like
(b) These products are generally costly toothpaste, detergents, bathing soap
and their unit price is very high; and stationary products etc. From
the marketing point of view, these
(c) These products are available for products generally command a small
sale at few places as the number of margin, should be made available in
customers is small and are willing many locations and need to be heavily
to take extra efforts in the purchase advertised.
of these products;
2. Durable Products: Those tangible
(d) An aggressive promotion is required consumer products which normally
for the sale of speciality products, survive many uses, for example,
in order to inform people about refrigerator, radio, bicycle, sewing
their availability, features, etc.; and machine and kitchen gadgets are
(e) After sales services are very referred to as durable products. These
important for many of the speciality goods are generally used for a longer
products. period, command a higher per unit
Speciality Products
2019-2020

Ch_11.indd 303 28-Feb-19 3:05:58 PM
BUSINESS STUDIES
304
margin, require greater personal- other products. The examples of such

selling efforts, guarantees and after products are raw materials, engines,
sales services, on the part of the seller. lubricants, machines, tools, etc. In
3. Services: The durable and non- other words, industrial products are
durable goods are tangible in the sense meant for non-personal and business
that these have a physical existence use for producing other products.
and can be seen and touched. Services The market for industrial products
are intangible in form. By services consists of manufacturers, transport
we mean those activities, benefits or agencies, banks and insurance
satisfactions, which are offered for companies, mining companies
sale, e.g., dry cleaning, watch repairs, and public utilities. The important
hair cutting, postal services, services characteristics of industrial products
offered by a doctor, an architect and are given below:
a lawyer. Some of the distinguishing 1. Number of Buyers: As compared to
characteristics of services are as the consumer products, the numbers
follows: of buyers of industrial products are
(a) By their very nature, services are limited. For example, sugarcane is
intangible, i.e., we can not see, feel purchased by few producers of sugar,
or touch them; but sugar, which is a consumer
(b) A service is inseparable from its product, is purchased by crores of
source. That means we cannot people in our country.
separate the service from the 2. Channel Levels: Because of
person providing the service; limited number of buyers, the sale of
(c) The services cannot be stored. They industrial products is generally made
are highly perishable. For example, with the help of shorter channels of
if a tailor does not work for one distribution, i.e., direct selling or one
week, the services he would have level channel.
provided during such period go 3. Geographic Concentration:
waste; and Because of location of industries at
(d) Services are highly variable as certain points or regions, industrial
their type and quality depends on markets are highly concentrated,
the person providing them. That geographically. For instance, the
is why, there is a difference in the demand for power loom comes from
extent of satisfaction we get from Bombay, Sholapur, Bangalore,
the services provided by different etc. where the textile industry is
people. concentrated in our country.
4. Derived Demand: The demand for
Industrial Products industrial products is derived from the
Industrial products are those products, demand for consumer products. For
which are used as inputs in producing example, the demand for leather will
2019-2020

Ch_11.indd 304 28-Feb-19 3:05:58 PM
Marketing
305
be derived from demand for shoes and Classification

other leather products in the market.
The industrial goods are classified into
5. Role of Technical Considerations: the following major categories:
Technical considerations assume
(i) Materials and Parts: These
greater significance in the purchase
include goods that enter
of industrial products because these
the manufacture’s products
products are complex products, bought
completely. Such goods are of
for use in business operations.
two types: (a) Raw material:
6. Reciprocal Buying: Some big including farm products like
companies from basic industries like cotton, sugar cane, oil seed
oil, steel, rubber, and medicines resort and natural products such as
to the practice of reciprocal buying. minerals (say crude petroleum,
For example, Ashok Leyland may buy iron ore), fish and lumber; and
tyres and tubes from MRF, which in (b) manufactured material and
turn may buy trucks from Leyland, parts. These are again of two
whenever it feels the need for the types – component materials
same. like glass, iron, plastic and
7. Leasing Out: A growing trend in component parts such as tyre,
industrial product market is to lease electric bulb, steering, and
out rather than to purchase the battery.
products on outright basis because of (ii) Capital Items: These are such
the heavy price of these products. goods that are used in the
Industrial Goods
Materials and Capital Items Supplies and

Parts Business Services
Raw Manufactured Installations Equipments Maintanence Operating

Material Material and Parts and Repair Supplies
items
Farm Natural Component Component

Products Products Material Parts
Classification of Industrial Goods
2019-2020

Ch_11.indd 305 28-Feb-19 3:05:58 PM
BUSINESS STUDIES
306
production of finished goods. products will be marketed under a

These include: (a) installations brand name or a generic name. Generic
like elevators, mainframe name refers to the name of the whole
Computers, and (b) equipments class of the product. For example, a
like Hand Tools, Personal book, a wristwatch, tyre, camera, toilet
Computer, Fax Machines, etc. soap, etc. We know that a camera is
(iii) Supplies and Business Services: a lens surrounded by plastic or steel
These are short lasting goods from all sides and having certain other
and services that facilitate features such as a flash gun and so on.
developing or managing Similarly book is a bunch of papers,
the finished product. These which are in a bound form, on which
include: (a) maintenance and some useful information about a
repair items like Paint, Nails, subject is printed. Thus, all products
etc., and (b) operating supplies having these characteristics would be
like Lubricant, Computer called by the generic name such as
Stationary, Writing Paper, etc. camera or book.
If products were sold by generic
The difference in the nature of names, it would be very difficult for the
consumer products and industrial marketers to distinguish their products
products is important because of the from that of their competitors. Thus,
fact that the buyers of the two sets most marketers give a name to their
of products have different buying product, which helps in identifying and
motives and have different attitudes distinguishing their products from the
and use different approaches in the competitors’ products. This process of
purchase of the products. For example, giving a name or a sign or a symbol
an industrial buyer is expected to etc., to a product is called branding.
be more rational who will study the The various terms relating to branding
cost of different available brands, are as follows:
their technical specifications and the
1. B r a n d : A b r a n d i s a n a m e ,
goodwill of the supplier. Whereas, the
term, sign, symbol, design or some
buyer of a consumer product may be
combination of them, used to identify
more impulsive and emotional who is
the products—goods or services of
susceptible to advertising and various
one seller or group of sellers and to
sales promotion schemes.
differentiate them from those of the
competitors. For example, some of the
Branding common brands are Bata, Lifebuoy,
One of the most important decisions Dunlop, and Parker. Brand is a
that a marketer has to take in the area comprehensive term, which has two
of ‘product’ is in respect of branding. components—brand name and brand
He has to decide whether the firm’s mark.
2019-2020

Ch_11.indd 306 28-Feb-19 3:05:58 PM
Marketing
307
2. Brand Name: That part of a brand, Though branding adds to the cost
which can be spoken, is called a brand e.g., to the cost of packaging, labelling,
name. In other words, brand name is legal protection, and promotion, it
the verbal component of a brand. provides several advantages to the
3. Brand Mark: That part of a brand sellers as well as the consumers.
which can be recognised but which
Advantages to the Marketers
is not utterable is called brand mark.
It appears in the form of a symbol, (i) E n a b l e s M a r k i n g P r o d u c t
design, distinct colour scheme or Differentiation: Branding helps a
lettering. firm in distinguishing its product
4. Trade Mark: A brand or part of a from that of its competitors. This
brand that is given legal protection is enables the firm to secure and
called trademark. The protection is control the market for its products.
given against its use by other firms. (ii) Helps in Advertising and Display
Thus the firm, which got its brand Programmes: A brand aids a firm
registered, gets the exclusive right for in its advertising and display
its use. In that case, no other firm can programmes. Without a brand
use such name or mark in the country. name, the advertiser can only
Perspectives of Brands and Branding

Branding is creating a corporate brand identity for consumer, and getting that
brand identity imprinted on the minds of consumer, and this requires brand
positioning and brand management.
A brand today is an entity (product. service, company, person, technology, etc.),
that offers a set of value exchange measures between what the owner/market
seeks and the price he is willing to pay for.
It has always seemed to me that your brand is formed primarily, not by what your
company says about itself, but what the company does.
— Jeff Bezos
A product is something made in a factory; a brand is something that is bought
by the customer. A product can be copied by a competitor; a brand is unique. A
product can be quickly outdated; a successful brand is timeless.
— Stephen King
Your brand’s power lies in dominance. It is better to have 50% of one market,
instead of 10% of five markets.
— Al Ries
Your brand image is primarily an emotional construct. Emotion is probably
always more powerful in swaying people than reason. but people like to be able
to rationalise their choices.
— Drayton Bird
Source: Adopted from Effective Executive, 2006
2019-2020

Ch_11.indd 307 28-Feb-19 3:05:58 PM
BUSINESS STUDIES
308
create awareness for the generic example, if a person is satisfied with

product and can never be sure of a particular brand of a product, say
the sale for his product. tea leaves or detergent soap, he
(iii) Differential Pricing: Branding need not make a close inspection
enables a firm to charge different every time, he has to buy that
price for its products than that product. Thus, branding greatly
charged by its competitors. This is facilitates repeat purchase of the
possible because if customers like products.
a brand and become habitual of (ii) Ensures Quality: Branding ensures
it, they do not mind paying a little a particular level of quality of the
higher for it. product. Thus, whenever there is
(iv) Ease in Introduction of New Product: any deviation in the quality, the
If a new product is introduced customers can have recourse to
under a known brand, it enjoys the manufacturer or the marketer.
the reflected glory of the brand and This builds up confidence of the
is likely to get off to an excellent customers and helps in increasing
start. Thus, many companies with his level of satisfaction.
established brand names decide (iii) Status Symbol: Some brands
to introduce new products in the become status symbols because
same name. For example, Food of their quality. The consumers of
Specialties Ltd. had a successful those brands of products feel proud
brand Maggie (Noodles), it extended of using them and adds to the level
this name to many of its new of satisfaction of the customers.
products introduced such as Tomato
Ketchup, Soups, etc. Similarly Characteristics of Good Brand Name
Samsung extended the brand name Choosing the right brand name is
of its Television to Washing Machines not an easy decision. What makes
and other durable products, like this decision important is the fact
Microwave oven. that once a brand name is chosen
and the product is launched in the
Advantages to Customers
market, changing the brand name is
(i) Helps in Product Identification: very difficult. So, getting it right the
Branding helps the customers first time is very essential. Following
in identifying the products. For are some of the considerations, which
Activity
Visit a retail store in your locality and prepare a list of the (i) number of brands
available, (ii) the price of each brand, and (iii) most selling brand in respect of any
three consumer non-durable products such as Toilet Soap, Detergent Powder,
Cooking, Oil, Toothpaste, Tea, etc. used in your family. Which brand of each of
the product selected is used in your family? Give reasons.
2019-2020

Ch_11.indd 308 28-Feb-19 3:05:58 PM
Marketing
309
should be kept in mind while choosing are added to the product line.
a brand name. (vi) It should be capable of being
(i) The brand name should be registered and protected legally.
short, easy to pronounce, spell,
(vii) C h o s e n n a m e s h o u l d h a v e

recognise and remember e.g.,
staying power i.e., it should not
Ponds, VIP, Rin, Vim, etc.
get out of date.
(ii) A brand should suggest the
product’s benefits and qualities. Packaging
It should be appropriate to the
product’s function. One of the most important
developments affecting the business
(iii) A b r a n d n a m e s h o u l d b e

world in recent years has been in the
distinctive.
area of packaging. Many products,
(iv) The brand name should be which we thought could never lend
adaptable to packing or labelling themselves to packing because of
requirements, to different their nature, have been successfully
advertising media and to different packed e.g., Pulses, Ghee, Milk, Salt,
languages. Cold Drinks, etc. Packaging refers to
(v) T h e b r a n d n a m e s h o u l d the act of designing and producing
be sufficiently versatile to the container or wrapper of a product.
accommodate new products, which Packaging plays a very important role
Levels of Packaging
2019-2020

Ch_11.indd 309 28-Feb-19 3:05:59 PM
BUSINESS STUDIES
310
in the marketing success or failure Importance of Packaging

of many products, particularly the
Packaging has acquired great
consumer non-durable products. In
significance in the marketing of goods
fact if one makes an analysis of the
and services, because of following
reasons for the success of some of reasons:
the successful products in the recent
past, it can be noted that packaging (i) R i s i n g S t a n d a r d s o f H e a l t h
and Sanitation: Because of the
has played its due role. For example,
increasing standards of living
it was one of the important factors in
in the country, more and more
the success of products like Maggie’s
people have started purchasing
Noodles, Uncle Chips or Crax wafers.
packed goods as the chances of
adulteration in such goods are
Levels of Packaging
minimised.
There can be three different levels of (ii) Self Service Outlets: The self-service
packaging. These are as below: retail outlets are becoming very
1. Primary Package: It refers to the popular, particularly in major cities
product’s immediate container. In and towns. Because of this, some
some cases, the primary package is of the traditional role assigned
kept till the consumer is ready to use to personal selling in respect of
the product (e.g., plastic packet for promotion has gone to packaging.
socks); whereas in other cases, it is (iii) Innovational Opportunity: Some
kept throughout the entire life of the of the recent developments in the
product (e.g., a toothpaste tube, a area of packaging have completely
match box, etc.). changed the marketing scene
2. Secondary Packaging: It refers to in the country. For example,
additional layers of protection that are milk can now be stored for 4-5
kept till the product is ready for use, days without refrigeration in
e.g., a tube of shaving cream usually the recently developed packing
comes in a card board box. When materials. Similarly, in the area of
consumers start using the shaving pharmaceuticals, soft drinks, etc.,
cream, they will dispose off the box lots of new innovations have come
but retain the primary tube. in respect of packaging. As a result,
3. Transportation Packaging: It refers the scope for the marketing of such
to further packaging components products has increased.
necessary for storage, identification (iv) Product Differentiation: Packaging
or transportation. For example a is one of the very important means
toothpaste manufacturer may send the of creating product differentiation.
goods to retailers in corrugated boxes The colour, size, material etc., of
containing 10, 20, or 100 units. package makes real difference
2019-2020

