PRINCIPLES AND PRACTICES OF MANAGEMENT

UNIT-2
PLANNING

CONCEPT OF PLANNING

Planning means to look ahead and chalk out future courses of action to be followed. It is a
systematic activity which determines when, how and who is going to perform a specific job. It is
rightly said “Well plan is half done”. Therefore planning takes into consideration available &
prospective human and physical resources of the organization so as to get effective co-
ordination, contribution & perfect adjustment. It is the basic management function which
includes formulation of one or more detailed plans to achieve optimum balance of needs or
demands with the available resources.

NATURE OF PLANNING
The nature of planning can be better understood by emphasizing the following characteristics of
planning:-

1. Based on objectives- Planning is closely associated with the objectives of the

organization. It lays down the actions that will lead towards the ultimate objectives

2. Forward looking- It involves forecasting the future environment in which the

organization is expected to function.
3. Primacy of planning- Planning is the first of the managerial functions to be performed.
4. Selection of Alternatives- Planning is concerned with selecting the best course of action
among all the alternatives.
5. Effectiveness of planning- The efficiency and effectiveness of planning is measured by
its contribution in reaching organizational objectives versus its corresponding costs.
6. Intellectual activity: Planning involves vision and foresightedness to decide the things to
be done in future. It bridges the gap between where we are and where we want to go.
7. Pervasive function:It is done at all levels of the organization and in all types of
organization.

SCOPE AND OBJECTIVES OF PLANNING

1. To provide unity of direction: Planning is intended to give a sense of direction to all
organizational activities by focusing on well defined goals of the enterprise.
2. To reduce uncertainty: Business enterprises operate in an uncertain environment and
 face several types of risks. Planning enables the enterprises to predict future events and
prepare for the same.
3. To check overlapping and wasteful activities: Planning is done to ensure clarity in
thought and action. There would be no confusion and misunderstanding.
4. To promote new ideas: Planning is thinking in advance and, therefore, there is scope of
finding better ideas, methods and procedures to reach the goals of the enterprise.
5. To establish standards for controlling: Planning is intended to provide standards or
benchmarks against which the actual performance could be measured and evaluated.
SIGNIFICANCE/IMPORTANCE OF PLANNING
1. Focuses attention on objectives: Since all planning is directed towards achieving
enterprise objectives, the very act of planning focuses attention on these objectives.
2. Ensures economical operations: Planning involves a lot of mental exercise which is
directed towards achieving efficient operation in the enterprise.
3. Reduces uncertainty: Planning helps to reduce uncertainties of future because it
involves anticipation of future events.
4. Facilitates control: Planning and control are inseparable in the sense that unplanned
action cannot be controlled because control involves keeping activities on the
predetermined course by rectifying deviations from plan.
5. Encourages innovation and creativity: Planning is basically the deciding function of
management which helps to bring innovation and creative thinking among the managers
because many new ideas come to the mind of the manager when he is planning.
6. Improves motivation: A good planning system ensures participation of all managers
which improves their motivation.
7. Improves competitive strength: Effective planning gives a competitive edge to the
enterprise over other enterprises that do not have planning or have ineffective planning.
TYPES OF PLANNING
We can classify planning on the basis of the following dimensions:-

1. Organizational level: Corporate, Divisional and Functional planning

2. Focus: Strategic, Operational and Tactical planning.
3. Time period: Long-range, Medium-range and Short-range.

I. LEVELS OF PLANNING
Based on organizational levels, planning exercise may take the form of following:

1. Corporate Planning: Corporate planning may be defined as a systematic and

comprehensive process of planning taking account of the resources and capability of the
organization and the environment within which it has to operate and viewing the
organization as a total corporate unit.
2. Divisional Planning: This relates to a particular division or department. Thus, it sets the
objectives, policies for a particular department in tune with the corporate plans of an
enterprise. Divisional head and middle level managers are responsible for this.
3. Sectional or Unit Planning: Unit planning is highly specific as it is done to achieve the
divisional objectives. Its focus is to lay down detailed plans for a particular unit for day-
to-day guidance of personal working there. First line managers are responsible for its
planning.

II. FOCUS OF PLANNING

The focus of managerial planning may be on developing:

1. Strategic planning: Strategic planning is the process of deciding the objectives of the
organization and determining the manner in which the resources of the enterprise are to
be deployed to realize the objectives in the uncertain environment.
2. Operational planning: Operational planning is concerned with the efficient use of the
already allocated and with the development of a control mechanism to ensure efficient
operation so that organizational objectives are achieved.
3. Tactical planning: These plans are made for short term moves necessary for supporting
the strategic plans and achieving the firm's objectives. They are required to meet the
challenges of sudden changes in the environmental forces.
III. RANGE OR TIME SPAN OF PLANNING
Basis Long-range Planning Medium-range Planning Short-range Planning
Time Span Time horizon is generally
Time horizon is more than Time span is restricted
more than five years. one year, but less than five to one year.
years.
Focus It is focused on the It is focused on the long Its main focus is on the
external environment of range plans and internal internal environment of
the business. environment of the business. Linkage
business. between various
elements of business
are greatly emphasized.
Uncertainty It is very high. It is moderate. It is low.
Specificity The actions are The actions are specified The actions are highly
less specified. but there is a lack of specific and detailed.
details available.
Linkage It is linked with It is linked with long- range It is instrumental in
the corporate objectives. planning. implementing medium
and long-range
planning.
Means Strategies and long-term Policies, Methods,
policies are formulated. procedures, programmes rules, budgets,
and projects schedules etc
are quite often used. are used.

PLANNING PROCESS
It is not easy to specify the steps in the planning process for all organizations because of their
differences in size and complexity. The suggested steps are:

1. Establishing Objectives: Objectives provide direction to various activities in the

enterprise. The establishment of objectives is then objectives themselves since their
establishment emphasizes how various people and units fit into the overall organization’s
framework. Objectives clarify the tasks to be accomplished. The derivatives objectives
focus on more details, that is, what is to be accomplished, where action is to take place,
who is to perform it, how it is to be undertaken, and when it is to be accomplished.
2. Collection of Information and Forecasting: Sufficient information must be collected
in order to make the plans and sub plans. Necessary information includes the critical
assessment of the current status of the organization together with a forward look at the
environment that is anticipated. Collection of information and making forecasts serve as
an important basis of planning.
 3. Development of planning premises: This step involves making assumptions concerning
the behavior of internal and external factors. Assumptions denote the expected
environment in the future and are known as ‘Planning Premises’. It is advisable to limit
premising to those factors which are critical or strategic to the planning process.
4. Search of Alternatives: The planner must try to find out all the possible alternatives.
Without resorting to such a search, manager is likely to be guided by his limited
imagination. It should be noted that determination of alternative plans can be a time
consuming task because objectives which have been established initially may be found to
be flexible.
5. Evaluation of Alternatives: Once alternative action plans have been determined, they
must be evaluated with references to considerations like costs, long-range objectives,
limited resources, risk and many intangible factors to select the satisfactory course of
action. The best possible alternatives may be chosen by the manager after detailed
analysis.
6. Selection of plan and development of Derivative plans: The final step in planning
process is to select the most feasible plan to develop derivative plans. The plans must also
include the feedback mechanism. The derivative plans are required to support the basic or
overall plans because the master plans cannot be executed effectively unless they are
supported by them.

ESSENTIAL REQUIREMENTS OF AN EFFECTIVE PLAN:

An effective plan is one which helps in the better management of the enterprise. In order to be effective,
a plan should possess the following characteristics:

1. The plan should be specific: The more specific it is, the less chance there is for it to be
misinterpreted.
2. The plan should be logical: The more facts it is based on, the better it is. If facts are not
available, reasonable assumptions must be made about the future.
3. The plan should be complete and integrated: A plan is said to be complete when it is
comprehensive enough to cover all actions expected from the individuals. It is said to be
integrated when various administrative plans are so welded into one another that the whole
undertaking operates at the peak of its efficiency.
4. The plan should be flexible: No plan is infallible nor can it cover all possible contingencies.
Conditions under which a plan will be most effective change as do the variables and factors
on which the plan is formulated.
5. The plan should be capable of being controlled: plan must distinguish between a
controllable and uncontrollable future environment for better administrative control.
KEY PRINCIPLES OF PLANNING:

1. Principle of contribution to objectives- The purpose of plans and their components is to

develop and facilitate the realization of organizational aims.
2. Principle of pervasiveness of planning- Strategic planning or long-term planning is related
to top management,, while intermediate and short range planning are the concern of middle
and operating management.
3. Principle of limiting factor- Planning must take the limiting factors, i.e., money, manpower,
machines, materials and management, into account by concentrating in them when
developing alternative plans, strategies, policies, procedures and standards.
4. Principle of flexibility- This states that management should be able to change an existing
plan because of change in environment without undue costs or delay so that activities keep
moving towards established goals.
5. Principles of Navigational Change- This states that managers should periodically check on
events and redraw plans to maintain a course towards the desired goals. It is the duty of the
navigator to check constantly whether his ship is following the right direction as scheduled.
6. Principle of commitment- This principle helps in determining the length of planning period.
It suggests that the time period covered by planning should be related to the commitment.

