MANAGEMENT, ECONOMICS AND ACCOUNTANCY

INTRODUCTION:
Management: Meaning and definition, Scope of management, Principles of
management; Scientific management- Definition, Characteristics. Functions of
Management: Planning-Definition, Process, Characteristics. Organizing; Definition of
organization, Characteristics, Types, Principles of organization. Centralization and
Decentralization; Definitions, Features, Merits and Demerits. Communication; process
of communication- channels- media and barriers. Staffing: Meaning and functions of
personnel management. Coordination : Definition, steps to achieve effective
coordination. Controlling: Definition and process.
UNIT-II (9+3) Economics: Meaning and definition, scope; Micro and macro-Assumptions
-Methods and usefulness of economics. Laws of economics-Differences with laws of
physical sciences. Factors of Production: Meaning, definition and characteristics of
Land-Labor-capital and entrepreneur. Division of Labor: Types, advantages and
disadvantages. Forms of Business Organization: Sole Proprietor ship, Partnership firm,
Types of Partners Cooperative society & Joint stock company-features-Types of Joint
stock companies-Merits and demerits.
UNIT-III (9+3) Double Entry System and Book Keeping: Accounting concepts and
conventions, Overview of accounting-cycle. Journal-meaning and journalisation; Ledger-
meaning, Ledger posting, Balancing; Two- column-cash book (cash and bank),
Preparation of trial balance.
UNIT – IV (9+3) Preparation of Final Accounts: Trading Account, profit and loss account
and Balance Sheet with simple adjustments. Text Books: 1. Y.K Bhushan, Business
Organization and Mamgt., Sultan Chand,2012, (Unit I) 2. K.K. Dewett, Modern Economic
Theory., Pearson Ed., 2010 (Unit II). 3. T S Grewal. Introduction to Accountancy.,

UNIT-I
Meaning of Management

According to Theo Heimann, management has three different meanings, viz.,

Management as a Noun : refers to a Group of Managers.
Management as a Process : refers to the Functions of Management i.e. Planning,
Organising, Directing, Controlling, etc.
Management as a Discipline : refers to the Subject of Management.
Management is an individual or a group of individuals that accept responsibilities to run
an organisation. They Plan, Organise, Direct and Control all the essential activities of the
organisation. Management does not do the work themselves. They motivate others to
do the work and co-ordinate (i.e. bring together) all the work for achieving the objectives
of the organisation.
Management brings together all Six Ms i.e. Men and Women, Money, Machines,
Materials, Methods and Markets. They use these resources for achieving the objectives
of the organisation such as high sales, maximum profits, business expansion, etc.
Features of Management
Following image depicts fourteen important features of management.
The nature, main characteristics or features of management:
 Continuous and never ending process.
 Getting things done through people.
 Result oriented science and art.
 Multidisciplinary in nature.
  A group and not an individual activity.
 Follows established principles or rules.
 Aided but not replaced by computers.
 Situational in nature.
 Need not be an ownership.
 Both an art and science.
 Management is all pervasive.
 Management is intangible.
 Uses a professional approach in work.
 Dynamic in nature.
Now let's briefly discuss each feature of management.