Ch_11.indd 310 28-Feb-19 3:05:59 PM
Marketing
311
in the perception of customers than advertising. In self-service

about the quality of the product. stores, this role of packaging
For example, by looking at the becomes all the more important.
package of a product say Paint
or Hair Oil, one can make some Labelling
guess about quality of the product A simple looking but important task
contained in it. in the marketing of goods relates to
designing the label to be put on the
Functions of Packaging package. The label may vary from a
As stated above, packaging performs a simple tag attached to the product
number of functions in the marketing (such as in case of local unbranded
of goods. Some of the important products like sugar, wheat, pulses,
functions are as follows: etc.) indicating some information
about the quality or price, to complex
(i) Product Identification: Packaging
graphics that are part of the package,
greatly helps in identification of the
like the ones on branded products.
products. For example, Colgate in
Lables are useful in providing detailed
red colour, or Ponds cream jar can
information about the product, its
be easily identified by its package.
contents, method of use, etc. The
(ii) Product Protection: Packaging various functions performed by a label
protects the contents of a product are as follows:
from spoilage, breakage, leakage, 1. Describe the Product and Specify
pilferage, damage, climatic effect, its Contents: Let us look at some of
etc. This kind of protection the labels of the products used by us
is required during storing, in our day to day life. The label on
distribution and transportation of the package of a local tea company
the product. describes the company as ‘Mohini
(iii) Facilitating Use of the Product: Tea Company, an ISO 9001:200C
The size and shape of the package Certified Company’; a popular brand
should be such that it should be of Prickly Heat Powder, describes
convenient to open, handle and how the product provides relief from
use for the consumers. Cosmetics, prickly heat and controls bacterial
medicines and tubes of toothpastes growth and infection, giving caution
are good examples of this. forbidding its application on cuts
(iv) Product Promotion: Packaging is and wounds. Package of fast food
also used for promotion purposes. products like ready to eat Dosa, Idli
A startling colour scheme, or Noodles, describe the procedure of
photograph or typeface may be cooking these products; the Package of
used to attract attention of the a toothpaste brand lists the ‘Ten Teeth
people at the point of purchase. and Gum Problems’, which the product
Sometimes it may work even better claims to fight with its ‘Complete
2019-2020

Ch_11.indd 311 28-Feb-19 3:05:59 PM
BUSINESS STUDIES
312
Germicheck Formula’; the Package attention and give reason to purchase.

of a brand of Coconut Oil describes We see many product labels providing
the product as pure coconut oil with promotional messages for example, the
Heena, Amla, Lemon and specifies how pack of a popular Amla Hair Oil states,
these are good for Hair. Thus, one of ‘Baalon mein Dum, Life mein Fun’.
the most important functions of labels The label on the package of a brand
is to describe the product, its usage, of Detergent Powder says, ‘Keep cloth
cautions in use, etc. and specify its look good and your machine in top
contents. condition’. Labels play important role
2. Identification of the Product or in sales promotional schemes launched
Brand: The other important function by companies. For example the label
performed by labels is to help in on the package of a Shaving Cream
identifying the product or brand. mentions, ‘40% Extra Free’ or package
For example, the brand name of any of a toothpaste mentioning, ‘Free
product, say Biscuits or Potato Chips Toothbrush Inside’, or ‘Save Rs15’.
imprinted on its package helps us to 5. Providing Information Required
identify, from number of packages, by Law: Another important function
which one is our favourite brand. Other of labeling is to provide information
common identification information required by law. For example,
provided by the labels include name packaged food articles must have list
and address of the manufacturer, net of ingredients declaration regarding
weight when packed, manufacturing vegetarian or non-vegetarian food
date, maximum retail price and Batch additives and date of manufacturing or
number. packing on the label. Such information
3. Grading of Products: Another is required on processed foods, drugs
important function performed by and tobacco products. In case of
labels is to help grading the products hazardous or poisonous material,
into different categories. Sometimes appropriate safety-warning need to be
marketers assign different grades to put on the label.
indicate different features or quality
Thus, labels perform number
of the product. For example, a popular
of important functions relating to
brand of Hair Conditioners comes in
communicating with the potential
different categories for different hair,
buyers and promoting the sale of the
say for ‘normal hair’ and for other
products.
categories. Different type of tea is sold
by some brands under Yellow, Red and
Green Label categories. Pricing
4. Helps in Promotion of Products: When a product is bought, some
An important function of label is to money is paid for it. This money
aid in promotion of the products. A represent the sum of values that
carefully designed label can attract consumers exchange for the benefit
2019-2020

Ch_11.indd 312 28-Feb-19 3:05:59 PM
Marketing
313
of having or using the prdocut and is This includes the cost of producing,
referred to as the price of the product. distributing and selling the product.
Similarly, money paid for the services The cost sets the minimum level or the
such as fare for the transport service, floor price at which the product may
premium for an insurance policy, and be sold. Generally all marketing firms
fee to a doctor for his medical advise strive to cover all their costs, at least
represent the price of these services. in the long run. In addition, they aim
Price may therefore be defined as the at earning a margin of profit over and
amount of money paid by a buyer (or above the costs. In certain circumstance,
received by a seller) in consideration of for example, at the time of introducing
the purchase of a product or a service. a new product or while entering a new
Pricing occupies an important market, the products may be sold
place in the marketing of goods and at a price, which does not cover all
services by a firm. No product can the costs. But in the long run, a firm
be launched without a price tag or cannot survive unless at least all its
at least some guidelines for pricing. costs are covered.
Pricing is often used as a regulator of There are broadly three types of
the demand of a product. Generally, if costs: viz., Fixed Costs, Variable Costs
the price of a product is increased, its and Semi Variable Costs. Fixed costs
demand comes down, and vice-versa. are those costs, which do not vary with
Pricing is considered to be an the level of activity of a firm say with
effective competitive weapon. In the the volume of production or sale. For
conditions of perfect competition, example, rent of a building or salary
most of the firms compete with each of a sales manager remains the same
other on the basis of this factor. It is whether 1000 units or 10 units are
also the single most important factor produced in a week.
affecting the revenue and profits of a Those costs which vary in direct
firm. Thus, most marketing firms give proportion with the level of activity
high importance to the fixation of price are called variable costs. For example,
for their products and services. the costs of raw material, labour and
power are directly related with the
Factors Affecting Price quantity of goods produced. Let us say,
Determination if the cost of wood for manufacturing
one chair comes to Rs.100 the cost of
There are number of factors which wood for 10 chairs would be Rs. 1000.
affect the fixation of the price of a Obviously, there will be no cost of wood
product. Some of the important factors if no chair is produced.
in this regard are discussed as below: Semi variable costs are those costs
1. Product Cost: One of the most which vary with the level of activity
important factor affecting price but not in direct proportion with it.
of a product or service is its cost. For example, compensation of a sales
2019-2020

Ch_11.indd 313 28-Feb-19 3:05:59 PM
BUSINESS STUDIES
314
person may include a fixed salary of better position to fix higher prices.
say Rs. 10,000 plus a commission of 3. Extent of Competition in the
5 per cent on sales. With an increase Market: Between the lower limit and
in the volume of sales, the total the upper limit where would the price
compensation will increase but not in settle down? This is affected by the
direct proportion with the change in nature and the degree of competition.
the volume of sale. The price will tend to reach the upper
Total Costs are the sum total of the limit in case there is lesser degree of
fixed, variable and semi-variable costs competition while under conditions of
for the specific level of activity, say free competition, the price will tend to
volume of sales or quantity produced. be set at the lowest level.
2. The Utility and Demand: While Competitors’ prices and their
the product costs set the lower limits anticipated reactions must be
of the price, the utility provided by the considered before fixing the price
product and the intensity of demand of of a product. Not only the price but
the buyer sets the upper limit of price, the quality and the features of the
which a buyer would be prepared competitive products must be examined
to pay. In fact the price must reflect carefully, before fixing the price.
the interest of both the parties to the 4. Government and Legal Regulations:
transaction—the buyer and the seller. In order to protect the interest of public
The buyer may be ready to pay up to against unfair practices in the field of
the point where the utility from the price fixing, Government can intervene
product is at least equal to the sacrifice and regulate the price of commodities.
made in terms of the price paid. The Government can declare a product
seller would, however, try to at least as essential product and regulate its
cover the costs. According to the law of price. For example, the cost of a drug
demand, consumers usually purchase manufactured by a company having
more units at a low price than at a monopoly in the production of the same
high price. come to Rs 20 per strip of ten and the
The price of a product is affected buyer is prepared to pay any amount
by the elasticity of demand of the for it, say Rs 200. In the absence of any
product. The demand is said to be competitor, the seller may be tempted to
elastic if a relatively small change in extort the maximum amountof Rs 200
price results in large change in the for the drug and intervene to regulate
quantity demanded. Here numerically, the price. Usually in such a case, the
the price elasticity is greater than one. Government does not allow the firms to
In the case of inelastic demand, the charge such a high price and intervene
total revenue increases when the price to regulate the price of the drug. This can
is increased and goes down when the be done by the Government by declaring
price is reduced. If the demand of a the drug as essential commodity and
product is inelastic, the firm is in a regulating its price.
2019-2020

Ch_11.indd 314 28-Feb-19 3:05:59 PM
Marketing
315
5. Pricing Objectives: Pricing objectives 6. Marketing Methods Used: Price

are another important factor affecting fixation process is also affected by
the fixation of the price of a product or a other elements of marketing such
service. Generally the objective is stated as distribution system, quality of
to be maximise the profits. But there salesmen employed, quality and
is a difference in maximising profit in amount of advertising, sales promotion
the short run and in the long run. If efforts, the type of packaging, product
the firm decides to maximise profits in differentiation, credit facility and
the short run, it would tend to charge customer services provided. For
maximum price for its products. But if example, if a company provides free
it is to maximise its total profit in the home delivery, it has some of flexibility
long run, it would opt for a lower per in fixing prices. Similarly, uniqueness
unit price so that it can capture larger of any of the elements mentioned
share of the market and earn greater above gives the company a competitive
profits through increased sales. freedom in fixing prices of its products.
Apart from profit maximisation,
the pricing objectives of a firm may Physical Distribution
include:
(a) Obtaining Market Share Leadership: The fourth important element
If a firms objective is to obtain larger of marketing mix is the physical
share of the market; it will keep the distribution of products and services.
price of its products at lower levels It is concerned with making the goods
so that greater number of people are and services available at the right
attracted to purchase the products; place, so that people can purchase
(b) Surviving in a Competitive Market: the same. There are two important
If a firm is facing difficulties in decisions relating to this aspect—
surviving in the market because of one regarding physical movement of
intense competition or introduction goods from producers to consumers
of a more efficient substitute or users and two, regarding the
by a competitor, it may resort channels or using intermediaries in
to discounting its products or the distribution process. These are
running a promotion campaign to described as follows:
liquidate its stock; and
Channels of Distribution
(c) A t t a i n i n g P r o d u c t Q u a l i t y
Leadership: In this case, normally In case of large number of consumer
higher prices are charged to cover products, the potential buyers are
high quality and high cost of scattered over a wide geographical
Research and Development. area. In order to contact these
Thus, the price of a firm’s products people efficiently and effectively, it is
and services is affected by the pricing important to take the help of number
objective of the firm. of intermediaries as contacting them
2019-2020

Ch_11.indd 315 28-Feb-19 3:05:59 PM
BUSINESS STUDIES
316
Channels of Distribution used for a Consumer Product
directly may not be cost effective and goods or services as it moves from
may be difficult even otherwise. For the producers to the consumers. In
example, a manufacturer of detergent other words, channel refers to a team
powder in Gujarat would find it very of merchants, agents, and business
difficult to directly approach customers, institutions that combine physical
say in Delhi, Thiruvananthapuram, movement and title movement of
Bhuvaneshwar, Hyderabad Srinagar products to reach specific destinations.
and other far off places. Therefore, Mostly goods and services are
he/she would supply a large quantity distributed through a network of
of his/her product to a big merchant, marketing channels. For example we
say in Hyderabad. This big merchant buy merchandise of our need such
would then supply detergent powder as salt, bulb, tea, sugar, soap, paper,
to relatively small sellers in various books, flour, etc., from retail sellers.
towns of Hyderabad. These sellers The channels bring economy of
would, in turn, resell the goods to effort. This can be better understood
customers. In this manner, goods with the help of an example. Let us
are distributed from the place of say you have to buy four things,
production to the place of consumption. viz., Sugar, Bulb, Coffee and Ink.
These people, institutions, merchants, Most probably you would walk into a
and functionaries, who take part General Merchant’s Shop and buy all
in the distribution function, are the articles form one place. Imagine
called ‘Channels of Distribution’. what would happen if there were no
(see figure on channels) middlemen or general merchants
Channels of Distribution are set of available. In that case you would have
firms and individuals that take title, or to buy directly from the manufacturers
assist in transferring title, to particular of these products. You will have to
2019-2020

Ch_11.indd 316 28-Feb-19 3:05:59 PM
Marketing
317
make four contacts, each with the Functions of Distribution

producer of Sugar, Bulb, Coffee and Channels
Ink. Compared to this, there was Channels of distribution smoothen the
only one contact when all the things flow of goods by creating possession,
were bought from the same general place and time utilities. They facilitate
merchant. Now let us assume that movement of goods by overcoming
there are four customers needing various time, place and possession
the same four articles. In all sixteen barriers that exist between the
contacts would have to be made. In manufacturers and consumers. The
case middleman are used, as shown important functions performed by
in the part II of the figure, only eight middlemen are as follows:
contacts could be needed. Thus, use
1. Sorting: Middlemen procure
of middlemen brings economy of effort.
supplies of goods from a variety of
This situation is illustrated in the
sources, which is often not of the same
preceeding figure.
quality, nature, and size. For example,
Apart from the economy of
a wholesaler of cashew nuts may
effort, middlemen help to cover large
procure a large quantity from different
geographical area and bring efficiency
cashew nut producing areas, which
in distribution, including transportation,
would contain nuts of varied quality
storage and negotiation. They bring
and sizes. He/She then sorts the nuts
convenience to customers as they
into homogenous groups on the basis
make various items available at one
of the size or quality.
store and also serve as authentic
source of market information as they 2. Accumulation: This function
are in direct contact with the customer. involves accumulation of goods into
Economy of Efforts with the use of Channels
2019-2020