RELATIONSHIP BETWEEN PLANNING AND CONTROLLING

Planning and controlling are two separate functions of management, yet they are closely related.
The scopes of both activities are overlapping to each other. Without the basis of planning,
controlling activities becomes baseless and without controlling, planning becomes a meaningless
exercise. In absence of controlling, no purpose can be served by. Therefore, planning and
controlling reinforce each other. According to Billy Goetz, "Relationship between the two can be
summarized in the following points:

1. Planning precedes controlling and controlling succeeds planning.

2. Planning and controlling are inseparable functions of management.
3. Activities are put on rails by planning and they are kept at the right place through controlling.
4. The process of planning and controlling works on Systems Approach which is as follows:

Planning → Results → Corrective Action

 5. Planning and controlling are integral parts of an organization as both are important for
smooth running of an enterprise.
6. Planning and controlling reinforce each other. Each drives the other function of
management.

The strong relationship between the two is very critical and important. In the present day
environment, it is quite likely that planning fails due to some unforeseen events. Their control
comes to the rescue. Once control is done effectively, it gives us stimulus to make better plans.
Therefore, planning and controlling are interdependent and interrelated functions of a business
enterprise.

MANAGEMENT BY OBJECTIVES

The process of setting objectives in the organization to give a sense of direction to the employees
is called as Management by Objectives.

It refers to the process of setting goals for the employees so that they know what they are
supposed to do at the workplace. Management by Objectives defines roles and responsibilities
for the employees and help them chalk out their future course of action in the organization.

Management by objectives guides the employees to deliver their level best and achieve the
targets within the stipulated time frame.

What is Management by Objectives and what are the steps involved in it?

The concept of management by objectives is a logical extension of Goal setting theory. The
Goal Setting theory studies the processes by which people set goals for themselves and then put
in efforts to achieve them. Evidence proves that 90 percent of the time, performance improves
with goal setting. Comparatively high achievers set comparatively more difficult goals and they
are more satisfied with intrinsic rewards than extrinsic rewards. Management by objectives is an
extension of Goal theory as it involves systematic and programmatic goal getting throughout an
organization.

The concept of MBO was introduced by Peter Drucker in 1954 as a means of using goals to
improve people rather than to control them. Thus this concept of MBO is also known as Goal
management. It is based upon the assumption that involvement leads to commitment and when
an employee participates in goal setting as well as setting standards for measurement of
performance towards that goal then the employees will be motivated to perform better and in a
manner that directly contributes to the achievement of organizational objectives. Simply stated,
“MBO is a process whereby both managers and subordinates work together in identifying goals
and setting up objectives and makes plans together in order to achieve these objectives. Their
objectives and goals should be consistent with the organizational goals”.

According to George S. Ordiorne, MBO is a process whereby the superior and subordinate
managers of an organization jointly identify its common goals, define each individual major
areas of responsibility in terms of results expected of him, and use these measures as guides for
operating the unit and assessing the contribution of each of the members.

According to Koontz and Weihrich, “Management by objectives is a comprehensive

managerial system that integrates many key managerial activities in a systematic manner and that
is consciously directed toward the effective and efficient achievement of organizational and
individual objectives.”

NEED FOR MANAGEMENT BY OBJECTIVES (MBO):

The Management by Objectives process helps the employees to understand their duties at
the workplace.
KRAs are designed for each employee as per their interest, specialization and educational
qualification.
The employees are clear as to what is expected out of them.
Management by Objectives process leads to satisfied employees. It avoids job mismatch
and unnecessary confusions later on.
Employees in their own way contribute to the achievement of the goals and objectives of
the organization. Every employee has his own role at the workplace. Each one feels
indispensable for the organization and eventually develops a feeling of loyalty towards
the organization. They tend to stick to the organization for a longer span of time and
contribute effectively. They enjoy at the workplace and do not treat work as a burden.
Management by Objectives ensures effective communication amongst the employees. It
leads to a positive ambience at the workplace.
Management by Objectives leads to well defined hierarchies at the workplace. It ensures
transparency at all levels. A supervisor of any organization would never directly interact
with the Managing Director in case of queries. He would first meet his reporting boss
who would then pass on the message to his senior and so on. Every one is clear about his
position in the organization.
The MBO Process leads to highly motivated and committed employees.
The MBO Process sets a benchmark for every employee. The superiors set targets for
each of the team members. Each employee is given a list of specific tasks.
FEATURES OF MBO:

1. Superior-subordinate participation: MBO requires the superior and the subordinate to

recognize that the development of objectives is a joint project/activity. They must be jointly
agree and write out their duties and areas of responsibility in their respective jobs.
2. Joint goal-setting: MBO emphasizes joint goal-setting that are tangible, verifiable and
measurable. The subordinate in consultation with his superior sets his own short-term goals.
However, it is examined both by the superior and the subordinate that goals are realistic and
attainable. In brief, the goals are to be decided jointly through the participation of all.
3. Joint decision on methodology: MBO focuses special attention on what must be
accomplished (goals) rather than how it is to be accomplished (methods). The superior and
the subordinate mutually devise methodology to be followed in the attainment of objectives.
They also mutually set standards and establish norms for evaluating performance.
4. Makes way to attain maximum result: MBO is a systematic and rational technique that
allows management to attain maximum results from available resources by focussing on
atainable goals. It permits lot of freedom to subordinate to make creative decisions on his
own. This motivates subordinates and ensures good performance from them.
5. Support from superior: When the subordinate makes efforts to achieve his goals, superior's
helping hand is always available. The superior acts as a coach and provides his valuable
advice and guidance to the subordinate. This is how MBO facilitates effective
communication between superior and subordinates for achieving the objectives/targets set.

PROCESS OF MBO:

The basic steps that are common in all the processes of management by objective (MBO) are:-

1. Central goal setting: defining and verifying organizational objectives is the first step in
MBO process. Generally these objectives are set by central management of the organization but
it does so after consulting other managers. Before setting of these objectives, an extensive
assessment of the available resources is made by the central management. It also conducts
market service and research along with making a forecast. Through this elaborate analysis, the
desired long run and short run objectives of the organization are highlighted. The central
management tries to make these objectives realistic and specific. After setting these goals it is the
responsibility of the management that these are known to all members and are also under stood
by them.

2. Development and individual goal setting: After organization objectives are established
by the central management, the next step is to establish the department goals. The top
management needs to discuss these objectives with the heads of the departments so that mutually
agreed upon objectives are established. Long range and short range goals are set by each
department in consultation with the top management. After the department goals are established,
the employees work with their managers to establish their own individual goals which relate with
the organization goals. These participative goals are very important because It has been seen that
employees become highly motivated to achieve the objectives established by them. These
objectives for individuals should be specific and short range. These should indicate the capability
of the unit of the individual. Through this process all the members of the organization become
involved in the process of goal setting.

3. Revision of job description: In the process of MBO resetting individual goals involves a
revision of job description of different positions in the organization which in turn requires the
revision of the entire structure of the organization. The organization manuals and charts may also
have to be modified to portray the changes that have been introduced by the process of MBO.
The job description has to define the objectives, authority and responsibility of different jobs.
The connection of one job with all other jobs of the organization also needs to be established
clearly.

4. Matching goals: The establishment of objectives can not be fruitful unless the resources
and means required to achieve these objectives are provided. Therefore the subordinates should
be provided required tools and materials which enables them to achieve the objectives efficiently
and effectively. Resource requirements can be measured precisely if the goals are set precisely.
This makes the process of resource allocation relatively easy. Resource allocation should be
made after consulting the subordinates

5. Freedom Implementation: The task team of manager and his subordinates should be
given freedom in deciding the way to utilize their resources and the way to achieve their
objectives. There should be very little or no interference by the seniors as long as the team is
working with in the framework of organization policies.

6. Establishing check points: The process of MBO requires regularly meetings between
the managers and their subordinates to discuss the progress achieve in the accomplishment of the
objective established for the subordinates. For this purpose the mangers need to establish the
standards of performance or check points to evaluate the progress of their subordinates. These
standards need to be specified as for as possible quantitatively and it should also be ensured that
these are completely understood by the subordinates. This practices needs to be followed by all
managers and these should lead to an analysis of key results has the targets are represented in
terms of the results.

7. Performance appraisal: An informal performance appraisal is generally conducted in

routine by the manager, a periodic review of performance of the subordinates should also be
conducted. Periodic reviews are required as the priorities and conditions change constantly and
need to be monitored constantly. These reviews help the mangers as well as the subordinates to
modify the objectives or the methods whenever require. This significantly increases the chances
of
achieving the goals and also ensures that no surprises are found at the time of final appraisal.
Periodic performance appraisal needs to be based on measurable and fair standards so that these
are completely understood by the subordinates and there are also aware of the degree of
performance required at each step.