1. Continuous and never ending process

Management is a Process. It includes four main functions, viz., Planning, Organising,
Directing and Controlling. The manager has to Plan and Organise all the activities. He
had to give proper Directions to his subordinates. He also has to Control all the
activities. The manager has to perform these functions continuously. Therefore,
management is a continuous and never ending process.
2. Getting things done through people
The managers do not do the work themselves. They get the work done through the
workers. The workers should not be treated like slaves. They should not be tricked,
threatened or forced to do the work. A favourable work environment should be created
and maintained.
3. Result oriented science and art
Management is result oriented because it gives a lot of importance to "Results".
Examples of Results like, increase in market share, increase in profits, etc. Management
always wants to get the best results at all times.
4. Multidisciplinary in nature
Management has to get the work done through people. It has to manage people. This is
a very difficult job because different people have different emotions, feelings,
aspirations, etc. Similarly, the same person may have different emotions at different
times. So, management is a very complex job. Therefore, management uses knowledge
from many different subjects such as Economics, Information Technology, Psychology,
Sociology, etc. Therefore, it is multidisciplinary in nature.
5. A group and not an individual activity
Management is not an individual activity. It is a group activity. It uses group (employees)
efforts to achieve group (owners) objectives. It tries to satisfy the needs and wants of a
group (consumers). Nowadays, importance is given to the team (group) and not to
individuals.
6. Follows established principles or rules
Management follows established principles, such as division of work, discipline, unity of
command, etc. These principles help to prevent and solve the problems in the
organisation.
7. Aided but not replaced by computers
Now-a-days, all managers use computers. Computers help the managers to take
accurate decisions. However, computers can only help management. Computers cannot
replace management. This is because management takes the final responsibility. Thus
Management is aided (helped) but not replaced by computers.
8. Situational in nature
Management makes plans, policies and decisions according to the situation. It changes
its style according to the situation. It uses different plans, policies, decisions and styles
for different situations.
The manager first studies the full present situation. Then he draws conclusions about
the situation. Then he makes plans, decisions, etc., which are best for the present
situation. This is called Situational Management.
9. Need not be an ownership
In small organisations, management and ownership are one and the same. However, in
large organisations, management is separate from ownership. The managers are highly
qualified professionals who are hired from outside. The owners are the shareholders of
the company.
10. Both an art and science
Management is result-oriented. Therefore, it is an Art. Management conducts
continuous research. Thus, it is also a Science.
11. Management is all pervasive
Management is necessary for running a business. It is also essential for running
business, educational, charitable and religious institutions. Management is a must for
all activities, and therefore, it is all pervasive.
12. Management is intangible
Management is intangible, i.e. it cannot be seen and touched, but it can be felt and
realised by its results. The success or failure of management can be judged only by its
results. If there is good discipline, good productivity, good profits, etc., then the
management is successful and vice-versa.
13. Uses a professional approach in work
Managers use a professional approach for getting the work done from their
subordinates. They delegate (i.e. give) authority to their subordinates. They ask their
subordinates to give suggestions for improving their work. They also encourage
subordinates to take the initiative. Initiative means to do the right thing at the right time
without being guided or helped by the superior.
14. Dynamic in nature
Management is dynamic in nature. That is, management is creative and innovative. An
organisation will survive and succeed only if it is dynamic. It must continuously bring in
new and creative ideas, new products, new product features, new ads, new marketing
techniques, etc.

NATURE OF MANAGEMENT
Universal process: Wherever there is human activity, there is management. Without
efficient management, objectives of the company can not be achieved.
Factor of production: Qualified and efficient managers are essential to utilization of
labor and capital.
Goal oriented: The most important goal of all management activity is to accomplish the
objectives of an enterprise. The goals should be realistic and attainable.
Supreme in thought and action: Managers set realizable objectives and then
mastermind action on all fronts to accomplish them. For this, they require full support
form middle and lower levels of management.
Group activity: All human and physical resources should be efficiently coordinated to
attain maximum levels of combined productivity. Without coordination, no work would
accomplish and there would be chaos and retention.