Ch_11.indd 317 28-Feb-19 3:05:59 PM
BUSINESS STUDIES
318
larger homogeneous stocks, which price, quality, guarantee and other

help in maintaining continuous flow related matters with customers so
of supply. that transfer of ownership is properly
3. Allocation: Allocation involves affected.
breaking homogenous stock into 7. Risk Taking: In the process of
smaller, marketable lots. For example, distribution of goods the merchant
once cashew nuts are graded and large middlemen take title of the goods
quantities are built, these are divided and thereby assume risks on account
into convenient packs of say 1 kg, of price and demand fluctuations,
500 gms and 250 gms, to sell them to spoilage, destruction, etc.
different types of buyers.
Types of Channels
4. Assorting: Middlemen build
assortment of products for resale. There A manufacturer may choose from
is usually a difference between the direct distribution to indirect
product lines made by manufacturers distribution and from a short channel
and the assortment or combinations consisting of few intermediaries to a
desired by the users. For example, a long channel of distribution consisting
cricket player may need a bat, a ball, of large number of middlemen. Each
wickets, gloves, helmet, a T-shirt, form of channel network differs in
and a pair of shoes. Perhaps no number and type of middlemen
one manufacturer produces these involved. The major types of channels
products in desired combination. are as follows:
Middlemen procure variety of goods
Direct Channel (Zero Level)
from different sources and deliver
them in combinations desired by The most simple and the shortest mode
customers. of distribution is direct distribution,
where in the goods are made directly
5. Product Promotion: Mostly
available by the manufacturers to
advertising and other sales
customers, without involving any
promotion activities are organised
intermediary. This is also called zero
by manufacturers. Middlemen also
level channel. A straight and direct
participate in certain activities such
relationship is established between
as demonstrations, special displays, the manufacturer and the customer.
contests, etc., to increase the sale of For example, when a manufacturer
products. sells his goods through his own retail
6. Negotiation: Channels operate outlets (e.g., Mc Donald, Bata); it is
with manufacturers on the one hand referred to as direct channel. Similarly,
and customers one, the other. Arriving mail order selling, internet selling and
at deals that satisfy both the parties selling through own sales force, (e.g.,
is another important function of Eureka Forbes) are example of direct
the middlemen. They negotiate the selling or zero level channel.
2019-2020

Ch_11.indd 318 28-Feb-19 3:05:59 PM
Marketing
319
(i) Direct Channel (zero level)
Manufacturer Customer
Indirect Channel
(ii) One level Channel
Manufacturer Retailer Customer
(iii) Two level Channel
Manufacturer Wholesaler Retailer Customer
(iv) Three level Channel
Manufacturer Agent Wholesaler Retailer Customer
Types of Channels
Indirect Channels 2. Manufacturer-Wholesaler-

When a manufacturer employs one or Retailer-Consumer (Two Level
more intermediary to move goods from Channel): This is the most commonly
adopted distribution network for
the point of production to the point of
most consumer goods like soaps, oils,
consumption, the distribution network
clothes, rice, sugar and pulses. Here
is called indirect. This may take any of
the wholesaler and retailer function
the following forms: as connecting links between the
1. Manufacturer-Retailer Consumer manufacturer and consumer. Use of
(One Level Channel): In this form two middlemen in the channel network
of arrangement one intermediary enables the manufacturer to cover a
i.e., retailers is used between the larger market area.
manufacturers and the customers. That 3. Manufacturer-Agent-Wholesaler-
is, goods pass from the manufacture Retailer-Consumer (Three Level
to the retailers who, in turn, sell them Channel): In this case, manufactures
to the final users. For example, Maruti use their own selling agents or brokers
Udyog sells its cars and vans through who connect them with wholesalers
company approved retailers. This type and then the retailers. Thus, one more
of distribution network enables the level is added to the levels discussed in
manufacturers to cover wide area of the proceeding arrangement. It is done
market while retaining control over particularly when the manufacturer
the Channels. carries a limited product line and has
2019-2020

Ch_11.indd 319 28-Feb-19 3:06:00 PM
BUSINESS STUDIES
320
to cover a wide market. An agent in like toiletry products (e.g., soap,

each major area is appointed, who in toothpaste, hair oil etc.), groceries
turn contact the wholesalers. (vegetable oil, tea leaf etc.), fabrics
require longer channels to reach wide
Factors Determining Choice of spread consumers.
Channels If the unit value of a product is low as
Choice of appropriate channel in case of most convenience products,
of distribution is a very important long channels are preferred while in
marketing decision, which affects case of high value products, shorter
the performance of an organisation. channels may be used. Similarly, in
Whether an organisation will adopt direct case of complex products requiring
marketing channels or long channels technical details as in case of most
involving number of intermediaries industrial or engineering products,
is a strategic decision. The choice of short channels are preferred but if
channels depends on various factors, the product is a non-complex one, it is
which are discussed as follows: sold through long channels, involving
1. Product Related Factors: number of intermediaries.
The important product related 2. Company Characteristics: The
considerations in deciding the important company characteristics
channels include whether the product affecting the choice of channels of
is an industrial or a consumer product, distribution include the financial
whether it is a perishable or a non- strength of the company and the
perishable product, what is the unit degree of control it wants to hold
value of the product and the degree of on other channel members. Direct
complexity of the product. selling involves lot of funds to be
Industrial products are usually invested in fixed assets say for starting
technical, made to order and expensive own retail outlets or engaging large
products purchased by few buyers. number of sales force. Indirect selling
These products require short channels through intermediary does not involve
i.e., direct channel or involving few deployment of huge funds on these
middlemen. aspects. Thus, if the firm has plenty of
Consumer products, on the other funds it may go for direct distribution.
hand, are usually standardised, less If spare funds are not available, it may
expensive, less bulky, non-technical go for indirect channels.
and frequently bought products. These Similarly if the management want
can be better distributed by long to have greater control on the channel
network of channels, involving many members, short channels are used but
middlemen. Perishable products like if the management do not want more
fruits, vegetables, and dairy products control over the middlemen, it can go
are best sold through short channels, in for longer channel or large number
while non-perishable products of intermediaries.
2019-2020

Ch_11.indd 320 28-Feb-19 3:06:00 PM
Marketing
321
3. Competitive Factors: The choice large number of intermediaries may be

of channel is also affected by the used. But if the size of order is large,
channel selected by competitors in direct channels may be used.
the same industry. If the competitor’s 5. Environmental Factors: Other
have selected a particular channel say important factors affecting the choice
Chemist shops for the sale of toiletry of channels of distribution include
products like hair oil, the other firm environmental factor such as economic
may also like to select the similar condition and legal constraints. In a
channel. In some cases producers depressed economy marketers use
may want to avoid the channels used shorter channels to distribute their
by competitors. For example if other goods in an economical way.
cosmetic producers have chosen
big retail stores for the sale of their Physical Distribution
products, a particular firm may like
Once goods are manufactured,
to adopt door to door selling. Thus,
packaged, branded, priced, and
it will depend upon the policy of the
promoted, these must be made
firm –whether it wants to go with
available to customers at the right
the competitors or be different from
place, in right quantity and at the
them. The changing global marketing
right time. For example, a person
environment has lead to adoption of
convinced about the quality etc. of a
newer channels.
product, say, a detergent bar, wants to
4. Market Factors: Important market purchase the same. He/She goes to a
factors affecting the choice of channel retail outlet and asks for the product.
of distribution include size of market, If that product is not available in that
geographical concentration of potential shop, he/she may purchase some of
buyers and quantity purchased. In the alternative brand available. This
case the number of buyers is small, way a sure sale is lost because goods
like for most industrial products, were not available at the place where
short channels are used. But if the the customer wanted to purchase.
number of buyers is large, as in case Thus, it is an important responsibility
of most convenience products like of the marketers to make the product
soft drink, toothpaste etc., longer physically available at a place where
channels involving large number of the customers would like them to buy.
intermediaries are used. The physical handling and movement
If the buyers are concentrated in of goods from place of production to
a small place, short channels may the place of distribution is referred to
be used but if the buyers are widely as physical distribution, which is a very
dispersed over a large geographical important element of marketing mix.
area, longer channels may be used. Physical distribution covers all
Similarly if the size of order is small, the activities required to physically
as in case of most consumer products, move goods from manufacturers to
2019-2020

Ch_11.indd 321 28-Feb-19 3:06:00 PM
BUSINESS STUDIES
322
the customers. Important activities warehousing activities is to arrange

involved in the physical distribution placement of goods and provide
include transportation, warehousing, facilities to store them. The need for
material handling, and inventory warehousing arises because there
control. These activities constitute may be difference between the time a
major components of physical product is produced and the time it is
distribution. required for consumption. Generally
the efficiency of a firm in serving its
Components of Physical customers will depend on where these
Distribution warehouses are located and where are
The main components of physical these to be delivered.
distribution are explained as follows: Generally larger the number of
warehouses a firm has, lesser would be
1. Order Processing: In a typical buyer-
the time taken in serving customers at
seller relationship order placement
different locations but greater would be
is the first step. Products flow from
the cost of warehousing and vice-versa.
manufacturers to customers via
Thus the firm has to strike a balance
channel members while orders flow in
between the cost of warehousing and
the reverse direction, from customers
the level of customer service.
to the manufacturers. A good physical
For products requiring long-
distribution system should provide for
term storage (such as agricultural
an accurate and speedy processing of
products) the warehouses are
orders, in the absence of which goods
located near production sites. This
would reach the customers late or helps in minimising the charges on
in wrong quantity or specifications. transportation of the goods. On the
This wo uld resu lt in cu sto mer other hand, the products which are
dissatisfaction, with the danger of loss bulky and hard to ship (machinery,
of business and goodwill. automobiles) as well as perishable
2. Transportation: Transportation products (bakery, meat, vegetables)
is the means of carrying goods and are kept at different locations near
raw materials from the point of the market.
production to the point of sale. It 4. Inventory Control: Linked to
is one of the major elements in the warehousing decisions are the
physical distribution of goods. It is inventory decisions which hold key
important because unless the goods to success for many manufacturers,
are physically made available, the sale especially those where the perunit cost
cannot be completed. is high. A very important decision in
3. Warehousing: Warehousing refers respect of inventory is deciding about
to the act of storing and assorting the level of inventory. Higher the level
products in order to create time of inventory, higher will be the level
utility in them. The basic purpose of of service to customers but the cost
2019-2020

Ch_11.indd 322 28-Feb-19 3:06:00 PM
Marketing
323
Nothing Beats Word of Mouth in India

Nothing sways an Indian buyer’s choice more than a word of reassurance from the
people he knows. Even for the purchases like cars, mobile phones and home loans,
majority of the consumers in India rely on the references from their friends and
relatives while making their decisions.
The story is different in developed economies. Take the case of automobiles. In
markets like the US, Canada and Japan, more people are influenced by conventional
advertising by automobile companies, in developing markets like India, Malaysia and
Thailand it’s the neighbour or the colleague who tips the scales one way or the other.
“In case of luxury goods, the psyche of Indians has always been different. Buying a
car is a family decision, so it is only natural that all the members of the family will
talk to all the other users of a similar products, who they know”, General Motors
India director P Balendran said.
When the whole world is going crazy with Internet and mobile marketing, it is
interesting that for Indians it’s still conventional advertising and word of mouth
campaigns that sways their choices. Unlike in the West, Indians come from a very
closely-knit society where people get influenced by their peers, relatives and local
celebrities. People are more than willing to accept a brand if it’s endorsed by their
favourite superstar or is recommended by their close associates.
of carrying the inventory will also be The major factors determining

high because lot of capital would be inventory levels include:
tied up in the stock. Thus, a balance (a) firm’s policy regarding the level
is to be maintained in respect of the of customer service to be offered.
cost and customer satisfaction. With Higher the level of service greater
advancements in computers and will be the need to keep more
information technology the need for inventories;
keeping higher inventory is reducing (b) degree of accuracy of the sales
and the new concept of Just-in-
forecasts. In case more accurate
Time-Inventory decision is becoming
estimates are available, the need
popular in an increasing number of
for keeping very high level of
companies.
inventory can be minimised;
The decision regarding level of
inventory involves prediction about (c) responsiveness of the distribution
the demand for the product. A correct system i.e., ability of the system to
estimate of the demand helps to hold transmit inventory needs back to
inventory and cost level down to a the factory and get products in the
minimum. This not only helps the market. In case the time required to
firm in terms of the cash flows but respond to the additional demand
also in terms of its ability to maintain for the products is high there is a
production at a consistent level. need to maintain higher inventory.
2019-2020

Ch_11.indd 323 28-Feb-19 3:06:00 PM
BUSINESS STUDIES
324
But if the additional demand can of various tools of communication

be met in less time, the need for to encourage exchange of goods and
inventory will also be low; and services in the market.
(d) cost of inventory, which includes
holding cost such as cost of Promotion Mix
warehousing, tied up capital, etc Promotion mix refers to combination
and the manufacturing cost. of promotional tools used by an
organisation to achieve its
Promotion communication objectives. Various
A company may produce a good quality tools of communication are used by
product, price it appropriately and make the marketers to inform and persuade
it available at the selling points, which customers about their firm’s products.
are convenient to customers. But in These include: (i) Advertising, (ii)
spite of all this, the product may not Personal Selling, (iii) Sales Promotion,
sell well in the market. There is a need and (iv) Publicity. These tools are also
for developing proper communication called elements of promotion mix and
with the market. In the absence of can be used in different combinations,
communication, the customers would to achieve the goals of promotion.
not be able to know about the product For example consumer goods firms
and how it can satisfy their needs and may use more of advertising through
wants or may not be convinced about mass media while the industrial
its utility and benefits. goods firms may be using more of
Promotion refers to the use of personal selling. What combination
communication with the twin objective of these elements is used by a firm
of informing potential customers will depend upon various factors such
about a product and persuading them as nature of market, nature product,
to buy it. In other words, promotion the promotions budget, objectives of
is an important element of marketing promotion, etc. Let us first know about
mix by which marketers makes use these elements in some details.
M C
A U
R
ADVERTISING PERSONAL SELLING
S
K T
E O
PUBLIC RELATIONS SALES PROMOTION
T M
E E
R R Promotion Mix
Marketing Communications
2019-2020