8. Counseling: Periodic performance review helps the subordinates in improving his future
performance.

Advantages/Benefits of Management by Objectives:

1. Develops result-oriented philosophy: MBO is a result-oriented philosophy. It does not

favor management by crisis. Managers are expected to develop specific individual and
group goals, develop appropriate action plans, properly allocate resources and establish
control standards. It provides opportunities and motivation to staff to develop and make
positive contribution in achieving the goals of an organization.
2. Formulation of dearer goals: Goal-setting is typically an annual feature. MBO produces
goals that identify desired/expected results. Goals are made verifiable and measurable
which encourage high level of performance. They highlight problem areas and are limited
in number. The meeting is of minds between the superior and the subordinates.
Participation encourages commitment. This facilitates rapid progress of an organization. In
brief, formulation of realistic objectives is me benefit of MBO.
3. Facilitates objective appraisal: NIBO provides a basis for evaluating a person's
performance since goals are jointly set by superior and subordinates. The individual is
given adequate freedom to appraise his own activities. Individuals are trained to exercise
discipline and self control. Management by self-control replaces management by
domination in the MBO process. Appraisal becomes more objective and impartial.
4. Raises employee morale: Participative decision-making and two-way communication
encourages the subordinate to communicate freely and honestly. Participation, clearer goals
and improved communication will go a long way in improving morale of employees.
5. Facilitates effective planning: MBO programmes sharpen the planning process in an
organization. It compels managers to think of planning by results. Developing action plans,
providing resources for goal attainment and discussing and removing obstacles demand
careful planning. In brief, MBO provides better management and better results.
6. Acts as motivational force: MBO gives an individual or group, opportunity to use
imagination and creativity to accomplish the mission. Managers devote time for planning
results. Both appraiser and appraise are committed to the same objective. Since MBO aims
at providing clear targets and their order of priority, employees are motivated.
7. Facilitates effective control: Continuous monitoring is an essential feature of MBO. This
is useful for achieving better results. Actual performance can be measured against the
standards laid down for measurement of performance and deviations are corrected in time.
 A clear set of verifiable goals provides an outstanding guarantee for exercising better
control.
8. Facilitates personal leadership: MBO helps individual manager to develop personal
leadership and skills useful for efficient management of activities of a business unit. Such a
manager enjoys better chances to climb promotional ladder than a non-MBO type

Limitations of Management By Objectives:

1. Time-consuming: MBO is time-consuming process. Objectives, at all levels of the

organization, are set carefully after considering pros and cons which consumes lot of time.
The superiors are required to hold frequent meetings in order to acquaint subordinates with
the new system. The formal, periodic progress and final review sessions also consume time.
2. Reward-punishment approach: MBO is pressure-oriented programme. It is based on
reward-punishment psychology. It tries to indiscriminately force improvement on all
employees. At times, it may penalize the people whose performance remains below the goal.
This puts mental pressure on staff. Reward is provided only for superior performance.
3. Increases paper-work: MBO programmes introduce ocean of paper-work such as training
manuals, newsletters, instruction booklets, questionnaires, performance data and report into
the organization. Managers need information feedback, in order to know what is exactly
going on in the organization. The employees are expected to fill in a number of forms thus
increasing paper-work. In the words of Howell, "MBO effectiveness is inversely related to
the number of MBO forms.
4. Creates organizational problems: MBO is far from a panacea for all organizational
problems. Often MBO creates more problems than it can solve. An incident of tug-of-war is
not uncommon. The subordinates try to set the lowest possible targets and superior the
highest. When objectives cannot be restricted in number, it leads to obscure priorities and
creates a sense of fear among subordinates. Added to this, the programme is used as a 'whip'
to control employee performance.
5. Develops conflicting objectives: Sometimes, an individual's goal may come in conflict with
those of another e.g., marketing manager's goal for high sales turnover may find no support
from the production manager's goal for production with least cost. Under such circumstances,
individuals follow paths that are best in their own interest but which are detrimental to the
company.
6. Problem of co-ordination: Considerable difficulties may be encountered while coordinating
objectives of the organization with those of the individual and the department. Managers may
face problems of measuring objectives when the objectives are not clear and realistic.
7. Lacks durability: The first few go-around of MBO are motivating. Later it tends to become
old hat. The marginal benefits often decrease with each cycle. Moreover, the programme is
deceptively simple. New opportunities are lost because individuals adhere to rigidly
established goals.
8. Problems related to goal-setting: MBO can function successfully provided measurable
objectives are jointly set and it is agreed upon by all. Problems arise when: (a) verifiable
goals are difficult to set (b) goals are inflexible and rigid (c) goals tend to take precedence
over the people who use it (d) greater emphasis on quantifiable and easily measurable results
instead of important results and (e) over-emphasis on short-term goals at the cost of long-
term goals.
9. Lack of appreciation: Lack of appreciation of MBO is observed at different levels of the
organization. This may be due to the failure of the top management to communicate the
philosophy of MBO to entire staff and all departments. Similarly, managers may not delegate
adequately to their subordinates or managers may not motivate their subordinates properly.
This creates new difficulties in the execution of MBO programme.

DECISION MAKING
Decision-making is an integral part of modern management. Essentially, Rational or sound
decision making is taken as primary function of management. Every manager takes hundreds and
hundreds of decisions subconsciously or consciously making it as the key component in the role
of a manager. Decisions play important roles as they determine both organizational and
managerial activities. Decisions are made at every level of management to ensure organizational
or business goals are achieved. Further, the decisions make up one of core functional values that
every organization adopts and implements to ensure optimum growth and drivability in terms of
services and or products offered.

“Decision-making involves the selection of a course of action from among two or more
possible alternatives in order to arrive at a solution for a given problem”

According to Peter Drucker, "Whatever a manager does, he does through decision-making".

6 C’s in decision making

1. Construct : clear picture of what must be

2. Compile: list of requirement that must be met
3. Collect: information on alternatives that meet the requirement
4. Compare the alternatives that meet the requirement
5. Consider: factors that might go wrong
6. Commit: to a decision and follow through with it
CHARACTERISTICS/NATURE OF DECISION MAKING
Decision making implies choice: Decision making is choosing from among two or more alternative
courses of action. Thus, it is the process of selection of one solution out of many available. For any
business problem, alternative solutions are available. Managers have to consider these alternatives and
select the best one for actual execution.

1. Continuous activity/process: Decision-making is a continuous and dynamic process. It

pervades all organizational activity. Managers have to take decisions on various policy
and administrative matters. It is a never ending activity in business management.
2. Mental/intellectual activity: Decision-making is a mental as well as intellectual
activity/process and requires knowledge, skills, experience and maturity on the part of
decision-maker. It is essentially a human activity.
3. Based on reliable information/feedback: Good decisions are always based on reliable
information. The quality of decision-making at all levels of the Organisation can be
improved with the support of an effective and efficient management information system
(MIS).
4. Goal oriented process: Decision-making aims at providing a solution to a given
problem/ difficulty before a business enterprise. It is a goal-oriented process and provides
solutions to problems faced by a business unit.
5. Means and not the end: Decision-making is a means for solving a problem or for
achieving a target/objective and not the end in itself.
6. Relates to specific problem: Decision-making is not identical with problem solving but
it has its roots in a problem itself.
7. Time-consuming activity: Decision-making is a time-consuming activity as various
aspects need careful consideration before taking final decision. For decision makers,
various steps are required to be completed. This makes decision-making a time
consuming activity.
8. Needs effective communication: Decision-taken needs to be communicated to all
concerned parties for suitable follow-up actions. Decisions taken will remain on paper if
they are not communicated to concerned persons. Following actions will not be possible
in the absence of effective communication.
9. Pervasive process: Decision-making process is all pervasive. This means managers
working at all levels have to take decisions on matters within their jurisdiction.
10. Responsible job: Decision-making is a responsible job as wrong decisions prove to be
too costly to the organization. Decision-makers should be matured, experienced,
knowledgeable and rational in their approach. Decision-making need not be treated as
routing and casual activity. It is a delicate and responsible job.
ADVANTAGES OF DECISION MAKING

1. Decision making is the primary function of management: The functions of

management starts only when the top-level management takes strategic decisions.
Without decisions, actions will not be possible and the resources will not be put to use.
Thus decision-making is the primary function of management.
2. Decision-making facilitates the entire management process: Decision-making creates
proper background for the first management activity called planning. Planning gives
concrete shape to broad decisions about business objectives taken by the top-level
management. In addition, decision-making is necessary while conducting other
management functions such as organizing, staffing, coordinating and communicating.
3. Decision-making is a continuous managerial function: Managers working at all levels
will have to take decisions as regards the functions assigned to them. Continuous decision
making is a must in the case of all managers/executives. Follow-up actions are not
possible unless decisions are taken.
4. Decision-making is essential to face new problems and challenges: Decisions are
required to be taken regularly as new problems, difficulties and challenges develop before
a business enterprise. This may be due to changes in the external environment. New
products may come in the market, new competitors may enter the market and government
policies may change. All this leads to change in the environment around the business
unit. Such change leads to new problems and new decisions are needed.
5. Decision-making is a delicate and responsible job: Managers have to take quick and
correct decisions while discharging their duties. In fact, they are paid for their skill,
maturity and capacity of decision-making. Management activities are possible only when
suitable decisions are taken. Correct decisions provide opportunities of growth while
wrong decisions lead to loss and instability to a business unit.