Dynamic function: Management should be equipped to face the changes in business

environment brought about by economic, social, political, technological or human
factors. They must be adequate training so that can enable them to perform well even in
critical situations.
Social science: All individuals that a manager deals with, have different levels of
sensitivity, understanding and dynamism.
Important organ of society: Society influences managerial action and managerial
actions influence society. Its managers responsibility that they should also contribute
towards the society by organizing charity functions, sports competition, donation to
NGO’s etc.
System of authority: Well-defined lines of command, delegation of suitable authority
and responsibility at all levels of decision-making. This is necessary so that each
individual should what is expected from him and to whom he need to report to.
Profession: Managers need to possess managerial knowledge and training, and have to
conform to a recognized code of conduct and remain conscious of their social and
human obligations.
Process: The management process comprises a series of actions or operations
conducted towards an end.
SCOPE OF MANAGEMENT
Although it is difficult to precisely define the scope of management, yet the following
areas are included in it:
1.  Subject-matter of management: Planning, organizing, directing, coordinating and
controlling are the activities included in the subject matter of management.
2.  Functional areas of management: These include:
Financial management includes accounting, budgetary control, quality control, financial
planning and managing the overall finances of an organization.
Personnel management includes recruitment, training, transfer promotion, demotion,
retirement, termination, labor-welfare and social security industrial relations.
Purchasing management includes inviting tenders for raw materials, placing orders,
entering into contracts and materials control.
Production management includes production planning, production control techniques,
quality control and inspection and time and motion studies.
Maintenance management involves proper care and maintenance of the buildings, plant
and machinery.
Transport management includes packing, warehousing and transportation by rail, road
and air.
Distribution management includes marketing, market research, price-determination,
taking market¬ risk and advertising, publicity and sales promotion.
Office Management includes activities to properly manage the layout, staffing and
 equipment of the office.
Development management involves experimentation and research of production
techniques, markets, etc.
3. Management is an inter-disciplinary approach: For the correct implementation of the
management, it is important to have knowledge of commerce, economics, sociology,
psychology and mathematics.
4. Universal application: The principles of management can be applied to all types of
organizations irrespective of the nature of tasks that they perform.
5. Essentials of management: Three essentials of management are:
 Scientific method
 Human relations
 Quantitative technique
6. Modern management is an agent of change: The management techniques can be
modified by proper research and development to improve the performance of an
organization.
14 Principles of Management of Henri Fayol
14 principles of Management are statements that are based on a fundamental truth.
These principles of management serve as a guideline for decision-making and
management actions. They are drawn up by means of observations and analyses of
events that managers encounter in practice. Henri Fayol was able to synthesize 14
principles of management after years of study, namely:
1. Division of Work
In practice, employees are specialized in different areas and they have different skills.
Different levels of expertise can be distinguished within the knowledge areas (from
generalist to specialist). Personal and professional developments support this.
According to Henri Fayol specialization promotes efficiency of the workforce and
increases productivity. In addition, the specialization of the workforce increases their
accuracy and speed. This management principle of the 14 principles of management is
applicable to both technical and managerial activities.
2. Authority and Responsibility
In order to get things done in an organization, management has the authority to give
orders to the employees. Of course with this authority comes responsibility. According
to Henri Fayol, the accompanying power or authority gives the management the right to
give orders to the subordinates. The responsibility can be traced back from
performance and it is therefore necessary to make agreements about this. In other
words, authority and responsibility go together and they are two sides of the same coin.
3. Discipline
This third principle of the 14 principles of management is about obedience. It is often a
part of the core values of a mission and vision in the form of good conduct and
respectful interactions. This management principle is essential and is seen as the oil to
make the engine of an organization run smoothly.
4. Unity of Command
The management principle ‘Unity of command’ means that an individual employee
should receive orders from one manager and that the employee is answerable to that
manager. If tasks and related responsibilities are given to the employee by more than
one manager, this may lead to confusion which may lead to possible conflicts for
employees. By using this principle, the responsibility for mistakes can be established
more easily.
5. Unity of Direction
This management principle of the 14 principles of management is all about focus and
unity. All employees deliver the same activities that can be linked to the same
objectives. All activities must be carried out by one group that forms a team. These
activities must be described in a plan of action. The manager is ultimately responsible
for this plan and he monitors the progress of the defined and planned activities. Focus
areas are the efforts made by the employees and coordination.
6. Subordination of Individual Interest
There are always all kinds of interests in an organization. In order to have an
organization function well, Henri Fayol indicated that personal interests are subordinate
to the interests of the organization (ethics). The primary focus is on the organizational
objectives and not on those of the individual. This applies to all levels of the entire
organization, including the managers.
7. Remuneration
Motivation and productivity are close to one another as far as the smooth running of an
organization is concerned. This management principle of the 14 principles of
management argues that the remuneration should be sufficient to keep employees
motivated and productive. There are two types of remuneration namely non-monetary (a
compliment, more responsibilities, credits) and monetary (compensation, bonus or
other financial compensation). Ultimately, it is about rewarding the efforts that have
been made.
8. The Degree of Centralization
Management and authority for decision-making process must be properly balanced in
an organization. This depends on the volume and size of an organization including its
hierarchy.
Centralization implies the concentration of decision making authority at the top
management (executive board). Sharing of authorities for the decision-making process
with lower levels (middle and lower management), is referred to as decentralization
by Henri Fayol. Henri Fayol indicated that an organization should strive for a good
balance in this.
9. Scalar Chain
Hierarchy presents itself in any given organization. This varies from senior management
(executive board) to the lowest levels in the organization. Henri Fayol ’s “hierarchy”
management principle states that there should be a clear line in the area of authority
(from top to bottom and all managers at all levels). This can be seen as a type of
management structure. Each employee can contact a manager or a superior in an
emergency situation without challenging the hierarchy. Especially, when it concerns
reports about calamities to the immediate managers/superiors.
10. Order
According to this principle of the 14 principles of management, employees in an
organization must have the right resources at their disposal so that they can function
properly in an organization. In addition to social order (responsibility of the managers)
the work environment must be safe, clean and tidy.
11. Equity
 The management principle of equity often occurs in the core values of an organization.
According to Henri Fayol, employees must be treated kindly and equally. Employees
must be in the right place in the organization to do things right. Managers should
supervise and monitor this process and they should treat employees fairly and
impartially.
12. Stability of Tenure of Personnel
This management principle of the 14 principles of management represents deployment
and managing of personnel and this should be in balance with the service that is
provided from the organization. Management strives to minimize employee turnover
and to have the right staff in the right place. Focus areas such as frequent change of
position and sufficient development must be managed well.
13. Initiative
Henri Fayol argued that with this management principle employees should be allowed to
express new ideas. This encourages interest and involvement and creates added value
for the company. Employee initiatives are a source of strength for the organization
according to Henri Fayol. This encourages the employees to be involved and interested.
14. Esprit de Corps
The management principle ‘esprit de corps’ of the 14 principles of management stands
for striving for the involvement and unity of the employees. Managers are responsible
for the development of morale in the workplace; individually and in the area of
communication. Esprit de corps contributes to the development of the culture and
creates an atmosphere of mutual trust and understanding.
In conclusion on the 14 Principles of management
The 14 principles of management can be used to manage organizations and are useful
tools for forecasting, planning, process management, organization management,
decision-making, coordination and control.
Although they are obvious, many of these matters are still used based on common
sense in current management practices in organizations. It remains a practical list with
focus areas that are based on Henri Fayol ’s research which still applies today due to a
number of logical principles.
Meaning, Definition Characteristics and Features Scientific Management