Ch_11.indd 324 28-Feb-19 3:06:00 PM
Marketing
325
Advertising number of people can be reached

over a vast geographical area.
We generally come across hundreds of
For example, an advertisement
advertising messages everyday, which
message placed in a national daily
tell us about various products such
reaches lakhs of its subscribers.
as toilet soaps, detergent powder, soft
drinks and services such as hotels, (ii) Enhancing Customer Satisfaction
insurance policies, etc. and Confidence: A d v e r t i s i n g
Advertising is perhaps the most creates confidence amongst
commonly used tool of promotion. It is prospective buyers as they feel
an impersonal form of communication, more comfortable and assured
which is paid for by the marketers about the product quality and
(sponsors) to promote some goods hence feel more satisfied.
or service. The most common modes (iii) E x p r e s s i v e n e s s : W i t h t h e
of advertising are ‘newspapers’, developments in art, computer
‘magazines’, ‘television’, and ‘radio’. designs, and graphics, advertising
The important distinguishing has developed into one of
features of advertising are as follows: the most forceful medium of
(i) Paid Form: Advertising is a paid communication. With the special
form of communication. That is, effects that can be created, even
the sponsor has to bear the cost of simple products and messages can
communicating with the prospects. look very attractive.
(ii) Impersonality: There is no direct (iv) Economy: Advertising is a very
face-to-face contact between the economical mode of communication
prospect and the advertiser. It is if large number of people are to be
therefore, referred to as impersonal reached. Because of its wide reach,
method of promotion. Advertising the overall cost of advertising
creates a monologue and not a gets spread over numerous
dialogue. communication links established.
(iii) Identified Sponsor: Advertising is As a result the per-unit cost of
undertaken by some identified reach comes low.
individual or company, who makes
the advertising efforts and also Limitations of Advertising
bears the cost of it. The following are the major limitations
of advertising as a tool of promotion:
Merits of Advertising
(i) Less Forceful: Advertising is an
Adver t isi ng, as a medium of impersonal form of communication.
communication, has the following It is less forceful than the personal
merits: selling as there is no compulsion
(i) Mass Reach: Advertising is a on the prospects to pay attention
medium through which a large to the message.
2019-2020

Ch_11.indd 325 28-Feb-19 3:06:00 PM
BUSINESS STUDIES
326
(ii) Lack of Feedback: The evaluation 1. Adds to Cost: The opponents of

of the effectiveness of advertising advertising argue that advertising
message is very difficult as there unnecessarily adds to the cost of
is no immediate and accurate product, which is ultimately passed
feedback mechanism of the on to the buyers in the form of high
message that is delivered. prices. An advertisement on TV, for
(iii) I n f l e x i b i l i t y : A d v e r t i s i n g i s a few seconds, for example, costs the
less flexible as the message is marketers several lakhs of rupees.
standardised and is not tailor made Similarly an advertisement in print
to the requirements of the different media say in a newspaper or a magazine
customer groups. costs the marketers a large amount of
money. The money spent adds to the
(iv) Low Effectiveness: As the volume cost, which in an important factor in
of advertising is getting more and fixation of the price of a product.
more expanded it is becoming True, advertisement of a product
difficult to make advertising costs lot of money but it helps to
messages heard by the target increase the demand for the product
prospects. This is affecting the as large number of potential buyers
effectiveness of advertising. come to know about the availability
of the products, its features etc. and
Objections to Advertising are persuaded to buy it. The increased
In the proceeding sections, you have demand leads to higher production,
noted the merits and limitations which brings with it the economies
of advertising. Though advertising of scale. As a result, the per unit cost
is one of the most frequently used of production comes down as the
medium of promotion of goods and total cost is divided by larger number
services, it attracts lot of criticism. of units. Thus, the expenditure on
The opponents of advertising say advertisement adds to the total cost
that the expenditure on advertising but the per unit cost comes down
is a social waste as it adds to the which in fact lessens the burden of
cost, multiplies the needs of people consumers rather than adding to it.
and undermines social values. 2. Undermines Social Values: Another
The proponents, however, argue important criticism of advertising
that advertising is very useful as it is that it undermines social values
increases the reach, brings the pay and promotes materialism. It breeds
unit cost of production down and discontent among people as they come
adds to the growth of the economy. It to know about new products and feel
is therefore, important to examine the dissatisfied with their present state
major criticisms against advertising of affairs. Some advertisements show
and see the extent to which these are new life styles, which don’t find social
true. This is taken up as follows: approval.
2019-2020

Ch_11.indd 326 28-Feb-19 3:06:00 PM
Marketing
327
This criticism is not entirely true. 4. Encourages Sale of Inferior

Advertisement in fact helps buyers Products: Advertising does not
by informing them about the new distinguish between superior and
products, which may be improvement inferior products and persuade people
over the existing products. If the to purchase even the inferior products.
buyers are not informed about these In fact superiority and inferiority
products, they may be using inefficient depends on the quality, which is
products. Further, the job of an a relative concept. The desired
advertisement is to inform. The final level of quality will depend on the
choice to buy or not to buy anyway economic status and preferences of
rests with the buyers. They will buy if the target customers. Advertisements
the advertised product satisfies some sell products of a given quality and
of their needs. They may be motivated the buyers will buy if it suits their
to work harder to be able to purchase requirements. No advertisement
these products. should however, make false claim
3. Confuses the Buyers: Another about the quality of a product. If a
criticism against advertisement is that firm makes a false claims it can be
so many products are being advertised prosecuted for the same.
which makes similar claims that the 5. Some Advertisements are in
buyer gets confused as to which one Bad Taste: Another criticism against
is true and which one should be advertising is that some advertise-
relied upon. For example, we may ments are in bad taste. These show
note similar claims of whiteness or something which in not approved
stain removing abilities in competing by some people say advertisements
brands of detergent powder or claims showing women dancing when not
of whiteness of tooth or ‘feelings required or running after a man because
of freshness’ in competing brands he is wearing a particular suit or using
of toothpaste that it is sometimes a particular perfume are certainly not
confusing to us as to which one good. Some advertisements distort the
to buy. relationship like employer employee
The supporters of advertisement, and are quite offensive.
however, argue that we are all rational We have seen the views of the
human beings who make our decisions opponents and the proponents of
for purchase of products on factors advertising. There may be some
such as price, style, size, etc. Thus the chances of misuse of advertising as a
buyers can clear their confusion by tool, which can be properly safeguarded
analysing the information provided on by the law or by developing a code
the advertisements and other sources of conduct by the advertisers, for
before taking a decision to purchase a their self regulation. However, most
product. However, this criticism cannot of the criticism against advertising
be completely overruled. are not entirely true. In the changed
2019-2020

Ch_11.indd 327 28-Feb-19 3:06:00 PM
BUSINESS STUDIES
328
economic environment of globalisation, salesperson to develop personal

advertising is considered as an relationships with the prospective
important tool of marketing. It helps customers, which may become
a firm in effectively communicating important in making sale.
with its target market, increasing the
sale and there by reducing the per unit Merits of Personal Selling
cost of production. It is not a social (i) Flexibility: There is lot of flexibility
waste, rather it adds value to the social in personal selling. The sales
cause by giving a boost to production
presentation can be adjusted to fit
and generating employment.
the specific needs of the individual
customers.
Personal Selling
(ii) Direct Feedback: As there is direct
Personal selling involves oral face-to-face communication in
presentation of message in the form personal selling, it is possible
of conversation with one or more to take a direct feed back from
prospective customers for the purpose the customer and to adapt the
of making sales. It is a personal form presentation according to the
of communication. Companies appoint
needs of the prospects.
salespersons to contact prospective
buyers and create awareness about (iii) Minimum Wastage: The wastage of
the product and develop product efforts in personal selling can be
preferences with the aim of making sale. minimised as company can decide
the target customers before making
Features of Personal Selling any contact with them.
(i) Personal Form: In personal selling
a direct face-to-face dialogue takes
Role of Personal Selling
place that involves an interactive Personal selling plays a very important
relationship between the seller and role in the marketing of goods and
the buyer. services. The importance of personal
(ii) Development of Relationship: selling to businessmen, customers
Personal selling allows a and society may be described as below.
Personal Selling
‘Most people think ‘selling’ is the same as ‘talking’. But the most effective
salespeople know that listening is the most important part of their job.’
—Roy Bartell
‘You don’t close a sale, you open a relationship if you want to build a long-term,
successful enterprise.’
—Patricia Fripp
2019-2020

Ch_11.indd 328 28-Feb-19 3:06:00 PM
Marketing
329
Importance to Businessmen (vi) Personal Rapport: Development of

personal rapport with customers
Personal selling is a powerful tool
increases the competitive strength
for creating demand for a firm’s
of a business organisation.
products and increasing their sale.
The importance of personal selling (vii) Role in Introduction Stage: Personal
to a business organisation may be selling plays very important role
described as follows: in the introduction stage of a new
product as it helps in persuading
(i) E ff e c t i v e P r o m o t i o n a l T o o l : customers about the merits of the
Personal selling is very effective product.
promotional tool, which helps in
( viii) Link with Customers: Sales people
influencing the prospects about
play three different roles, namely
the merits of a product and
persuasive role, service role and
thereby increasing its sale.
informative role, and thereby link
(ii) Flexible Tool: Personal selling is a business firm to its customers.
more flexible than other tools of
promotion such as advertising and Importance to Customers
sales promotion. It helps business
persons in adopting their offer in This role of personal selling becomes
varying purchase situations. more important for the illiterate and
rural customers, who do not have
(iii) Minimises Wastage of Efforts: many other means of getting product
Compared with other tools of information.
promotion, the possibility of The customers are benefited by
wastage of efforts in personal personal selling in the following ways:
selling is minimum. This helps
the business persons in bringing (i) Help in Identifying Needs: Personal
economy in their efforts. selling helps the customers in
identifying their needs and wants
(iv) Consumer Attention: There is an
and in knowing how these can
opportunity to detect the loss of
best be satisfied.
consumer attention and interest
in a personal selling situation. (ii) L a t e s t M a r k e t I n f o r m a t i o n :
This helps a business person Customers get latest market
in successfully completing the information regarding price
sale. changes, product availability
(v) Lasting Relationship: Personal and shortages and new product
selling helps to develop lasting introduction, which help them in
relationship between the sales taking the purchase decisions in
persons and the customers, which a better way.
is very important for achieving the (iii) Expert Advice: Customers get
objectives of business. expert advice and guidance in
2019-2020

Ch_11.indd 329 28-Feb-19 3:06:00 PM
BUSINESS STUDIES
330
purchasing various goods and (v) Product Standardisation: Personal

services, which help them in selling increases product
making better purchase. standardisation and uniformity in
(iv) Induces Customers: Personal consumption pattern in a diverse
selling induces customers to society.
purchase new products that
satisfy their needs in a better way Sales Promotion
and thereby helps in improving Sales promotion refers to short-
their standards of living. term incentives, which are designed
to encourage the buyers to make
Importance to Society immediate purchase of a product or
Personal selling plays a very productive service. These include all promotional
role in the economic progress of a society. efforts other than advertising,
The more specific benefits of personal personal selling and publicity, used
selling to a society are as follows: by a company to boost its sales. Sales
(i) Converts Latest Demand: Personal promotion activities include offering
selling converts latest demand into cash discounts, sales contests, free gift
effective demand. It is through this offers, and free sample distribution.
cycle that the economic activity in Sales promotion is usually undertaken
the society is fostered, leading to supplement other promotional
to more jobs, more incomes and efforts such as advertising and
more products and services. personal selling.
That is how economic growth is Companies use sales promotion
influenced by personal selling. tools specifically designed to promote
to customers (e.g., free samples,
(ii) Employment Opportunities: Personal discounts, and contests), tradesmen
selling offers greater income and or middlemen (e.g., cooperative
employment opportunities to the advertising, dealer discounts and dealer
unemployed youth. incentives and contests) and to sales
(iii) Career Opportunities: Personal person (e.g., bonus, salesmen contests,
selling provides attractive career special offers). Sales promotions
with greater opportunities for include only those activities that are
advancement and job satisfaction used to provide short term incentives
as well as security, respect, to boost the sales of a firm.
variety, interest and independence
to young men and women. Merits of Sales Promotion
(iv) Mobility of Sales People: There is a (i) Attention Value: Sales promotion
greater degree of mobility in sales activities attract attention of
people, which promote travel and the people because of the use of
tourism in the country. incentives.
2019-2020

Ch_11.indd 330 28-Feb-19 3:06:00 PM
Marketing
331
(ii) Useful in New Product Launch: 50%’ or a shirt marketer’s offer of

Sales promotion tools can be very ‘50+40% Discount’.
effective at the time of introduction 3. Refunds: Refunding a part of price
of a new product in the market. It paid by customer on some proof of
induces people to break away from purchase, say on return of empty foils
their regular buying behaviour and or wrapper. This is commonly used
try the new product. by food product companies, to boost
(iii) Synergy in Total Promotional their sales.
Efforts: Sales promotion activities 4. Product Combinations: Offering
are designed to supplement the another product as gift along with the
personal selling and advertising purchase of a product, say offer of a
efforts used by a firm and add to pack of ½ kg of rice with the purchase
the over all effectiveness of the of a bag of Aatta (wheat flour), or
promotional efforts of a firm. ‘Get 128 KB Memory Card Free with
a Digicam’ or Buy a TV of 25+ and
Limitation of Sales Promotion
Get a Vacuum Cleaner Free’ or ‘100
(i) Reflects Crisis: If a firm frequently Gm Bottle of Sauce Free With 1 kg
rely on sales promotion, it may give Detergent.’
the impression that it is unable to 5. Quantity Gift: Offering extra
manage its sales or that there are quantity of the product commonly
no takers of its product. used by marketer of toiletry products.
(ii) Spoils Product Image: Use of sales For example, a shaving cream’s offer of
promotion tools may affect the ‘40% Extra’ or A Hotel’s offer of “Take
image of a product. The buyers a 2 Night 3 Days Package At the Hotel
may start feeling that the product and Get an Extra Night Stay At Just
is not of good quality or is not Rs 500” or ‘Buy 2 Get 1 Free’ offer of
appropriately priced. a marketer of shirts.
6. Instant Draws and Assigned
Commonly used Sales Promotion Gift: For example, ‘Scratch a Card’ or
Activities ‘Burst a Cracker’ and instantly win a
1. Rebate: Offering products at special Refrigerator, Car, T-shirt, Computer,
prices, to clear off excess inventory. with the purchase of a TV.
Example, a car manufacturer’s offer 7. Lucky Draw: For example, the offer
to sell a particular brand of car at a of a bathing soap to win a gold coin
discount of Rs 10,000, for a limited on lucky draw coupon for free petrol
period. on purchase of certain quantity of
2. Discount: Offering products at petrol from given petrol pump or lucky
less than list price. Example, a shoe draw coupon on purchase of easy
company’s offer of ‘Discount Up to undergarment and win a car offer.
2019-2020

Ch_11.indd 331 28-Feb-19 3:06:00 PM
BUSINESS STUDIES
332
8. Usable Benefit: ‘Purchase goods Electronic goods, automobiles etc offer

worth Rs 3000 and get a holiday easy financing schemes such as ‘24
package worth Rs 3000 free’ or ‘Get easy instalments, Eight Up Front and
a Discount Voucher for Accessories 16 To Be Paid as Post Dated Cheques’.
on Apparel Purchase of Rs 1000 and However, one should be careful about
above.’ the file charges, which sometimes
9. Full finance @ 0%: Many marketers is nothing but interest recovered in
o f c o n s u m e r d u r a b le s s u c h a s advance.
Sales Promotion
2019-2020