TYPES OF DECISIONS

Decisions may be classified according to different bases such as:

a) Routine and Strategic Decisions: Tactical or routine decisions are made repetitively
following certain established rules, procedures and policies. They neither require
collection of new data nor conferring with people. Thus, they can be taken without much
deliberation. They may be complicated but are always one-dimensional. They do not
require any special effort by the manager. Such decisions are generally taken by the
managers at the middle and lower management level. Strategic or basic decisions, on
the other hand, are more important and so they are taken generally by the top
management and middle management. The highest the level of a manager, the more
strategic decisions he is required to take. These include decisions regarding policy
matters and so require thorough fact finding and analysis of the possible alternatives.
b) Policy and Operating Decisions: Policy decisions are of vital importance and are taken
by the top management. They affect the entire enterprise. But Operating decisions are
taken by the lower management in order to put into action the policy decisions. For
instance, the bonus issue is a policy matter which is to be decided by the top
management, and calculation of bonus is an operating decision which is taken at the
lower levels to execute the policy decision.
c) Organizational and Personal Decisions: Organizational decisions are those which a
manager takes in his official capacity. Such decisions can be delegated. But Personal
decisions, which relate to the manager as an individual and not as a member of the
organization, cannot be delegated.
d) Programmed and Non-Programmed Decisions: The programmed decisions are of
routine and repetitive in natures which are to be dealt with according to specific
procedures. But non-programmed decisions arise because of unstructured problems and
there are no standard procedures for handling such problems. Eg: single employee absent
for longer time without any information, supervisor may decision may take decision like
suspension etc. But is a large no. of employees are absent without any information, it has
to be dealt with as an unstructured problem and decision should be taken be the head of
the organization.

Programmed Decisions Non- Programmed Decisions

These are made for solving routine and These are made for solving unique and
repetitive problems. non-repetitive problems.
Decisions are made by using predetermined Decisions are made by using experience,
procedures and rules. creativity and innovativeness.
These involve less use of judgement. These involve more use of experience and
judgement.
There is often consistency for longer period There is consistency in the long-run.
of time over many situations.
Such decisions are made for solving both Such decisions are made generally for
simple and complex problems. solving complex problems.
Techniques used for programmed decisions Techniques used for non-programmed
include procedures and rules organizational decisions include linear programming,
structure etc. queuing theory, break-even analysis,
simulation, replacement theory etc.

e) Individual and Group Decisions: When a decision is taken by an individual in the

organization, it is known as Individual decision. Such decisions are generally taken in
small organizations and in those organizations where autocratic style of management
prevails. Groups or collective decisions refer to the decisions which are taken by a
group of organizational members say Board of Directors or a Committee.
STEPS INVOLVED IN DECISION MAKING PROCESS

Decision-making involves a number of steps which need to be taken in a logical manner

1. Defining / Identifying the managerial problem,

2. Analyzing the problem,
3. Developing alternative solutions,
4. Selecting the best solution out of the available alternatives,
5. Converting the decision into action, and
6. Ensuring feedback for follow-up.

1. Identifying the Problem: Identification of the real problem before a business enterprise is
the first step in the process of decision-making. It is rightly said that a problem well-defined
is a problem half-solved. Information relevant to the problem should be gathered so that
critical analysis of the problem is possible. This is how the problem can be diagnosed. Clear
distinction should be made between the problem and the symptoms which may cloud the real
issue. In brief, the manager should search the 'critical factor' at work. It is the point at which
the choice applies. Similarly, while diagnosing the real problem the manager should consider
causes and find out whether they are controllable or uncontrollable.

2. Analyzing the Problem: After defining the problem, the next step in the decision-making
process is to analyze the problem in depth. This is necessary to classify the problem in order
to know who must take the decision and who must be informed about the decision taken.
Here, the following four factors should be kept in mind:

a) Futurity of the decision,

b) The scope of its impact,
c) Number of qualitative considerations involved, and
d) Uniqueness of the decision.

3. Collecting Relevant Data: After defining the problem and analyzing its nature, the next step
is to obtain the relevant information/ data about it. There is information flood in the business
 world due to new developments in the field of information technology. All available
information should be utilized fully for analysis of the problem. This brings clarity to all
aspects of the problem.

4. Developing Alternative Solutions: After the problem has been defined, diagnosed on the
basis of relevant information, the manager has to determine available alternative courses of
action that could be used to solve the problem at hand. Only realistic alternatives should be
considered. It is equally important to take into account time and cost constraints and
psychological barriers that will restrict that number of alternatives. If necessary, group
participation techniques may be used while developing alternative solutions as depending on
one solution is undesirable.

5. Review of Key Factors: While developing alternatives, the principle of limiting factor has to
be taken care of. A limiting factor is one which stands in the way of accomplishing the
desired goal. It is a key factor in decision-making. If such factors are properly identified,
manager can confine his search for alternatives to those which will overcome the limiting
factors. Depending upon the situation faced, the limiting factor may be inadequate funds,
shortage of human resources, old machines or lack of marketing skills.

6. Selecting the Best Alternative: After preparing alternative solutions, the next step in the
decision-making process is to select an alternative that seems to be most rational for solving
the problem. Peter Drucker has laid down four criteria in order to weigh the consequences of
various alternatives. They are:

a) Risk: A manager should weigh the risks of each course of action against the expected
gains. As a matter of fact, risks are involved in all the solutions. What matters is the
intensity of different types of risks in various solutions.
b) Economy of effort: The best manager is one who can mobilize the resources for the
achievement of results with the minimum of efforts. The decisions to be chosen
should ensure the maximum possible economy of efforts, money and time.
c) Situation or Timing: The choice of course of action will depend upon the situation
prevailing at a particular point of time. If the situation has great urgency, the
preferable course of action is one that alarms the organization that something
important is happening, If a long and consistent effort is needed , a ‘slow start gathers
momentum’ approach may be preferable.
d) Limitation of Resources: In choosing among the alternatives, primary attention must
be given to those factors that are limiting or strategic to the decision involved. The
search of limiting factors in decision-making should be a never ending process.
Discovery of the limiting factor lies at the basis of selection from the alternatives and
hence of planning and decision-making.
7. Implementing the Decision: The choice of an alternative will not serve any purpose if it is
not put into practice. The manager is not only concerned with taking a decision, but also with
its implementation. The alternative thus selected must be communicated to those who are
likely to be affected by it. Acceptance of the decision by group members is always desirable
and useful for its effective implementation. He should try to ensure that systematic steps are
taken to implement the decision. The main problem which the manager may face at this stage
is the resistance by the subordinates who are affected by the decision. If the manager is
unable to overcome this resistance, the energy and efforts consumed in decision-making will
go waste. In order to make the decision acceptable, it is necessary for the manager to make
the people understand what the decision involves, what is expected of them and what they
should expect from the management. The principle of slow and steady progress should be
followed to bring about a change in the behaviour of the subordinates.

8. Ensuring Feedback: Feedback is the last step in the decision-making process. Here, the
manager has to make built-in arrangements to ensure feedback for continuously testing actual
developments against the expectations. It is like checking the effectiveness of follow-up
measures. Feedback is possible in the form of organized information, reports and personal
observations. Feed back is necessary to decide whether the decision already taken should be
continued or be modified in the light of changed conditions.