Meaning
The term scientific management is the combination of two words i.e. scientific and
management. The word “Scientific” means systematic analytical and objective
approach while “management” means getting things done through others. In simple
words Scientific management means application of principles and methods of science
in the field of management. “Scientific management is the art of knowing best and
cheapest way”. It is the art of knowing exactly what is to be done by whom it is to be
done and what is the best and cheapest way of doing it. Scientific methods and
techniques are applied in the field of management i.e., recruitment, selection, training,
placement of workers and methods of doing work in the best and cheapest way.
The Scientific management can be studied under the following heads:
 Primary principles of scientific management as evolved by F.W. Taylor.
 Secondary principles of scientific management.
Definitions of Scientific Management
The main definitions of scientific management are as follows:
According to Fredrick Winslow Taylor, “Scientific management means knowing exactly
what you want men to do and seeing that they do it in the best and the cheapest way.”
According to Harlow Person, “Scientific management characterizes that form of
organisation and procedure in purposive collective effort which rests on principles or
laws derived by the process of scientific investigation and analysis, instead of tradition
or on policies determined empirically and casually by the process of trial and error.”
ADVERTISEMENTS:
According to Jones, “Scientific management is a body of rules, together with their
appropriate expression in physical and administrative mechanism and specialized
executives, to be operated in coordination as a system for the achievement of a new
strictness in the control and process of production.”
According to Lioyd, Dodd and zynch, In broad outline “Scientific management seeks to
get the maximum from methods, men materials machines and money and it controls
the works of production from the location and layout of the worker to the final
distribution of the product.”
According to Peter F. Drucker, ” Scientific management is the organized study of work,
the analysis of work into its simplest element and the systematic improvement of the
workers”.
Characteristics / Features of Scientific Management
The main characteristics or features of scientific management are as follows:
Approach: It is a systematic, analytical and objective approach to solve industrial
problems.
Economy: The basis of scientific management is economy. For implementing economy,
all the unnecessary elements of production are eliminated and a sincere effort is made
to achieve optimum production at the minimum cost.
A Definite plan: The main characteristic of scientific management is that before starting
and work there must be a definite plan before as and the work is to be done strictly
according to that plan.
Discards old methods: It discards the age old methods of rule of thumb and hit or miss
approach.
Emphasis: It lays emphasis on all factors of production, men, material and technology.
Techniques: It implies scientific techniques in methods of work, recruitment, selection
and training of workers.
Attempts: It attempts to develop each man to his greatest efficiency and prosperities.
Method: It attempts to discover the best method of doing a work at the cheapest cost.
A definite Aim: It is another main characteristic of scientific management. Scientific
management is the process of organizing, directing, conducting and controlling human
activities. Hence there must be a definite aim before the managers, so that the human
activities be organized directed conducted and controlled for achieving that aim or aims.
changes in attitude: It involves a complete change in the mental attitude of workers as
well as the management.
A Set of Rules: There must be a set of rules in accordance with the laid plan so that the
objectives can be achieved. According to F.W. Taylor, It is no single element but rather
the whole combination that constitutes the scientific management.
FUNCTIONS OF MANAGEMENT
Management has been described as a social process involving responsibility for
economical and effective planning & regulation of operation of an enterprise in the
fulfillment of given purposes. It is a dynamic process consisting of various elements
and activities. These activities are different from operative functions like marketing,
finance, purchase etc. Rather these activities are common to each and every manger
irrespective of his level or status.
Different experts have classified functions of management. According to George &
Jerry, “There are four fundamental functions of management i.e. planning, organizing,
actuating and controlling”.
According to Henry Fayol, “To manage is to forecast and plan, to organize, to command,
& to control”. Whereas Luther Gullick has given a keyword ’POSDCORB’ where P stands
for Planning, O for Organizing, S for Staffing, D for Directing, Co for Co-ordination, R for
reporting & B for Budgeting. But the most widely accepted are functions of
management given by KOONTZ and O’DONNEL
i.e. Planning, Organizing, Staffing, Directing and Controlling.
For theoretical purposes, it may be convenient to separate the function of management
but practically these functions are overlapping in nature i.e. they are highly inseparable.
Each function blends into the other & each affects the performance of others.