Ch_11.indd 332 28-Feb-19 3:06:01 PM
Marketing
333
10. Sampling: Offer of free sample of source, e.g., the press in the form of
a product, say a detergent powder or news stories and features, the message
tooth paste to potential customers at has more credibility than if that comes
the time of launch of a new brand. as a sponsored message in advertising.
11. Contests: Competitive events Also, as the message goes in the
involving application of skills or luck, form of a news rather than direct sales
say salving a quiz or answering some communication, it can reach even to
questions. those persons who otherwise may not
pay attention to paid communication.
Publicity However, an important limitation
of publicity is that as a medium of
Publicity is similar to advertising, in promotion, it is not within the control
the sense that it is a non-personal of a marketing firm. The media would
form of communication. However, as cover only those pieces of information,
against advertising it is a non-paid which are news worthy and which
form of communication. Publicity symbolise some achievement in the
generally takes place when favourable field. Thus, a firm can’t use publicity
news is presented in the mass media to actively promote its products.
about a product or service. For
example, if a manufacturer achieves Public Relations
a breakthrough by developing a car
Managing public opinion of an
engine, which runs on water instead
organisation is an important task which
of petrol, and this news is covered by
can be performed by the marketing
television or radio or newspapers in
department. The business needs to
the form of a news item. It would be
communicate effectively to customers,
termed as publicity because the engine
suppliers, and dealers, since they are
manufacturer would benefit from such
instrumental in increasing the sales
dissemination of information about its
and profit. Besides those who come into
achievement by the media but would
direct contact with the organisation or
not bear any cost for the same. Thus,
its products, there are other members
the two important features of publicity
of the general public whose voice
are that:
or opinion is equally important.
(i) P ublicity is an unpaid form of This public may be interested in the
communication. It does not involve company and its product and have
any direct expenditure by the an impact on the business ability to
marketing firm; and achieve its objectives. Thus, it becomes
(ii) There is no identified sponsor for imperative to manage public opinion
the communication as the message and the company’s relation with the
goes as a news item. public on a regular basis. Therefore,
In publicity, as the information public relations involve a variety of
is disseminated by an independent programmes designed to promote or
2019-2020

Ch_11.indd 333 28-Feb-19 3:06:01 PM
BUSINESS STUDIES
334
protect a company’s image and its Role of Public Relations

individual products in the eyes of the The role of public relations can be
public. discussed with respect to the functions
The business relates with a which the department performs.
number of groups including suppliers, Public relations itself is an important
shareholders, intermediaries, activist tool in the hands of the marketing
groups, and the government. For department, which can be used to the
example, active support of middlemen advantage of the business. The public
is needed if the firm wants to survive relations department performs five
in a competitive selling environment. functions:
Similarly, consumer activist groups 1. Press relations: Information
need to be satisfied because they can about the organisation needs to
impose restriction on the sales of the be presented in a positive manner
firm’s products directly by urging in the press. Generating news
customers to refrain from buying them requires skill in developing and
or through the imposition of laws. Most researching a story and getting the
organisations, business or otherwise media to accept press releases is a
nowadays, have a separate department difficult task. The public relations
to manage public relations. They may department is in contact with the
also utilize the services of any outside media to present true facts and a
public relations agency. correct picture about the company.
Their main task is to disseminate Otherwise news can get distorted
information and build goodwill about if taken from other sources.
the business. Concrete steps are to be 2. Product publicity: New products
taken to monitor the attitude of the require special effort to publicise
general public and generate positive them and the company has to
publicity. They are especially useful sponsor such programmes. The
when there is negative publicity public relations department
about the company or its products. manages the sponsoring of such
At that time, the situation has to be events. The company can draw
tackled like an emergency to improve attention to new products by
public image. The public relations arranging sports and cultural
department then has to do something events like news conferences,
drastic so that damage to company’s seminars and exhibitions.
images is controlled and minimised. 3. Corporate Communication:
They also advise top management to The image of the organisation
adopt certain programmes which will needs to be promoted through
add to their public image and ensure communicat-ing with the public
that negative publicity does not take and the employees within the
place at all. organisation. This is usually done
2019-2020

Ch_11.indd 334 28-Feb-19 3:06:01 PM
Marketing
335
with the help of newsletter, annual wildlife, children’s rights, education,

reports, brochures, articles and etc. Such cause-related activities
audio-visual materials. Companies help in promoting public relations
rely on these materials to reach and building goodwill.
and influence their target markets. In addition, maintaining good
Speeches by the company’s public relations also helps in achieving
executives at a meeting of trade the following marketing objectives:
associations or trade fairs can (a) B u i l d i n g a w a r e n e s s : Public
really boost the company’s image. relations department can place
Even interviews with TV channels stories and dramatise the product
and responding to queries from the in the media. This will build
media go a long way in promoting marketplace excitement before
public relations. the product reaches the market
4. Lobbying: The organisation has or media advertising takes place.
to deal with government officials This usually creates a favourable
and different ministers in charge of impression on the target customer.
corporate affairs, industry, finance (b) Building credibility: If news about
with respect to policies relating a product comes in the media
to business and the economy. whether print or electronic it
The government also seeks to always lends credibility and people
maintain a healthy relationship believe in the product since it is in
with associations of commerce the news.
and industry and solicits the (c) Stimulates sales force: It becomes
opinion of major stakeholders while easier for the sales force to deal
formulating industrial, telecom, with the retailers and convince
taxation policies, etc. The public dealers if they have already heard
relations department then has to about the product in the news
be really proactive in promoting before it is launched. Retailers
or decoding regulations that affect and dealers also feel it is easier
them. to sell the product to the ultimate
5. C o u n s e l l i n g : T h e p u b l i c consumer.
relations department advises the (d) L o w e r s p r o m o t i o n c o s t s :
management on general issues Maintaining good public relations
which affect the public and the costs much less than advertising
position the company would like and direct mail. However, it
to the take on a particular issue. requires a lot of communication
The company can build goodwill and interpersonal skills to convince
by contributing money and time to the media to give space or time for
certain causes like environment, the organisation and its product.
2019-2020

Ch_11.indd 335 28-Feb-19 3:06:01 PM
BUSINESS STUDIES
336
The major differences between advertising and personal selling are as follows:
Difference between Advertising and Personal Selling
S. Advertising Personal Selling

No.
1. Advertising is an impersonal form of Personal selling is a personal form of

communication. communication.
2. Advertising involves transmission of In personal selling, the sales talk is
standardised messages, i.e., same adjusted keeping view customer’s
message is sent to all the customers background and needs.
in a market segment.
3. Advertising is inflexible as the message Personal selling is highly flexible. as
can’ t be adjusted to the needs of the the message can be adjusted.
buyer.
4. It reaches masses, i.e., a large number Only a limited number of people can
of people can be approached. be contacted because of time and cost
considerations.
5. In advertising the cost per person The cost per person is quite high in
reached is very low. the case of personal selling.
6. Advertising can cover the market in a Personal selling efforts take a lot of
short time. time to cover the entire market.
7. Advertising makes use of mass media Personal selling makes use of sales
such television, radio, newspaper, and staff, which has limited reach.
magazines.
8. Advertising lacks direct feedback. Personal selling provides direct and
Marketing research efforts are needed immediate feed back. Sales persons
to judge customers’ reactions to come to know about the customers’
advertising. reactions immediately.
9. Advertising is more useful in creating Personal selling plays important role
and building interest of the consumers at the awareness stage of decision
in the firms products. making.
10. Advertising is more useful in marketing Personal selling is more helpful in
to the ultimate consumer’s who are selling products to the industrial
large in numbers. buyers or to imtermediaries such as
dealers and retailers who are relatively
few in numbers.
2019-2020

Ch_11.indd 336 28-Feb-19 3:06:01 PM
Marketing
337
Key Terms
Marketing Brand Mark Market Packaging
Marketing Management Labelling Marketing Mix
Channels of Distribution Marketing Offering Physical Distribution
Consumer Product Promotion Industrial Product
Promotion Mix Convenience Product Advertising
Shopping Product Personal Selling Speciality Product
Publicity Generic Name Sales Promotion
Brand Brand Name Trade Mark
Summary
In the traditional sense, the term ‘market’ refers to the place where buyers
and sellers gather to enter into transactions involving the exchange of goods
and services. But in modern marketing sense, it refers to a set of actual and
potential buyers of a product or service.
What is Marketing: The term marketing has been described as performance
of business activities that direct the flow of goods and services from producers
to consumers. Marketing is not merely a post-production activity. It includes
many activities that are performed even before goods are actually produced
and continue even after the goods have been sold.
In Modern Times: Marketing is described as a social process by which
individual groups obtain what they need and want through creating offerings
and freely exchanging products and services of value with others. Marketing is
not merely a business phenomena or confined only to business organisations.
Marketing activities are equally relevant to non-profit organisations.
What can be Marketed: Anything that is of value to the other can be marketed.
It can be a product or a service or a person or a place or an idea. It can also be
an experience, properties, events, information or organisation.
Marketing management means management of the marketing function. It refers
to ‘The art and science of choosing target markets and getting, keeping and
growing customers through creating, delivering and communicating superior
customer value of management.’
Marketing and Selling: Many people confuse ‘selling’ for ‘marketing’. However,
selling is only a part of the process of marketing. The main focus of selling
is on affecting transfer of title and possession of goods from sellers to users.
Marketing activities put greater thrust on maximising customer’s satisfaction.
2019-2020

Ch_11.indd 337 28-Feb-19 3:06:01 PM
BUSINESS STUDIES
338
Marketing Management Philosophies: The different business philosophies or

concepts guiding the marketing efforts are: (i) Production Concept which assumes
that availability and affordability of the product are the key to the success of a
firm and puts greater emphasis on improving the production and distribution
efficiency of the firms. (ii) Product Concept assumes that product improvement
is, the key to profit maximisation of a firm; (iii) Sales Concept assumes that
the customers would not buy, or not buy enough, unless they are adequately
convinced and motivated to do so, It is believed that aggressive selling and
promotional efforts are important to make customers buy their products. (iv)
Marketing Concept implies that focus on satisfaction of customer’s needs is the
key to the success of any organisation in the market. (v) The Societal Marketing
Concept is the extension of the marketing concept as supplemented by the
concern for the long-term welfare of the society.
Functions of Marketing: The important functions of marketing include
Gathering and Analysing Market Information, Marketing Planning, Product
Designing and Development, Standardisation and Grading, Packaging and
Labelling, Branding, Customer Support Services, Pricing of Products, Promotion,
Physical distribution, Transportation, Storage or Warehousing.
Role of Marketing: By adopting marketing orientation, an organisation whether
profit making or non-profit making, can achieve its goals in the most effective
manner. Also marketing acts as a catalyst in the economic development of a
country and helps in raising the standards of living of people.
Marketing Mix is a set of marketing tools that the firm uses to pursue its
marketing objectives in a target market. The variables or elements of marketing
mix have been classified in to four categories, popularly known as four Ps
of marketing viz., Product, Price, Place and Promotion. These elements are
combined to create an offer.
Product: In common parlance, the word ‘product’, is used to refer only to the
physical or tangible attributes of a product. In marketing, product is a mixture
of tangible and intangible attributes, which are capable of being exchanged
for a value, with ability to satisfy customer needs. It is anything that can be
offered to a market to satisfy a want or need. Products may broadly be classified
into two categories—industrial products and consumers’ products. Products,
which are purchased, by the ultimate consumers or users for satisfying their
personal needs and desires are referred to as consumer products. On the
basis of shopping efforts involved, the products are classified as Convenience
Product, Shopping Products and Speciality Products. On the basis of their
durability, consumer products have been classified into categories—Durable,
Non-durable and Services.
2019-2020

Ch_11.indd 338 28-Feb-19 3:06:01 PM
Marketing
339
Those activities, benefits or satisfactions, which are offered for sale, e.g., dry
cleaning, watch repairs, hair cutting, are called services.
Industrial products are those products, which are used as inputs in producing
other products. These are broadly classified in to (i) Materials and Parts, (ii)
Capital Items, and (iii) Supplies and Business Services.
Generic name refers to the name of the whole class of the product. For example,
a book, a wristwatch, and tyre. A brand is a name, term, sign, symbol, design
or some combination of them, used to identify the products—goods or services
of one seller or group of sellers and to differentiate them from those of the
competitors. That part of a brand, which can be spoken, is called a brand name.
That part of a brand which can be recognized but which is not utter able
is called brand mark. Brand mark appears in the form of a symbol, design,
distinct colour scheme or lettering. Brand or part of a brand that is given legal
protection is called trademark.
A good brand name should be short, easy to pronounce, spell, recognize and
remember; Should suggest the product’s benefits and qualities; be distinctive;
be adaptable to packing or labelling requirements; be sufficiently versatile to
accommodate new products; be capable of being registered and protected legally
and have staying power i.e. it should not get out of date.
Packaging: The act of designing and producing the container or wrapper
of a product is referred as packaging. There can be three different levels of
packaging. viz Primary package, Secondary packaged, Transport package.
Packaging performs a number of functions in the marketing of goods. Some
of the important functions, include Product identification; Product protection;
Facilitating the use of the product and Promotion of goods and services.
Labelling: A simple looking but important task in the marketing of goods
relates to designing the label to be put on the package. The label may vary
from a simple tag attached to the product to complex graphics that are part
of the package. The most important functions of labels include i) describing
the product ii) help in identifying the product or brand; iii) help in grading the
products into different categories; and aids in promotion of the products.
Pricing: Price may be defined as the amount of money paid by a buyer or
received by a seller in consideration of the purchase of a product or service.
Generally, if the price of a product is increased, its demand comes down, and
vice-versa. Pricing is considered to be an effective competitive weapon. It is also
the single most important factor affecting the revenue and profits of a firm.
The factors affecting price determination are (i) Product Cost (ii) The Utility
2019-2020