TECHNIQUES OF DECISION MAKING

Every step in the decision-making process is important and needs proper consideration by
managers. In order to evaluate the alternatives, certain quantitative techniques have been
developed which facilitate making objective decisions. Some of these techniques are:

1. Marginal Cost Analysis: The technique is also known as marginal costing as under it the
additional revenues from additional costs are compared. The profits are maximum at the level
where marginal revenues and marginal costs are equal. Marginal analysis can also be used in
comparing factors other than costs and revenues. For example: In order to find the optimum
output of a machine, one can vary inputs against outputs until the additional inputs equal the
additional output. This would be the point of maximum efficiency.
2. Cost-Benefit Analysis: It is technique of weighing alternatives where the optimum solution
cannot be conveniently reduced to monetary terms as in the case of marginal cost analysis. It
is used for choosing among alternatives to identify a preferred choice when objectives are far
less specific than those expressed by such clear quantities as sales, costs or profits.
3. Operations Research: Operations research has been defined as the scientific method of
analysis of organizational problems to provide the executive the needed quantitative
information in making suitable decisions. The object of operations research is to provide the
managers with a scientific basis for solving organizational problems involving the interaction
 of components of the organization. In days gone by, executive decisions used to be taken on
the basis of intuition, subjectively or past experience but operations research seeks to replace
this process by an analytic, objective and quantitative basis. It uses techniques like inventory
control, sequencing theory etc.
4. Linear Programming: It is devised for determining the optimum combination of limiting
resources to achieve a given objective. It is based on the assumption that there exists a linear
relationship between variables and that the limits of variations could be ascertained. It is
applicable in such problem areas as production planning, transportation, warehouse location,
warehouse facilities at an overall minimum cost. It uses functions like maximization and
minimization subject to a set of some real or assumed restrictions known as constraints.
5. Delphi Method: In Delphi decision groups, a series of questionnaires, surveys, etc. are sent
to selected respondents (the Delphi group) through a facilitator who oversees responses of
their panel of experts. The group does not meet face-to-face. All communication is normally
in writing (letters or email). Members of the groups are selected because they are experts or
they have relevant information. The responses are collected and analyzed to determine
conflicting viewpoints on each point. The process continues in order to work towards
synthesis and building consensus. The process works as follows:
1. Members are selected for the Delphi panel due to their expertise.
2. They are kept separated and answer through an open-ended questionnaires, surveys,
etc. in order to solicit specific information about a subject or content area. Keeping
them separated avoids the negative effects of face-to-face discussions and avoids
problems associated with group dynamics.
3. Members are asked to share their assessment and explanation of a problem or predict
a future state of affairs.
4. The facilitator (panel director) controls the interactions among the participants by
processing the information and filtering out irrelevant content.
5. Replies are gathered, summarized, and then fed back to all the group members.
6. Members then make another decision based upon the new information.
7. The process is repeated until the the responses converge satisfactory, that is, it yields
consensus.

The success of this process depends upon the member's expertise and communication skill. Also,
each response requires adequate time for reflection and analysis. The major merits of the Delphi
process are:

Elimination of interpersonal
problems. Efficient use of expert's
time.
Diversity of ideals.
Accuracy of solutions and predictions.
6. Decision Tree

A decision tree is a graphic method by which a decision-maker can readily visualize alternatives
tighter with risks, possible outcomes and information needs involved in each chance. Decision
tree is a graphical method for illustrating the chances available at various stages in multi stage
decision process and the consequences of each choice.

A Decision Tree Analysis is a scientific model and is often used in the decision making process
of organizations.

When making a decision, the management already envisages alternative ideas and solutions. By
using a decision tree, the alternative solutions and possible choices are illustrated graphically as a
result of which it becomes easier to make a well-informed choice.

This graphic representation is characterized by a tree-like structure in which the problems in

decision making can be seen in the form of a flowchart, each with branches for alternative
choices.

The representation of the decision tree can be created in four steps:

Describe the decision that needs to be made in the square.

Draw various lines from the square and write possible solutions on each of the lines.
Put the outcome of the solution at the end of the line. Uncertain or unclear decisions are
put in a circle. When a solution leads to a new decision, the latter can be put in a new
square.
Each of the squares and circles are reviewed critically so that a final choice can be made.
RATIONAL DECISION MAKING:
Rationality is the ability to follow a systematical, logical, thorough approach in decision-making.
Thus, if a decision is taken after thorough analysis and reasoning and weighing the consequences
of various alternatives such a decision will be called an objective or rational decision.
The classical management thinkers stressed that managerial decision must be rational. They
argued that the decision-maker is an ‘economic man’ and is guided by economic considerations
in choosing solutions to problem.
The classical approach is based on following assumptions:
1. The decision-maker intends to maximize economic gains.
2. He is fully objective and rational uninfluenced by emotions.
3. He can identify the problem clearly and precisely.
4. He has full information about various alternatives & is able to evaluate them intelligently
to find out which alternative is the best.
5. He has complete freedom to choose the best alternative.

The rational economic model is prescriptive and explains how decision-maker should behave.
But perfect rationally is a norm which can be aimed at but not attained. In real life, the decision-
maker cannot be completely rational due to several constraints such as personal and
environmental factors.

BOUNDED RATIONALITY MODEL OR ADMINISTRATIVE MAN

MODEL
Decision-making involve the achievement of a goal. Rationality demands that the decision-
maker should properly understand the alternative courses of action for reaching the goals. He
should also have full information and the ability to analyze properly various alternative courses
of action in the light of goals sought. There should also be a desire to select the best solutions by
selecting the alternative which will satisfy the goal achievement.
Herbert A. Simon defines rationality in terms of objective and intelligent action. It is
characterized by behavioral nexus between ends and means. If appropriate means are chosen to
reach desired ends the decision is rational.

Bounded Rationality model is based on the concept developed by Herbert Simon. This
model does not assume individual rationality in the decision process. Instead, it assumes that
people, while they may seek the best solution, normally settle for much less, because the
decisions they confront typically demand greater information, time, processing capabilities than
they possess. They settle for “bounded rationality or limited rationality in decisions.
Managers take decisions which involve different combination of intuition and rational thinking.
A manager who depends much upon intuition is more subjective and a person who depends
much upon logical thinking is more objective. This is what Herbert has called the “principle pf
bounded rationality”. Simon emphasized that a person makes decision not only on absolutely
logical analysis of facts but also on his intuition, value system and way of thinking which are
subjective in nature.

Causes of Bounded Rationality: Herbert Simon of administrative man describes the decision-
making behaviour of individuals in actual practice. It recognizes that managers are unable to
make perfectly rational decisions due to the following constraints or limitations:
1. The individual does not study and analyze the problem fully because of personal bias,
indifferent attitude etc.
2. The individual dies not have the full knowledge of the alternatives and/or their
consequences.
3. The individual interprets the organizational goals in his own way. He may adopt course
of action which according to him will meet the goals effectively.
4. The individual does not search for the best solution, but for ‘good enough solutions’. In
other words, he aims at ‘satisfactory’ rather than ‘optimum decision’.
5. The decision-making situation may involve multiple goals all of which can’t be
maximized simultaneously. Further, these goals may be of conflicting nature.
6. The effectiveness of a decision is dependent upon environmental factors which are
beyond the control of decision-makers. Thus, the consequences of various alternatives
cannot be anticipated perfectly because of uncertain environment.

The concept of bounded rationality explains the behaviour of people in practice. The
administrative man seeks satisficing and not optimal decisions which are satisfactory for his
practical purposes.

PLANNING PREMISES
A plan is based on certain assumptions called premises. These assumptions or premises are for a
future setting or happenings are based upon certain intuition or scientific forecasting. The
assumptions about future derived from forecasting and used in Planning are known as planning
premises.

Planning premises are the anticipated environment in which plans are expected to operate. They
include assumptions or forecast of the future and known conditions that will affect the operations
of plans. Eg as prevailing policies and existing company plans that control the basic nature of
supporting plans. Purpose of premises is to facilitate the planning process by guiding, directing,
simplifying and reducing the degree of uncertainty in it. Premises guide planning.
Planning Premises Classification:

A. External Environment
1. Economic Environment
Includes the type of economic system that exist in the economy
The nature and structure of the economy, the business cycle, the fiscal
monetary and financial policies of the govt, foreign trade and foreign
investment policies of the govt.
The type of economic system, that is socialist, capitalist or mixed provides
institutional framework within which business firm have to work.

2. Social and Cultural Environment

Members of a society wield important influence over business
firms. Business should consider the social implication of their
decisions.
Social responsiveness ‘the ability of a corporate firm to relate its operations
and policies to social environment in way that are mutually beneficial to the
company and society at large..
3. Political and Legal Environment
Closely related to government. Political philosophy of the government yields
a great influence over business policies.
The nature of technology used for production of goods and services in an
important factor responsible for the success of a business firm.
The improvements in technology raise total factor productivity of a firm and
reduce unit cost of output.
Technological environment affects the success of firms and the need for
technological advancement cannot be ignored.
Includes the size and growth of population, life expectancy of the people
rural urban distribution of population the technological skills and educational
levels of labor force.
Since new workers are recruited from outside the firm, demographic factors
are considered as parts of external environment.
The skills and ability of a firm’s worker determine to a large extent how well
the organization can achieve its mission.
In the ultimate source of many inputs such as raw materials, energy which
business firms use in their productive activity.
Availability of natural resources in a region a country is a basic factor in
determining business activity in it.
It includes geographical and ecological factors such as minerals and oil
reserves, water and forest resources wealth and climatic conditions, port
facilities are all highly significant for various business activities.
 Not the availability of natural resources alone but also the technology and
ability to being them in use that determines the growth of business and the
economy.

B. Internal Environment
Internal factors are to a good extent controllable factor because the firm can
change or modify these factors to improve its efficiency.
Means the ethical beliefs that guide the organization in achieving its mission
and objective.
The value system of a business organization makes an important
contribution to its success and its prestige in the world of business.
Value system of a business firm has an important bearing on its corporate
culture and determines its behavior towards its employees, shareholders and
society at large.