Ch_11.indd 339 28-Feb-19 3:06:01 PM
BUSINESS STUDIES
340
and Demand (iii) Competition (iv) Government and Legal Regulations and v)
Marketing Methods Used.
Physical Distribution: There are two important decisions relating to this aspect-
one regarding physical movement of goods and two, regarding the channels.
Channels of Distribution are set of firms and individuals that take title, or
assist in transferring title, to particular goods or services as it moves from the
producers to the consumers. Channels of distribution smoothen the flow of
goods by creating possession, place and time utilities. The important functions
performed by middlemen are: (i) Sorting; (ii) accumulation; (iii) allocation; (iv)
assorting; (v) product promotion; (vi) negotiation; and (vii) risk taking:
Types of Channels: (I) Direct distribution channels are those where in the
goods are made directly available by the manufacturers to customers, without
involving any intermediary; include (II) Indirect Distribution Channels include
i. Manufacturer - Retailer – Consumer (One Level Channel) ii. Manufacturer -
Wholesaler - Retailer- Consumer (Two Level Channel) iii. Manufacturer - Agent
- Retailer- Consumer (Three Level Channel) Factors Determining Choice of
Channels include i. Product Related Factors; ii. Company Characteristics iii.
Competitive Factor iv. Market Factor; and v. Environmental Factor.
Physical Distribution Covers all the activities required to physically move
goods from manufacturers to the customers. The main component of physical
distribution are. i. Order Processing; ii. Transportation; iii. Warehousing; and
iv. Inventory Control: Just-in-Time-Inventory.
Promotion: Promotion refers to the use of communication with the twin
objective of informing potential customers about a product and persuading them
to buy it. There are four major tools, or elements of promotion mix, which are —
(i) Advertising, (ii) Personal Selling, (iii) Sales Promotion, and (iv) Publicity. These
tools are used in different combinations to achieve the goals of promotion.
Advertising is the most commonly used tool of promotion. It is an impersonal
form of communication, which is paid for by the marketers (Sponsors) to
promote some goods or service. The merits of advertising, as a medium of
communication, include (i) Mass reach; (ii) Enhancing customer satisfaction
and confidence iii. Expressiveness; and iv. Economy.
The limitations of advertising are that it is (i) less forceful (ii) lacks Feedback (iii)
inflexibility (iv) low effectiveness The most common Objections to Advertising are
that it (i) adds to cost; (ii) undermines social Values; iii. confuses the buyers;
and iv. encourages sale of Inferior Products:
Most of the criticisms against advertising are not fully true. Advertising is
therefore considered an essential function of marketing.
2019-2020

Ch_11.indd 340 28-Feb-19 3:06:01 PM
Marketing
341
Personal Selling involves oral presentation of message in the form of

conversation with one or more prospective customers for the purpose of making
sales. Personal Selling plays important role for the business persons as well
as for the society.
Sales Promotion refers to short-term incentives, which are designed to
encourage the buyers to make immediate purchase of a product service.
These include promotional efforts other than advertising, personal selling and
publicity, used by a company to boost its sales. Commonly used Sales Promotion
Activities include Rebate, Discount, Refunds, Product Combinations, Quantity
Gift, Instant Draws and Assigned Gift, Lucky Draw, Usable Benefit, Full Finance
@ 0%, sampling, and contests.
Publicity is similar to advertising, in the sense that it is a non-personal form
of communication. However, as against advertising it is a non-paid form
of communication. In publicity, as the information is disseminated by an
independent source. However, an important limitation of publicity is that as a
medium of promotion, it is not within the control of a marketing firm.
Exercises

1. State any two advantages of branding to marketers of goods and services?
2. How does branding help in differential pricing?
3. What is the societal concept of marketing?
4. List the characteristics of convenience products.
5. Enlist the advantages of packaging of consumer products.
6. What are the limitations of advertising as a promotional tool? Enlist.
7. List five shopping products purchased by you or your family during the
last few months.
8. A marketer of colour TV having 20% of the current market share of the
country aims at enhancing the market share to 50 per cent in next three
years. For achieving this objective he specified an action programme. Name
the function of marketing being discussed above. (Ans. Marketing planning.)
Short Answer Type

1. What is marketing? What functions does it perform in the process of
exchange of goods and services? Explain.
2019-2020

Ch_11.indd 341 28-Feb-19 3:06:01 PM
BUSINESS STUDIES
342
2. Distinguish between the product concept and production concept of

marketing.
3. Product is a bundle of utilities. Explain.
4. What are industrial products? How are they different from consumer
products? Explain.
5. Distinguish between convenience product and shopping product.
6. Describe the functions of labeling in the marketing of products.
7. Discuss the role of intermediaries in the distribution of consumer
non-durable products.
8. Explain the components of physical distribution.
9. Define advertising? What are its main features? Explain.
10. Discuss the role of ‘sales promotion’ as an element of promotion mix.
11. As the marketing manager of a big hotel located at an important tourist
destination, what societal concerns would be faced by you and what steps
would you plan to take care of these concerns? Discuss.
12. What information is generally placed on the package of a food product?
Design a label for one of the food products of your choice.
13. For buyers of consumer durable products, what ‘customer care services’
would you plan as a manager of a firm marketing new brand of motorcycle.
Discuss.
Long Answer Type

1. What is marketing concept? How does it help in the effective marketing
of goods and services.
2. What is marketing mix? What are its main elements? Explain.
3. How does branding help in creating product differentiation? Does it help
in marketing of goods and services? Explain.
4. What are the factors affecting determination of the price of a product or
service? Explain.
5. What do you mean by ‘channels of distribution’? What functions do they
play in the distribution of goods and services? Explain.
6. Explain the major activities involved in the physical distribution of
products.
7. ‘Expenditure on advertising is a social waste.’ Do you agree? Discuss.
8. Distinguish between advertising and personal selling.
9. Explain the factors determining the choice of channel of distribution.
2019-2020

Ch_11.indd 342 28-Feb-19 3:06:01 PM
chapter
12
Consumer Protection
Learning Consumer forum fines SBI for ignoring
Objectives customer’s problem
Now, if you do not get money from ATMs, it

After studying this would be considered as lack of service on part of
chapter, you should be bank, due to which it can also be penalized. In a
able to: similar case, Consumer Forum imposed a fine of
Rs 2,500 on State Bank of India after considering
reduction in bank service.Bank officials believe
¾¾ state the importance that it is possible that the penalty on the bank
of consumer due to lack of service in ATM. It is probably the
first matter. Lawyer Rajiv Aggarwal went to SBI
protection;
ATM to withdraw money on 25, 26 and 30 April,
2017. On May 4, 2017, he filed a petition in the
Consumer Forum.
¾¾ b r i e f l y e x p l a i n
In front of the forum, the bank gave a unique
legal framework for argument. The bank told the forum that although
consumer protection ATM runs with Internet connectivity, so at the
in India; time when users use ATM, at that time he is not
directly our client, so if money not withdrawn
from ATM, then it cannot be considered as a
¾¾ describe consumer reduction in service.
rights in India; On this, the forum said that bank is taking an
ATM fee every year from the customer and then this
argument does not mean that he is not a customer
¾¾ list out consumer of the bank. The forum rejected the bank’s logic
responsibilities; completely. The petitioner has presented photo
and video recording at the time of withdrawal as
evidence in front of forum. Forum acknowledged
¾¾ briefly describe the that the consumers at various times go to ATM to
ways and means of withdrawn money every time the message of ‘cash
not available’ is the lack in service.
consumer protection;
The forum accepted the petition. After hearing
and
the arguments of both the parties, the forum
ordered that if the bank will not provide ATM
service to the customer, then it will be considered
¾¾ d e s c r i b e t h e r o l e a reduction in service. The forum has ordered the
of consumer bank to pay Rs 1500 for the mental harassment
organisations and suffered by the complainant and Rs 1000 for a
NGOs in protecting judicial expense within 30 days.
consumers’ interests. Source: http://dailypost.in/news/consumer-
forum-fines-sbi-ignoring-customers/
2019-2020

Ch_12.indd 343 27-Feb-19 5:15:25 PM
BUSINESS STUDIES
344
The above case is just one of the or sale of spurious products, might
examples of the many problems that have to pay a higher price when sellers
consumers might have to face in the engage in overpricing, hoarding or
purchase, use and consumption of black-marketing etc. Thus, there is a
goods and services. The case also need for providing adequate protection
highlights the need for an appropriate to consumers against such practices
legal protection to be provided to of the sellers. Let us now discuss the
consumers to protect them from various importance of consumer protection.
forms of exploitation from the seller.
Have you ever thought what would be Importance of Consumer
the plight of consumers if adequate Protection
protection is not provided to them?
Consumer Protection has a wide
Can the present day businesses afford
agenda. It not only includes educating
to ignore the interests of consumers?
consumers about their rights and
The area of consumer protection has
responsibilities, but also helps in
emerged as a very important area of
getting their grievances redressed. It not
study having significance for both the
only requires a judicial machinery for
consumers and businesses alike.
protecting the interests of consumers
but also requires the consumers to
Introduction
get together and form themselves into
A consumer is said to be a king in consumer associations for protection
a free market economy. The earlier and promotion of their interests. At the
approach of caveat emptor, which same time, consumer protection has a
means “Let the buyer beware”, has special significance for businesses too.
now been changed to caveat venditor
(“Let the seller beware”). However, with From Consumers’ point of view
growing competition and in an attempt
The importance of consumer
to increase their sales and market
protection from the consumers’ point
share, manufacturers and service-
of view can be understood from the
providers may be tempted to engage in
following points:
unscrupulous, exploitative and unfair
trade practices like defective and (i) Consumer Ignorance: In the light
unsafe products, adulteration, false of widespread ignorance of consumers
and misleading advertising, hoarding, about their rights and reliefs available
black-marketing etc. This means that to them, it becomes necessary to
a consumer might be exposed to risks educate them about the same so as to
due to unsafe products, might suffer achieve consumer awareness.
from bad health due to adulterated (ii) Unorganised Consumers: Con-
food products, might be cheated sumers need to be organised in the
because of misleading advertisements form of consumer organisations which
2019-2020

Ch_12.indd 344 27-Feb-19 5:15:25 PM
consumer protection
345
Compensation for impurities in cold drinks
would take care of their interests. marketing etc. Consumers need

Though, in India, we do have consumer protection against such malpractices
organisations which are working in of the sellers.
this direction, adequate protection is
required to be given to consumers till From the point of view of
these organisations become powerful Business
enough to protect and promote the
A business must also lay emphasis on
interests of consumers.
protecting the consumers and adequately
(iii) Widespread Exploitation of
satisfying them. This is important
Consumers: Consumers might
because of the following reasons:
be exploited by unscrupulous,
exploitative and unfair trade practices (i) Long-term Interest of Business:
like defective and unsafe products, Enlightened businesses realise that it
adulteration, false and misleading is in their long-term interest to satisfy
advertising, hoarding, black- their customers. Satisfied customers
2019-2020

Ch_12.indd 345 27-Feb-19 5:15:25 PM
BUSINESS STUDIES
346
not only lead to repeat sales but also the image of the company. Thus, it is
provide good feedback to prospective advisable that business organisations
customers and thus, help in increasing voluntarily resort to such practices
the customer-base of business. Thus, where the customers’ needs and
business firms should aim at long- interests will well be taken care of.
term profit maximisation through In view of the above, the government
customer satisfaction. of India has enacted several regulations
(ii) Business uses Society’s designed to provide adequate
Resources: Business organisations use protection to consumers. We shall now
resources which belong to the society. discuss some of these regulations.
They, thus, have a responsibility to
supply such products and render Legal Protection to Consumers
such services which are in public
The Indian legal framework consists
interest and would not impair public
of a number of regulations which
confidence in them.
provide protection to consumers. As
(iii) Social Responsibility: A business per the Right to Information Act 2005,
has social responsibilities towards Section 4, all relevant information
various interest groups. Business is required to be made available to
organisations make money by selling all citizens of the country. Other
goods and providing services to regulations are as under.
consumers. Thus, consumers form
1. The Consumer Protection Act,
an important group among the many
1986: The Consumer Protection Act,
stakeholders of business and like other
1986 seeks to protect and promote
stakeholders, their interest has to be
the interests of consumers. The Act
well taken care of.
provides safeguards to consumers
(iv) Moral Justification: It is the against defective goods, deficient
moral duty of any business to take services, unfair trade practices, and
care of consumer’s interest and avoid other forms of their exploitation. The
any form of their exploitation. Thus, a Act provides for the setting up of a
business must avoid unscrupulous, three-tier machinery, consisting of
exploitative and unfair trade practices District Forums, State Commissions
like defective and unsafe products, and the National Commission. It also
adulteration, false and misleading provides for the formation of consumer
advertising, hoarding, black marketing protection councils in every District
etc. and State, and at the apex level.
(v) Government Intervention: A 2. The Indian Contract Act, 1872:
business engaging in any form of The Act lays down the conditions in
exploitative trade practices would which the promises made by parties
invite government intervention or to a contract will be binding on each
action. This can impair and tarnish other. The Act also specifies the
2019-2020

Ch_12.indd 346 27-Feb-19 5:15:25 PM
consumer protection
347
Protection against malpractices and exploitation
remedies available to parties in case activities of profiteers, hoarders and

of breach of contract. black-marketers.
3. The Sale of Goods Act, 1930: 5. The Agricultural Produce (Grading
The Act provides some safeguards and Marking) Act, 1937: The Act
and reliefs to the buyers of the goods prescribes grade standards for
in case the goods purchased do agricultural commodities and live-
not comply with express or implied stock products. The Act stipulates
the conditions which govern the
conditions or warranties.
use of standards and lays down the
4. The Essential Commodities Act, procedure for grading, marking and
1955: The Act aims at controlling packing of agricultural produce. The
production, supply and distribution quality mark provided under the Act
of essential commodities, checking is known as AGMARK, an acronym for
inflationary trend in their prices Agricultural Marketing.
and ensuring equal distribution of 6. The Prevention of Food
essential commodities. The Act also Adulteration Act, 1954: The Act
provides for action against anti-social aims to check adulteration of food
2019-2020