Mission and Objectives

The objectives of all firms are assured to be maximization of long – run

profits
Mission is def as the overall purpose or reason for its existence which guide
and influences its business decision and economic activities.
The choice of business domain, direction of its development, choice of
business strategy and policies are all guided by the overall mission of the
company.
Example: Infosys “Our corporate culture is to achieve our objectives in
environment of fairness, honesty, transparency and courtesy towards our customers
employees, vendors and society at large”
Reliance Industries Mission “To become a world class company and to achieve
global dominance. Ranbaxy laboratories – to become a research based
international pharma company.

FORECASTING
It is the Process of predicting future conditions that will influence and guide the activities, behavior and
performance of the Organization.

Definition: “Forecasting is the formal process of predicting future events that will significantly
affect the functioning of the enterprises”.

Features:
 Involvement of Future events
Depends upon past and present events
Happening of future events
Make use of forecasting techniques

Process:

Developing the ground work

Estimating the future trends
Comparing actual with estimated results
Refining the forecast

Importance:

Key to planning
Means of coordination
Basis for control
Executive development
Facing Environmental challenges

Forecasting Techniques:
Qualitative (use of Statistical tools) and Quantitative (employ human judgments to predict
future):
Time series Analysis: involves decomposition of historical series into its various
components. Viz – trend, seasonal variations, cyclical variations and random variations.
A trend can be known over the period of time and projections can be made about future.
Historical Analogy: Past history records
Correlation: To find the relationship between two variables. E.g. Between advertising
expenditure and sales volume, Future sales estimated on basis of change in adv
expenditure
Regression: To measure the relationship between two variables. To find the relative
movements of two or more inter-related series.
Delphi Technique – the minds of the experts in the concerned areas are probed
systematically.
Input output analysis
 ORGANIZING

CONCEPT

“Organization is the process of identifying and grouping work to be performed defining and
delegating responsibility and authority and establishing relationship for the purpose of enabling
people to work most effectively together in accomplishing objectives”

Concept of Organizing: The term ‘Organization’ is used in management literature in two

different ways:

1. Organization as a structure: Organization structure refers to the network of

relationships among individuals and positions in an organization. Structure organization
is the structural framework within which the efforts of different people are coordinated
and related to each other. It is a blue-print of how the management will work
2. Organization as a process: It is the process of determining, arranging, grouping and
assigning the activities to be performed for the attainment of the objectives.Organizing
process involves differentiation and integration of activities.

Significance of Organization:

Sound organization structure can contribute to the success of an enterprise in many ways. It is in fact
the backbone of management. It helps in achieving the following advantages:

Clear cut Authority relationships: It specifies who is to direct whom and who is
accountable for what results. The clearly defined authority-responsibility structure gives
role and goal clarity to all the employees.
Efficient Management: Organizing is necessary for performing other functions of
management like; planning, staffing, directing and controlling.
Coordination & communication: It brings coordination among various departments and
also provides for the activities of different departments.
Growth & diversification: It helps in the growth by facilitating its efficient
management. Sound organization structure helps in keeping the various activities under
control and increases the capacity of the enterprise to undertake more activities.
Optimum use of Human Resources: Sound organization matches the job with the
individual and vice-versa. Right person at the right place.
Optimum use of technological Innovations: Sound organization structure is not rigid
but flexible in nature and provides adequate scope for the improvement in technology.
Formal and Informal organization structure:

Formal Organization: The formal organization refers to the structure of jobs and positions with
clearly-defined functions and relationships as prescribed by the top management. This type of
organization is bound by rules, systems, and procedures and is deliberately built by the
management to accomplish organizational goals. The formal organization is built around the key
pillars of division of labor, scalar process, structure, and span of control. These may also be
called the principles of formal organization.

The formal organization structure is built around four key pillars:

1. Division of labor
2. Scalar & functional processes
3. Structure
4. Span of control

These may also be called the principles of formal organization.

Significance of formal organization: Formal organization is the basis of effective management

of any enterprise. It can help in achieving following benefits;-

1. It helps in determining the objectives of various departments and units. It facilitates

the process of fulfillment of objectives.
2. It facilitates optimum use of resources and new technological developments.
3. It clarifies authority & responsibility relationships which lead to better communication.
4. There is a clear-cut division of work among the departments and individuals. As a
result there is no overlapping of efforts.
5. Formal organization brings about stability in the enterprise through procedures,
policies, rules and regulations.

Informal organization: Informal organization refers to the relationship between people in the
organization based on personal attitudes, emotions, prejudices, likes, dislikes.

These relations are not developed according to procedures and regulations laid down in the
formal organization structure, generally large formal groups give rise to small informal or social
groups. These groups may be based upon common taste, language, culture, etc. These groups are
not planned but are automatically formed through continuous interaction between people.

Significance of Informal organization: The importance of informal organization arises from

the functions performed by informal groups, these are:-

1. It serves as a very useful channel of communication as it is very fast.

 2. It blends with the formal organization to make it more effective.
3. It gives psychological satisfaction to the members. They get a platform to express their
feelings.
4. The presence of informal organization encourages the managers to plan and act carefully.
Thus, it supports and supplements the formal organization.

Basis Formal Organization Informal Organization

Purpose It is created to achieve predetermined It has no determined objectives.
objectives.
Structure It is an official hierarchy of relations.
Its structure is based on human emotions
It refers to a well-defined authority-
and sentiments. It refers to personal
responsibility structure. relationships which develop
automatically when people work
together.
Formation Formal relations are well –planned Informal relations are unplanned and they
and created deliberately. originate automatically.
Chain of Formal organization follows the Informal organization does not have a
command and official chain of command which fixed chain of command. There are no
communication can’t be changed. Communication fixed patterns of communication.
has to follow formal channels.
Formal organization is usually stable. Informal organization may not last long.
Human Formal organization reflects the Informal organizations reflect human
Relations technological aspect of the aspect. It is based on the attitudes, likes
organization. It does not take care of and dislikes, tastes, language etc. of
human sentiments. people.
Flexibility It follows a rigid structure. It is loosely structured. It is highly
flexible.
Leadership Managers provide leadership to Informal leaders are chosen by the group
workers. members.

PROCESS OF ORGANIZING
It involves following steps:

1) Determination of Objectives: An organization is always related to certain clear-cut

objectives. It is therefore necessary for the management to identify the objectives in
definite and clear terms prior to the commencement of any activity.
2) Identification and Grouping of Activities: If the members of the group are to pool their
efforts effectively, there must be proper division of the major activities like production,
marketing, purchase finance etc. Each job should be properly classified and grouped as
this will enable the people to know what is expected of them and will help in avoiding
 duplication of efforts.
3) Assignment of Duties: After classifying and grouping the activities into various jobs,
they should be allotted to the individuals so that there are round pegs in round holes.
Each individual should be given a specific job to do according to his ability and made
responsible for that. He should also be given the adequate authority to do the job assigned
to him.
4) Establishing Authority-Responsibility Relationships: Since so many individuals work
in the same organization, it is the responsibility of management to lay down the structure
of relationships in the organization. Everybody should clearly know to whom he is
accountable. This will help in the smooth working of the enterprise by facilitating
delegation of authority and responsibility.

PRINCIPLES OF ORGANIZING/ORGANIZATION
In Order to create a sound organization, the following principle can be helpful.

1. Principle of objective: An organization and every part of it should be directed towards

the accomplishment of goals. The application of this principle implies the existence of
clearly formulated and well-understood objectives.
2. Principle of division of work: Total tasks should be divided in such a manner that the
work of every individual in the organization is limited as far as possible to the
performance of single leading functions. Allocation of qualification for a job/task should
be on the basis of qualification and aptitude and should not be mechanical and boring.
3. Principle of Unity of Command: Each person should receive orders from only one
supervisor and be accountable to him. This principle promotes coordination.
4. Principle of Span of Control: No executive should be required to supervise more
subordinates than he can effectively manage on account of the limitation of time and
ability.
5. Principle of Scalar chain: Authority and responsibility should be in a clear unbroken
line from the highest executive to the lowest executive. As far as possible, the chain of
command should be short.
6. Principle of Delegation: Authority delegated to an individual manager should be
adequate to enable him to accomplish results expected of him.
7. Principle of Absoluteness of Responsibility: The responsibility of a subordinate to his
superior is absolute. No executive can escape responsibility for the delegation of
authority to his subordinates.
8. Principle of Parity of Authority and Responsibility: Authority and responsibility must
be co-extensive. The responsibility expected for a position should be in balance with the
authority delegated to that position.
9. Principle of Coordination: It is an orderly arrangement of group efforts and unity of
action in the pursuit of a common purpose.
 10. Principle of Flexibility: Devices, techniques and environment factors should be built
into the structure to permit quick and easy adoption of the enterprise to change in its
environment.
11. Principle of Efficiency: An organization is efficient if it is able to accomplish planned
objectives at minimum possible cost and by using resources judiciously so as to
contribute to the welfare of the society.
12. Principle of Continuity: Structure should have continuity of operations. Arrangements
must be made to enable people to gain experience in positions of increasing diversity and
responsibility.
13. Principle of Balance: The various parts of the organization should be kept in balance
and none of the functions should be given undue emphasis at the cost of others.
14. Principle of Exception: Routine decisions should be taken at lower levels and top
management should concentrate on matters of exceptional importance.