Ch_12.indd 347 27-Feb-19 5:15:25 PM
BUSINESS STUDIES
348
articles and ensure their purity so as The most important of these

to maintain public health. regulations is the Consumer
7. The Standards of Weights and Protection Act which provides for
Measures Act, 1976: The provisions of six consumer rights and helps
this Act are applicable in case of those consumers in getting their grievances
goods which are sold or distributed redressed for any shortcoming in the
by weight, measure or number. It goods purchased or services availed.
provides protection to consumers
against the malpractice of under- The Consumer Protection Act,
weight or under-measure. 1986
8. The Trade Marks Act, 1999: This Act The Consumer Protection Act (CPA)
has repealed and replaced the Trade seeks to protect and promote the
and Merchandise Marks Act, 1958. consumers’ interest through speedy
The Act prevents the use of fraudulent and inexpensive redressal of their
marks on products and thus, provides grievances.
protection to the consumers against The scope of the Act is very
such products. wide. It is applicable to all types
9. The Competition Act, 2002: of undertakings, big and small,
This Act has repealed and replaced whether in the private or public
the Monopolies and Restrictive Trade sector, or in the co-operative sector,
Practices Act, 1969. The Act provides whether a manufacturer or a trader,
protection to the consumers in case of and whether supplying goods or
practices adopted by business firms providing services.
which hamper competition in the The Act confers certain rights to
market. consumers with a view to empowering
them and to protect their interests.
10. The Bureau of Indian Standards
Act, 1986: The Bureau of Indian
Consumer Rights
Standards has been set up under the
Act. The Bureau has two major activities: The Consumer Protection Act
formulation of quality standards for goods provides for six rights of consumers.
and their certification through the BIS The consumer protection councils
certification scheme. Manufacturers set up under the Act are intended
are permitted to use the ISI mark on to promote and protect the various
their products only after ensuring that rights of consumers. These rights
the goods conform to the prescribed include the following:
quality standards. The Bureau has 1. Right to Safety: The consumer has
also setup a grievance cell where a right to be protected against goods
consumers can make a complaint and services which are hazardous to
about the quality of products carrying life and health. For instance, electrical
the ISI mark. appliances which are manufactured
2019-2020

Ch_12.indd 348 27-Feb-19 5:15:25 PM
consumer protection
349
with substandard products or do not of his expectations. The Consumer

conform to the safety norms might Protection Act provides a number of
cause serious injury. Thus, consumers reliefs to the consumers including
are educated that they should use replacement of the product, removal
electrical appliances which are ISI of defect in the product, compensation
marked as this would be an assurance paid for any loss or injury suffered by
of such products meeting quality the consumer, etc.
specifications. 6. Right to Consumer Education:
2. Right to be Informed: The The consumer has a right to acquire
consumer has a right to have complete knowledge and to be a well informed
information about the product he consumer throughout life. He should
intends to buy including its ingredients, be aware about his rights and the
date of manufacture, price, quantity, reliefs available to him in case of a
directions for use, etc. It is because of product or service falling short of
this reason that the legal framework his expectations. Many consumer
in India requires the manufactures organisations and some enlightened
to provide such information on the businesses are taking an active
package and label of the product. part in educating consumers in this
3. Right to Choose: The consumer respect.
has the freedom to choose from a The Consumer Protection Act
variety of products at competitive by conferring these rights on the
prices. This implies that the marketers consumers empowers them to fight
should offer a wide variety of products against any unscrupulous, exploitative
in terms of quality, brand, prices, size, and unfair trade practices adopted by
etc. and allow the consumer to make sellers. The Box on East Delhi eatery
a choice from amongst these. shows how a restaurant owner was
4. Right to be Heard: The consumer fined for overpricing bottled water.
has a right to file a complaint and to Consumer rights, by themselves,
be heard in case of dissatisfaction cannot be effective in achieving the
with a good or a service. It is because objective of consumer protection.
of this reason that many enlightened Consumer protection can, in
business firms have set up their own effect, be achieved only when the
consumer service and grievance cells. consumers also understand their
Many consumer organisations are also responsibilities.
working towards this direction and
helping consumers in redressal of their Consumer Responsibilities
grievances. A consumer should keep in mind
5. Right to seek Redressal: The the following responsibilities while
consumer has a right to get relief in purchasing, using and consuming
case the product or service falls short goods and services.
2019-2020

Ch_12.indd 349 27-Feb-19 5:15:25 PM
BUSINESS STUDIES
350
Eatery fined for Overpricing Bottled Water

A restaurant owner in east Delhi has been directed to pay a fine of Rs. 5,000 to a
customer who was asked to shell out Rs. 34 for a water bottle which had a maximum
retail price (MRP) of Rs.12. The fine comes at a time when consumer courts are
turning the heat on shop-owners who overcharge. In a recent landmark decision,
the state consumer commission had slapped a fine of Rs. 50,000 on a cineplex for
similar malpractice. Goel was awarded the compensation by east district consumer
forum president and members directing Zaika Bazaar, Karkardooma Complex,
to compensate Goel for overcharging. The Forum said: “The present complaint is
covered by the judgment of the state consumer commision in case of Nirulas vs
Ankit Jain in which it said no trader or service provider can charge more price
than an item’s MRP printed on the packed item, if delivered packed”. Ordering the
restaurant owner to discontinue the malpractice, the forum said charging higher
amount than MRP, if delivered in packed form, was against the law of the land. Goel
had bought a bottle of Aquafina water from the restaurant in November last year
and was asked to pay Rs.34 for it, including a VAT of Rs. 4, when the bottle had a
MRP of Rs.12 printed on it.
Source: www.corecentre.org
(i) Be aware about various goods and and discourage unscrupulous

services available in the market so practices like black-marketing,
that an intelligent and wise choice hoarding etc.
can be made. (vii) Ask for a cash memo on purchase
(ii) Buy only standardised goods as of goods or services. This would
they provide quality assurance. serve as a proof of the purchase
Thus, look for ISI mark on made.
electrical goods, FPO mark on
food products, Hallmark on (viii) File a complaint in an appropriate
jewelry etc. consumer forum in case of a
shortcoming in the quality of
(iii) Learn about the risks associated
goods purchased or services
with products and services, follow
manufacturer’s instructions and availed. Do not fail to take an
use the products safely. action even when the amount
involved is small.
(iv) Read labels carefully so as to
have information about prices, (ix) Form consumer societies which
net weight, manufacturing and would play an active part in
expiry dates, etc. educating consumers and
(v) Assert yourself to ensure that you safeguarding their interests.
get a fair deal. (x) Respect the environment. Avoid
(vi) Be honest in your dealings. Choose waste, littering and contributing
only from legal goods and services to pollution.
2019-2020

Ch_12.indd 350 27-Feb-19 5:15:26 PM
consumer protection
351
Mark of Bureau of Indian

Standards
Food Process Order Agmark
BIS Hallmark Eco-mark
Marks indicating quality in different products
A consumers’ awareness about his standards and practices in dealing

rights and responsibilities is just one with their customers. Many firms
of the ways in which the objective of have set up their customer service and
consumer protection can be achieved. grievance cells to redress the problems
There are other ways in which this and grievances of their consumers.
objective may be achieved. 2. Business Associations: The
associations of trade, commerce and
Ways and means of Consumer business like Federation of Indian
Protection Chambers of Commerce of India
(FICCI) and Confederation of Indian
There are various ways in which the Industries (CII) have laid down their
objective of consumer protection can code of conduct which lay down for
be achieved. their members the guidelines in their
1. Self Regulation by Business: dealings with the customers.
Enlightened business firms realise 3. Consumer Awareness: A
that it is in their long-term interest consumer, who is well-informed about
to serve the customers well. Socially his rights and the reliefs available
responsible firms follow ethical to him, would be in a position to
2019-2020

Ch_12.indd 351 27-Feb-19 5:15:26 PM
BUSINESS STUDIES
352
raise his voice against any unfair 5. Government: The government can
trade practices or unscrupulous protect the interests of the consumers
exploitation. In addition to this, an by enacting various measures. For
understanding of his responsibilities example, the GOI has set up a toll-free
would also enable a consumer to national consumer Helpline Number
safeguard his interests. In this 1800114000 (9:30 am – 5:30 pm) for
regard, the Department of Consumer this purpose. The legal framework
Affairs, GOI, has been undertaking the in India encompasses various
campaign, Jago Grahak Jago through legislations which provide protection
to consumers. The most important
multimedia awareness.
of these regulations is the Consumer
4. Consumer Organisations: Consumer Protection Act, 1986. The Act provides
organisations play an important role for a three-tier machinery at the
in educating consumers about their district, state and national levels for
rights and providing protection to redressal of consumer grievances. The
them. These organisations can force redressal mechanism under this three-
business firms to avoid malpractices tier machinery has been explained
and exploitation of consumers. hereunder.
Consumer Awareness
2019-2020

Ch_12.indd 352 27-Feb-19 5:15:26 PM
consumer protection
353
Redressal Agencies under the Act defines a consumer and who can
Consumer Protection Act file a complaint under the Consumer
Protection Act.
For the redressal of consumer
grievances, the Consumer Protection Consumer: A ‘consumer’ is generally
Act provides for setting up of a three-tier understood as a person who uses or
enforcement machinery at the District, consumes goods or avails of any ser-
State, and the National levels, known vice. Under the Consumer Protection
as the District Consumer Dispute Act, a consumer is defined as:
Redressal Forum, State Consumer (a) Any person who buys any goods
Disputes Redressal Commission, and for a consideration, which has
the National Consumer Disputes been paid or promised, or partly
Redressal Commission. They are briefly paid and partly promised, or under
referred to as the ‘District Forum’, any scheme of deferred payment.
‘State Commission’, and the ‘National It includes any user of such goods,
Commission’, respectively. While the when such use is made with the
National Commission is set up by approval of the buyer, but does
the Central Government, the State not include a person who obtains
Commissions and the District Forums goods for re-sale or any commercial
are set up, in each State and District, purpose.
respectively, by the State Government (b) Any person who hires or avails of
concerned. The Figure on redressal any service, for a consideration
agencies shows the hierarchical which has been paid or promised,
structure of this three-tire machinery. or partly paid and partly promised,
Before studying the set-up and or under any system of deferred
functioning of these redressal agencies payment. It includes any beneficiary
let see how the Consumer Protection of services when such services are
Supreme Court
National Commission
State Commission
District Forum
Redressal Agencies under the Consumer Protection Act
2019-2020

Ch_12.indd 353 27-Feb-19 5:15:26 PM
BUSINESS STUDIES
354
availed of with the approval of the the complaint, the District Forum
person concerned, but does not shall refer the complaint to the party
include a person who avails of against whom the complaint is filed.
such services for any commercial If required, the goods or a sample
purpose. thereof, shall be sent for testing in a
Who can file a complaint?: A laboratory. The District Forum shall
complaint before the appropriate pass an order after considering the
consumer forum can be made by: test report from the laboratory and
(i) Any consumer can file a complaint hearing to the party against whom the
on his/her own and does not complaint is filed. In case the aggrieved
need the services of advocate/ party is not satisfied with the order
professionals; of the District Forum, he can appeal
before the State Commission within 30
(ii) A n y r e g i s t e r e d c o n s u m e r s ’ days of the passing of the order.
association;
2. State Commission: There are 365
(iii) The Central Government or any State Commission of India. Each State
State Government; Commission consists of a President
(iv) One or more consumers, on behalf and not less than two other members,
of numerous consumers having the one of whom should be a woman.
same interest; and They are appointed by the State
(v) A legal heir or representative of a Government concerned. A complaint
deceased consumer. can to be made to the appropriate
(vi) A complaint under Section 2 (b) of State Commission when the value
the Consumer Protection Act 1986. of the goods or services in question,
along with the compensation claimed,
Let us now see how the consumer
exceeds Rs. 20 lakhs but does not
grievances are redressed by the three-
exceed Rs. 1 crore. The appeals against
tire machinery under the Consumer
the orders of a District Forum can also
Protection Act.
be filed before the State Commission.
1. District Forum: There are 644 On receiving the complaint, the
district commissions in India. The State Commission shall refer the
District Forum consists of a President complaint to the party against whom
and two other members, one of whom the complaint is filed. If required, the
should be a woman. They all are goods or a sample thereof, shall be
appointed by the State Government sent for testing in a laboratory. The
concerned. A complaint can to be State Commission shall pass an order
made to the appropriate District after considering the test report from
Forum when the value of the goods the laboratory and hearing to the
or services in question, along with party against whom the complaint is
the compensation claimed, does not filed. In case the aggrieved party is not
exceed Rs. 20 lakhs. On receiving satisfied with the order of the State
2019-2020

Ch_12.indd 354 27-Feb-19 5:15:26 PM
consumer protection
355
Commission, he can appeal before the Moreover, in a case decided by the

National Commission within 30 days District Forum, the appeal can be
of the passing of the order. filed before the State Commission
3. National Commission: The National and, thereafter, the order of the State
Commission has territorial jurisdiction Commission can be challenged before
over the whole country, except the state the National Commission and no
of Jammu and Kashmir. The National further.
Commission consists of a President
and at least four other members, one Relief Available
of whom should be a woman. They are If the consumer court is satisfied about
appointed by the Central Government. the genuineness of the complaint, it
A complaint can to be made to the can issue one or more of the following
National Commission when the directions to the opposite party.
value of the goods or services in
question, along with the compensation (i) To remove the defect in goods or
claimed, exceeds Rs. 1 crore. The deficiency in service.
appeals against the orders of a State (ii) To replace the defective product
Commission can also be filed before the with a new one, free from any
National Commission. On receiving the defect.
complaint, the National Commission (iii) To refund the price paid for the
shall refer the complaint to the party product, or the charges paid for
against whom the complaint is filed. the service.
If required, the goods or a sample (iv) To pay a reasonable amount of
thereof, shall be sent for testing in a compensation for any loss or
laboratory. The National Commission injury suffered by the consumer
shall pass an order after considering due to the negligence of the
the test report from the laboratory and opposite party.
hearing to the party against whom the
complaint is filed. (v) To pay punitive damages in
appropriate circumstances.
An order passed by the National
Commission in a matter of its original (vi) To discontinue the unfair/
jurisdiction is appealable before the restrictive trade practice and not
Supreme Court. This means that only to repeat it in the future.
those appeals where the value of goods (vii) Not to offer hazardous goods for
and services in question, along with sale.
the compensation claimed, exceeded (viii) To withdraw the hazardous goods
Rs. 1 crore and where the aggrieved from sale.
party was not satisfied with the order (ix) T o c e a s e m a n u f a c t u r e o f
of the National Commission, can be hazardous goods and to desist
taken to the Supreme Court of India. from offering hazardous services.
2019-2020

Ch_12.indd 355 27-Feb-19 5:15:26 PM
BUSINESS STUDIES
356
Some Decided Cases

Under the Consumer Protection Act, a consumer can file a complaint against the
manufacturers or sellers for any defective good supplied to him or any deficient
services rendered to him.
In Jose Philip Mampillil vs. M/s Premier automobiles Ltd. & Anr, a diesel
car purchased by the appellant (consumer) was found defective. The defects
in the car were not removed by the defendants (manufacturer and dealer). The
Commissioner appointed by the District Forum found a large number of defects
in the car. Consequently, the District Forum directed repair of car free of cost and
replacement of engine. The order was upheld by the State Commission except for
the direction for replacement of engine.
In the case of Sashikant Krishnaii Dole vs. Shikshan Prasarak Mandali, the
National Commission held that failure to amount basic safeguards in the swimming
pool amounts to deficiency in service. A school owned a swimming pool and offered
swimming facilities to the public on payment of a fee. The school conducted winter
and summer training camps to train boys in swimming and for this purpose
engaged a coach. The plaintiffs enrolled their only son for learning swimming
under the guidance of the coach. It was alleged that due to the negligence of the
coach, the boy drowned and died. The school denied any responsibility on its part.
The coach claimed that he had considerable experience in coaching young boys
is swimming. When the deceased was found to have been drowned, the coach
immediately took him out of the water and removed the water from his stomach
and gave him artificial respiration and thereafter took him to a doctor. The doctor
advised that the boy be taken to the nearest hospital where the boy died. The State
Commission held the school and the coach deficient in rendering service to the
deceased. On appeal, the order was upheld by the National Commission.
Adapted from: www.indiainfoline.com
(x) To pay any amount (not less than Bring out some decided cases
5% of the value of the defective where a complaint was filed in a
goods or deficient services consumer court for defective goods and
provided), to be credited to the deficient services.
Consumer Welfare Fund or any
other organisation/person, to be Role of Consumer Organisations
utilised in the prescribed manner. and NGOs
(xi) To issue corrective advertisement In India, several consumer

to neutralise the effect of a organisations and non-governmental
misleading advertisement. organisations (NGOs) have been set
up for the protection and promotion
(xii) To pay adequate costs to the of consumers’ interests. Non-
appropriate party. governmental organisations are non-
2019-2020

Ch_12.indd 356 27-Feb-19 5:15:26 PM
consumer protection
357
CERS Wins Case against Railways

In a case filed by Consumer Education and Research Society (CERS), Ahmedabad,
and a senior couple, the Consumer Dispute Redressal Forum, Ahmedabad City,
has held the Railways responsible for negligence and directed it to pay Rs. 2000 to
the couple for its mental agony and Rs. 3000 towards cost.
Mr. Man Mohan Singh and his wife Kamlesh had bought a railway journey-
cum-reservation ticket at Ahmedabad for travel from New Delhi to Kanpur Central
by the Shatabdi Express on 2 December 2001. The details on the ticket, including
the coach number, the date of journey, etc., were illegible. Hence, they were forced
to buy another ticket for journey from New Delhi to Kanpur. They applied for a
refund for the earlier ticket but, as the Forum noted, they had to suffer much for
the purpose. In spite of the couple’s giving the Ahmedabad residential address for
sending the refund, the Railways sent it to their Delhi address. They approached
CERS for help.
CERS filed a complaint against the Railways before the Consumer Dispute
Redressal Forum, Ahmedabad City, under Sections 2(1)(g) and 2(1)(o) of the
Consumer Protection Act, 1986. CERS claimed that the two senior citizens had
to face mental harassment due to the deficiency in service by the Railways.
The Railways contended, among other things, that the Forum had no territorial
jurisdiction after cancellation of the ticket, the couple were no more consumers in
the eye of the law, the complaint was time-barred and the Railway Claim Tribunal
was the proper forum to entertain the complaint about refund.
The Forum, however, observed that the couple’s difficulties amounted to the
Railways’ deficiency in service and ordered it to pay Rs. 2000 to the couple for the
mental agony suffered by them and Rs. 3000 as cost. The Forum did not decide
on the amount of refund, which it said, was “to be exclusively dealt with by the
Railway Claim Tribunal”.
Source: www.corecentre.org
profit organisations which aim at (ii) Publishing periodicals and other

promoting the welfare of people. They publications to impart knowledge
have a constitution of their own and about consumer problems, legal
are free from government interference. reporting, reliefs available and
Consumer organisations and NGOs other matters of interest.
perform several functions for the (iii) Carrying out comparative testing of
consumer products in accredited
protection and promotion of interest
laboratories to test relative
of consumers. These include:
qualities of competing brands and
(i) Educating the general public publishing the test results for the
about consumer rights by benefit of consumers.
organising training programmes, (iv) E n c o u r a g i n g c o n s u m e r s t o
seminars and workshops. strongly protest and take an
2019-2020

Ch_12.indd 357 27-Feb-19 5:15:26 PM
BUSINESS STUDIES
358
action against unscrupulous, (ii) Common Cause, Delhi

exploitative and unfair trade (iii) Voluntary Organisation in Interest
practices of sellers. of Consumer Education (VOICE),
(v) Providing legal assistance to Delhi
consumers by way of providing
(iv) C o n s u m e r E d u c a t i o n a n d
aid, legal advice etc. in seeking
Research Centre (CERC),
legal remedy.
Ahmedabad
(vi) Filing complaints in appropriate
consumer courts on behalf of the (v) Consumer Protection Council
consumers. (CPC), Ahmedabad
(vii) Taking an initiative in filing cases (vi) Consumer Guidance Society of
in consumer courts in the interest India (CGSI), Mumbai
of the general public, not for any (vii) Mumbai Grahak Panchayat,
individual. Mumbai
Some of the important consumer
(viii) Karnataka Consumer Service
organisations and NGOs engaged in
Society, Bangalore
protecting and promoting consumers’
interests include the following. (ix) Consumers’ Association, Kolkata
(i) Consumer Coordination Council, (x) Consumer Unity and Trust Society
Delhi (CUTS), Jaipur
Key Terms
Consumer Protection Consumer Rights Consumer Responsibilities
Redressal of grievance Grades Standards
Summary
Importance of Consumer Protection: From the point of consumers, consumer

protection is important because consumers are ignorant, unorganised and
exploited by sellers. Consumer Protection is also important for a business
because (i) It is in the long-term interest of business, (ii) Business uses society’s
resources, (iii) It is a social responsibility of business, (iv) It has moral justification,
(v) It avoids government intervention in the functioning of business.
Legal Protection to Consumers: The Indian legal framework consists of a
number of legislations which provide protection to consumers. These include
(i) The Consumer Protection Act, 1986, (ii) The Indian Contract Act, 1872, (iii)
2019-2020

Ch_12.indd 358 27-Feb-19 5:15:26 PM
consumer protection
359
The Sale of Goods Act, 1930, (iv) The Essential Commodities Act,1955, (v) The
Agricultural Produce (Grading and Marking) Act, 1937, (vi) The Prevention
of Food Adulteration Act, 1954, (vii) The Standards of Weights and Measures
Act, 1976, (viii) The Trade Marks Act, 1999, (ix) The Competition Act, 2002,
(x) The Bureau of Indian Standards Act, 1986.
Consumer Rights: The Consumer Protection Act, 1986, provides for six
consumer rights. These are: (i) Right to safety, (ii) Right to be informed,
(iii) Right to choose, (iv) Right to be heard, (v) Right to seek redressal,
(vi) Right to consumer education.
Consumer Responsibilities: In addition to exercising his rights, a consumer
should also keep in mind his responsibilities while purchasing, using and
consuming goods and services.
Ways and Means of Consumer Protection: There are various ways in which
the objective of consumer protection can be achieved. These Include (i) Self
regulation by business, (ii) Business associations, (iii) Consumer awareness,
(iv) Consumer organisations, (v) Government.
Redressal Agencies under the Consumer Protection Act: The Consumer
Protection Act provides for setting up of a three-tier enforcement machinery at
the District, State, and the National levels. They are referred to as the ‘District
Forum’, ‘State Commission’, and the ‘National Commission’. There are various
reliefs available to a consumer under the Act. The appropriate consumer court
may pass an order for removal of defect in goods, replace a defective product,
refund the price of the product, pay compensation for the loss suffered, etc.
Consumer Organisations and NGOs: In India, several consumer organisations
and non-governmental organisations (NGOs) are playing an active role in
protection and promotion of consumers’ interests.
EXERCISES

1. Under which consumer right does a business firm set up consumer
grievance cell?
2. Which quality certification mark is used for agricultural products?
3. What is the jurisdiction of cases that can be filed in a State Commission?
4. State any two relief available to consumers under CPA.
5. Name the component of product mix that helps the consumer to exercise
the right to information.
2019-2020

Ch_12.indd 359 27-Feb-19 5:15:26 PM
BUSINESS STUDIES
360
Short Answer Type

1. Enumerate the various Acts passed by the Government of India which
help in protection of consumers’ interests.
2. What are the responsibilities of a consumer?
3. Who can file a complaint in a consumer court?
4. FSSAI (Food Safety and Standards Authority of India) has made a proposal
for hotels and other food outlets to declare the kind of oil/fat used in
cooking each of the food items on their menus. Name and explain the
Consumer Right being reinforced by this proposal.
5. Who is a consumer as per CPA?
Long Answer Type

1. Explain the importance of consumer protection from the point of view
of a business.
2. Explain the rights and responsibilities of consumer?
3. What are various ways in which the objective of consumer protection
can be achieved?
4. Explain the redressal mechanism available to consumers under the
Consumer Protection Act, 1986.
5. Explain the role of consumer organisations and NGOs in protecting and
promoting consumer’s interest.
6. Mrs. Mathur sent a jacket to a laundry shop in January 2018. The jacket
was purchased at a price of `4,500. She had previously sent the jacket
for dry cleaning with Shine Dry Cleaners and the jacket was cleaned
well. However, she noticed that her jacket had white discoloration marks
when she collected the jacket this time. On informing the dry cleaner,
Mrs. Mathur received a letter confirming that discolouration indeed
appeared after the jacket was dry cleaned. She contacted the dry cleaner
multiple times and requested for compensation for discoloured jacket
but to no avail.
Upon Consumer court’s intervention, Shine Dry Cleaners agreed to
compensate `2,500 to Mrs. Mathur for the discoloured jacket.
a. Which right was exercised by Mrs. Mathur at the first instance.
b. Name and explain the right which helped Mrs. Mathur to avail the
compensation.
c. State which consumer responsibility has been fulfilled by Mrs. Mathur
in the above case.
d. State any other two responsibilities to be assumed by the consumers.
2019-2020

Ch_12.indd 360 27-Feb-19 5:15:27 PM
Project work
1. Visit a consumer organisation in your town. List down the various
functions performed by it.
2. Collect some newspaper cuttings of some consumer cases and the rulings
given therein.
2019-2020

Ch_12.indd 361 27-Feb-19 5:15:27 PM
Notes
2019-2020

Ch_12.indd 362 27-Feb-19 5:15:27 PM

Buisness 12th Part-2

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Buisness 12th Part-2

Uploaded by

Copyright:

Available Formats

Business Studies

February 2019 Phalguna 1940 DIVISION NCERT

November 2019 Agrahayana 1941 NCERT Campus

Navjivan Trust Building

The National Council of Educational Research and Training (NCERT)

Note to the Teacher

Chapter 9 Financial Management 225

Chapter 10 Financial Markets 252

Chapter 11 Marketing 276

Chapter 12 Consumer Protection 323

Chapter 2 Principles of Management 30

Chapter 3 Business Environment 69

Chapter 5 Organising 111

Chapter 6 Staffing 141

Chapter 7 Directing 171

Chapter 8 Controlling 205

Click on this link to buy latest Educart Books on Amazon - https://amzn.to/3OwEosm

Introduction thus, very crucial for the survival and

Click on this link to buy latest Educart Books on Amazon - https://amzn.to/3OwEosm

prominent examples of the aspects raised by way of debt and/or equity

Click on this link to buy latest Educart Books on Amazon - https://amzn.to/3OwEosm

Click on this link to buy latest Educart Books on Amazon - https://amzn.to/3OwEosm

Click on this link to buy latest Educart Books on Amazon - https://amzn.to/3OwEosm

expected returns from each whether or not a firm has earned a

Click on this link to buy latest Educart Books on Amazon - https://amzn.to/3OwEosm

Factors Affecting Financing different. A prudent financial

Click on this link to buy latest Educart Books on Amazon - https://amzn.to/3OwEosm

India Inc. Issues Bonus Shares and Dividends

Click on this link to buy latest Educart Books on Amazon - https://amzn.to/3OwEosm

increases the firm’s future earning the change in earnings is small or

Click on this link to buy latest Educart Books on Amazon - https://amzn.to/3OwEosm

a dividend distribution tax is levied Financial Planning

Click on this link to buy latest Educart Books on Amazon - https://amzn.to/3OwEosm

Thus, financial planning strives to programmes. Short-term planning

Click on this link to buy latest Educart Books on Amazon - https://amzn.to/3OwEosm

respect of the availability and timing sales is predicted. However, it

Cutting Back on Debt

Click on this link to buy latest Educart Books on Amazon - https://amzn.to/3OwEosm

immense help in running the public deposits etc. These may be

Click on this link to buy latest Educart Books on Amazon - https://amzn.to/3OwEosm

in meeting these commitments may Capital structure of a company,

Situation I Situation II Situation III

Click on this link to buy latest Educart Books on Amazon - https://amzn.to/3OwEosm

D that company is earning on funds

Click on this link to buy latest Educart Books on Amazon - https://amzn.to/3OwEosm

structure are as follows: A higher DSCR indicates better

Click on this link to buy latest Educart Books on Amazon - https://amzn.to/3OwEosm

Click on this link to buy latest Educart Books on Amazon - https://amzn.to/3OwEosm

Click on this link to buy latest Educart Books on Amazon - https://amzn.to/3OwEosm

Click on this link to buy latest Educart Books on Amazon - https://amzn.to/3OwEosm

3. Choice of Technique: Some textile company is diversifying and

Click on this link to buy latest Educart Books on Amazon - https://amzn.to/3OwEosm

1. Cash in hand/Cash at Bank if it can be converted into cash quicker

Working Capital Position

Click on this link to buy latest Educart Books on Amazon - https://amzn.to/3OwEosm

Some part of current assets is to the organisations which operate on a

Click on this link to buy latest Educart Books on Amazon - https://amzn.to/3OwEosm

Click on this link to buy latest Educart Books on Amazon - https://amzn.to/3OwEosm

Financial Planning and Importance Financial planning is essentially

Click on this link to buy latest Educart Books on Amazon - https://amzn.to/3OwEosm

Fixed and Working Capital Fixed capital refers to investment in long-term

Very Short Answer Type

Click on this link to buy latest Educart Books on Amazon - https://amzn.to/3OwEosm

5. Ramnath is into the business of assembling and selling of televisions.