SPAN OF CONTROL
The term ‘span of management’ is also known as ‘span of control’ and ‘span of supervision’.
But span of management is a better term because control and supervision are elements of
management. Span of management refers to the number of subordinates that report directly to a
single manager or supervisor.
V.A. Graicunas has identified three types of superior-subordinate relationship:-

Direct single relationship: The direct single relationship arises from the direct and individual
contact of the superior with his subordinates. For example, if a manager A has two subordinates
X and Y there would be two direct single relationships : (a) A with X and (b) A with Y.

Direct group relationships. These relationships arise between the manager and group of his
subordinates in all possible combinations. Thus, in the above example there would be two direct
group relationships: (a) A with X, Y in attendance, and (b) A with Y, X in attendance.

Cross relationships. These relationships arise among the subordinates working under a common
superior. In the above example, there would be two cross relationships: (a) X with Y and (b) Y
with X.

Thus, Direct single relationship = n

Direct group relationships = n {2n/2 - 1}

Cross relationships = n (n-1)

Total relationships = n {2n/2 + n-1}

Where n = number of subordinates.

Factors determining Span of Control

In actual practice, a large number of variables determine the span of management. Some of these
factors are as follows:

Nature of work: When the work performed by subordinates is simple and repetitive, they
do not require frequent guidance. As a result, the manager can supervise a large number
of subordinates. But, if the work is different or non identical span has to be narrow.
Type of technology: Firms using mass production and assembly line technology can
have wider spans than those employing batch or process production system.
Ability of the manager: Managers possessing qualities, like leadership, communication,
decision making and control can manage more subordinates.
Capacity of subordinates: Efficient and trained subordinates may perform their jobs
efficiently without much help from the manager.
Degree of decentralization: When a manager does not delegate adequate authority to
subordinates, they require frequent consultation and the manager has to take many
decisions himself.
Staff assistance
Communication techniques: Where everything is communicated by face to face contact,
it takes much of a manager’s time and span has to be small
Time available for supervision: At higher levels top managers have less time of
supervision. Therefore span has to be narrow.

DEPARTMENTATION
Departmentalization is the grouping of related functions into manageable units to achieve the
objectives of the enterprise in the most efficient and effective manner. The following patterns
may be used for grouping activities into departments.

1) Departmentation by functions:
Under functional Departmentation each major or basic function is organized as a separate
department. Basic or organic functions are the function performance of which is organization.
For Example: Production, Sales, Marketing, Financing and Personnel are basic function in a
manufacturing enterprise. On the other hand in a retail store buying, selling and finance are the
major functions. If necessary, a major function may be divided; activities in the production
department may be classified into quality control, processing of materials and repairs
maintenance.

2) Product Departmentation:

In product or service departmentation, every major product is organized as a separate division.

Each department looks after the production, sales and finance of one product. Product
departmentation is useful when product expansion and diversification, manufacturing and
marketing characteristics of the product are of primary significance.

3) Territorial Departmentation

Territorial departmentation is very useful to large-sale enterprises whose activities are

geographically spread over a wide area. Banks, insurance companies, transport companies,
distribution agencies are examples of such enterprises. Under Territorial or geographical
departmentation, activities are divided into zones, divisions and branches.
 4) Customer Departmentation

Under this basis of departmentation, activities are grouped according to the type of customer. For
instance, a large cloth store may be divided into whole sales, retail and export divisions. This
type of departmentation is useful for banks, departmentation is useful for banks, departmental
stores etc. Which sells a product or service to a number of distinct and clearly defined customer
groups?

5) Departmentation by time and numbers

Under this basis, activities are grouped on the basis of the time of their performance. For
example: a factory operating twenty four hours may have their departments, one each for
morning day and night shifts. The idea is to obtain the advantages of people specialized to work
in a particular shift. In case of division by simple numbers, activities are grouped on the basis of
their Performance by a certain number of persons.

ORGANIZATIONAL STRUCTURE
The framework for organizing formal relationships is known as the organizational structure. It
provides the means for clarifying and communicating the lines of responsibility, authority, and
accountability. An organization structure denotes the authority and responsibility relationships
between the various positions in the organization by showing who reports to whom. The
structure of an organization is generally shown in the organization chart. It shows the authority &
responsibility relationship between various positions in the organization. Organization structure
helps in the efficient functioning of concerns on account of the following reasons:

1. It allocates authority & responsibility.

2. It lays down the pattern of communication and coordination.
 3. It creates proper balancing of activities.
4. It facilitates growth of the enterprise.
5. It is adaptable to changes.

Types of Organization Structure:

II. Line Organization

The line organization is the simplest organizational structure. It is the "doing" organization, in
that the work of all organizational units is directly involved in producing and marketing the
organization's goods and services. There are direct vertical links between the different levels
of the scalar chain. Since there is a clear authority structure, this form of organization
Promotes greater decision making and is simple in form to understand.

Merits of Line Organization:

Simplest- It is the most simple and oldest method of administration.

Unity of Command- In these organizations, superior-subordinate relationship is
maintained and scalar chain of command flows from top to bottom.
Better discipline- The control is unified and concentrates on one person and therefore, he
can independently make decisions of his own. Unified control ensures better discipline.
 Fixed responsibility- In this type of organization, every line executive has got fixed
authority, power and fixed responsibility attached to every authority.
Flexibility- There is a co-ordination between the top most authority and bottom line
authority. Since the authority relationships are clear, line officials are independent and
can flexibly take the decision. This flexibility gives satisfaction of line executives.
Prompt decision- Due to the factors of fixed responsibility and unity of command, the
officials can take prompt decision.
Economical- It is very economical because no staff specialists are required.

Demerits of Line Organization:

Over reliance
Lack of specialization
Inadequate communication
Lack of Coordination
Authority leadership
Overburdened
Instability

III. Line and Staff Organization

Most large organizations belong to this type of organizational structure. These organizations
have direct, vertical relationships between different levels and also specialists responsible for
advising and assisting line managers. Such organizations have both line and staff departments.
Staff departments provide line people with advice and assistance in specialized areas (for
example, quality control advising production department).
Merits of line and staff organization:

Expert advice- Line managers receive specialized assistance from staff experts.
They are enabled to discharge their responsibilities more efficiently.
Relief to top executives– Staff carries out detailed investigation and supply
information to line executives. Therefore, the burden of line executives is reduced.
They get ample chances for creative thinking to generate new ideas.
Quality Decisions– Staff specialists provide adequate information and expert advice. As
a result, line executives can make better decisions.
Flexibility– Line and staff organization is comparatively more flexible. As the
organization expands, staff can be added to help the line managers. There is more
opportunity for advancement because a greater variety of responsible jobs is available.

Demerits line and staff organization:

Line-staff conflicts- The main problem of line and staff organization is that conflicts
often arise between line managers and staff specialists.
Confusion- Different managers may not be clear as to what is the actual area of
operations and what is expected of them
Ineffective staff- Staff personnel are not accountable for the results. Therefore, they may
not take their tasks seriously.

IV. Functional Organization

Functional organizations are hierarchical organizations where each employee has one clear
superior, and staff are grouped by areas of specialization and managed by a person with expertise
in that area.
Merits:

Specialization- Functional organization promotes logical division of work. Every

function head is an expert in his area and all workers get the benefits of his experience.
Better control- Our man control is done away with and there is joint supervision of work.
As a result, control becomes more effective.
Easier staffing- Recruitment, selection and training of managers are simplified because
each individual is required to have knowledge of one functional area only.

Demerits:

Complexity– There are many cross relationships which create confusion. A worker may
receive conflicting orders.
Delay in decision making– A decision problem requires the involvement of several specialize.
Therefore, decision making process in functional organization is slow.

V. Divisional Organizational Structure

Divisional structure divides, shown above, the employees based on the product/customer
segment/geographical location. For example, each division is responsible for certain product and
has its own resources such as finance, marketing, warehouse, maintenance etc. Accordingly, this
structure is a decentralized structure and thus allows for flexibility and quick response to
environmental changes. It also enhances innovation and differentiation strategies. On the other
hand, this structure results in duplication of resources because, for ex., we need to have
warehouse for each division. But it does not support the exchange of knowledge between people
working in the same profession because parts of them are working in one division and the others
are working in other divisions.
VI. Project Organization

A team of specialists from different areas is created for each project. The size of the project team
varies from one project manager to another. Project organization is employed in IT, aero-space,
aircraft manufacture, construction and professional areas like management consulting. In such
organization, projects are subject to high standards of performance and there is a strong
emphasis on horizontal relations among specialists. A project team is a temporary set-up. Once
the project is complete the team is disbanded and the functioning specialists are assigned some
other project.

Merits:

Project org. provides concentrated attention that a complex project demands. It permits
the timely completion of a project without disturbing the normal routine of rest of the
org.
It can be tailored to a particular mission or project to consolidate diverse actions towards
the completion of the project while retaining the advantages of functional specialists.

Demerits:

There is organizational uncertainty because a project manager has to deal with

professionals drawn from diverse fields. Often they differ in approach and interest.
 There is lack of clearly defined responsibility, clear communication lines and
measurement yardsticks. Lack of prescribed organizational processes makes the job of a
project manager very frustrating.
In addition, lack of awareness of project problems and personal prejudices on the part of
top people may jeopardize a project.

VII. MATRIX ORGANISATION:

Matrix structure combines product and functional organizational structures. For example, there is a
functional structure and then assign a manager for each product. Some employees will have two
managers: functional manager and product manager. This type of structure tries to get the benefits of
functional structure and also of divisional structure; however, it is not easy to implement because of
the dual authority. This structure is very useful for multinational companies.

MERITS:

It effectively focuses attention & resource on a single project. This leads to better
planning & control which in turn, helps in completion of project in time.
It is more flexible than the traditional functional organization. It can more easily adapt to
changes in technology.
It stresses authority of knowledge rather than status. Therefore, services of professionals
can be better utilized.
DEMERITS:

It violates the principle of unity of command as functional groups receive orders from
both functional bosses & project manager. This may give rise to power, struggle &
jurisdictional conflicts in the organization.
The organizational relationships become very complex & there is great confusion among
personnel. They fail to identify their respective superiors as there are both formal &
informal relationships.
Coordination of people drawn temporarily from different functional departments
becomes very difficult. It is not a homogeneous group & in the absence of line
authority, the project manager cannot control its functioning. Morale of such a
heterogeneous group is likely to be low.
Joint decision making & sharing of resources are required. In the absence of
spirit of understanding & accommodation vital decisions get delayed.
Matrix structure can be successful only if there is an agreement amongst the key
executives regarding the sharing of authority & resources.

VIII. Virtual organization

A virtual organization or company is one whose members are geographically apart, usually
working by computer e-mail and groupware while appearing to others to be a single, unified
organization with a real physical location.

The positives associated with a virtual organization include reduced real-estate expenses,
increased productivity, higher profits, improved customer service, access to global markets,
environmental benefits, a wider pool of potential employees, and not needing to have all or
some of the relevant employees in the same place at the same time for meetings or
delivering services. The negatives include setup costs; some loss of cost efficiencies;
cultural issues (particularly when working in the global arena); traditional managers not
feeling secure when their employees are working remotely, particularly in a crisis; feelings
of isolation because of the loss of the camaraderie of the traditional office environment; and
a lack of trust.

43
DELEGATION AND DECENTRALIZATION
Delegation refers to the assignment of work to others and granting them requisite authority to
accomplish the job assigned. It enables the managers to distribute their load of work to others
and concentrate on more important functions which they can perform netter because of their
position in the organization.

In order for managers to achieve goals in an efficient manner, part of their work may be assigned
to others. When work is delegated, tasks and authority are transferred from one position to
another within an organization. The key to effective delegation of tasks is the transference of
decision-making authority and responsibility from one level of the organization to the level to
which the tasks have been delegated. In order to effectively delegate work, some guidelines
should be followed: Determine what each worker can most effectively accomplish; decide
whether the worker should just identify a problem or also propose a solution; consider whether
the person can handle the challenge of the task; be clear in the objectives of the task; encourage
questions; explain why the task is important; determine if the person has the appropriate
resources—time, budget, data, or equipment—to get the job done on a deadline; create progress
reviews as part of the project planning; and be prepared to live with less than perfect results.
Authority should be delegated in terms of expected results. Generally, the more specific the goal,
the easier it is to determine how much authority someone needs.

Some employees resist delegation for a variety of reasons. Initiative and responsibility involve
risk that some people try to avoid. People tend to play it safe if risk results in criticism. Those
who feel they already have more work than they can do avoid new assignments. Some people
doubt their own abilities and lack the self-confidence to tackle new assignments. Delegation is an
excellent professional development tool so long as it expands a worker's expertise and growth.
Delegation can also compensate for a manager's weakness. A successful team is developed by
building on the strengths of its members.

Elements in the process of Delegation: It involves three elements:-

1. Assignment of responsibility: Superior entrust some responsibility or duty to a

subordinate for performance.
 2. Granting of Authority: The superiors grant authority to the subordinate to carry out the
duty assigned. This may include right to use resources, spend money, engage people etc.
3. Accountability for Performance: The last step is concerned with creating an obligation
to carry out duty or responsibility and render an account of results achieved through the
use of delegated authority. By accepting the duties and authority, a subordinate becomes
responsible to his superior.

Significance of Delegation: Delegation of authority is a must for better management. It is an

important managerial skill requiring a manager to:

1. Size up his total work-load in operational terms.

2. Divide his total work-load into sub-tasks.
3. Work-out the authority content required to carry-out the assignable sub-tasks.
4. Distribute the assignable sub-tasks together with the authority content among his
subordinates.
5. Make his subordinates individually accountable to him for carrying out the assigned tasks
and for exercising the delegated authority.
6. Instruct, guide and motivate the subordinates in discharging their responsibilities.

Centralization of Authority

Centralization of authority means the concentration of the decision-making power at the top level
of management. Thus, under centralization, all important decisions are taken by the top
executives and operative decisions and actions at lower levels in the organization are subject to
the close supervision of top executives.

Advantages of centralization: The advantages of centralization are limitations of

decentralization. They are:

1. Centralization helps in fuller utilization of talents of outstanding executives, beneficial

for the organization as a whole.
2. In centralization, since decisions control are largely centralization, uniformity of policy
and procedures can be strictly enforced.
3. It helps to eliminate overlapping of activities.
4. It ensures uniformity of decisions.
Both centralization and decentralization have their relative merits and limitations. It is therefore,
necessary to consider each in balance with the other.

Decentralization of Authority

Decentralization is an extension of delegation which means to assign responsibility and

authority from one individual to another. It is the diffusion of authority within the entire
enterprise. Delegation can take place from one person to another and be a complete process. But
decentralization is completed only when the fullest possible delegation is made to all or most of
the people.

Decentralization is not a type of organization. Some people believe that a company can
decentralize by changing its organization structure, this is not true. Decentralization may be
achieved even without changing the organization structure as it refers to the systematic
delegation of authority throughout the organization.

Factors leading to decentralization:

1. Decentralization of authority is facilitated when it is released to take quick and appropriate

decisions at a level at which they are really required with a view to cash on the opportunity
present.
2. When the top management wants to reduce communication work, decentralization of
authority is preferred.
3. Nature of company’s products or markets may require decentralization of decision-making
to provide special emphasis to a product line or a market. Technological changes may also
create conditions favorable to decentralization.
4. Physical dispersion of activities of the company may require decentralization of authority
for better results.

AUTHORITY:

Authority is seen as the legitimate right of a person to exercise influence or the legitimate right
to make decisions, to carry out actions, and to direct others. For example, managers expect to
have the authority to assign work, hire employees, or order merchandise and supplies.

As part of their structure, organizations have a formal authority system that depicts the authority
relationships between people and their work. Different types of authority are found in this
structure: line, staff, and functional authority.
Line authority is represented by the chain of command; an individual positioned above another
in the hierarchy has the right to make decisions, issue directives, and expect compliance from
lower-level employees.

Staff authority is advisory authority; it takes the form of counsel, advice, and recommendation.
People with staff authority derive their power from their expert knowledge and the legitimacy
established in their relationships with line managers.

Functional authority allows managers to direct specific processes, practices, or policies

affecting people in other departments; functional authority cuts across the hierarchical structure.
For example, the human resources department may create policies and procedures related to
promoting and hiring employees throughout the entire organization.

Authority can also be viewed as arising from interpersonal relationships rather than a formal
hierarchy. Authority is sometimes equated with legitimate power. Authority and power and how
these elements are interrelated can explain the elements of managing and their effectiveness.

RESPONSIBILITY

Responsibility is the obligation to accomplish the goals related to the position and the
organization. Managers, at no matter what level of the organization, typically have the same
basic responsibilities when it comes to managing the work force: Direct employees toward
objectives, oversee the work effort of employees, deal with immediate problems, and report on
the progress of work to their superiors. Managers' primary responsibilities are to examine tasks,
problems, or opportunities in relationship to the company's short-and long-range goals. They
must be quick to identify areas of potential problems, continually search for solutions, and be
alert to new opportunities and ways to take advantage of the best ones. How effectively goals and
objectives are accomplished depends on how well the company goals are broken down into jobs
and assignments and how well these are identified and communicated throughout the
organization.