1. Planning
It is the basic function of management. It deals with chalking out a future course
of action & deciding in advance the most appropriate course of actions for
achievement of pre-determined goals. According to KOONTZ, “Planning is
deciding in advance - what to do, when to do & how to do. It bridges the gap from
where we are & where we want to be”. A plan is a future course of actions. It is an
exercise in problem solving & decision making. Planning is determination of
courses of action to achieve desired goals. Thus, planning is a systematic
thinking about ways & means for accomplishment of pre-determined goals.
Planning is necessary to ensure proper utilization of human & non-human
resources. It is all pervasive, it is an intellectual activity and it also helps in
avoiding confusion, uncertainties, risks, wastages etc.
2. Organizing
It is the process of bringing together physical, financial and human resources and
developing productive relationship amongst them for achievement of
organizational goals. According to Henry Fayol, “To organize a business is to
provide it with everything useful or its functioning i.e. raw material, tools, capital
 and personnel’s”. To organize a business involves determining & providing
human and non-human resources to the organizational structure. Organizing as a
process involves:
 Identification of activities.
 Classification of grouping of activities.
 Assignment of duties.
 Delegation of authority and creation of responsibility.
 Coordinating authority and responsibility relationships.
3. Staffing
It is the function of manning the organization structure and keeping it manned.
Staffing has assumed greater importance in the recent years due to
advancement of technology, increase in size of business, complexity of human
behavior etc. The main purpose o staffing is to put right man on right job i.e.
square pegs in square holes and round pegs in round holes. According to Kootz
& O’Donell, “Managerial function of staffing involves manning the organization
structure through proper and effective selection, appraisal & development of
personnel to fill the roles designed un the structure”. Staffing involves:
 Manpower Planning (estimating man power in terms of searching, choose
the person and giving the right place).
 Recruitment, Selection & Placement.
 Training & Development.
 Remuneration.
 Performance Appraisal.
 Promotions & Transfer.
4. Directing
It is that part of managerial function which actuates the organizational methods
to work efficiently for achievement of organizational purposes. It is considered
life-spark of the enterprise which sets it in motion the action of people because
planning, organizing and staffing are the mere preparations for doing the work.
Direction is that inert-personnel aspect of management which deals directly with
influencing, guiding, supervising, motivating sub-ordinate for the achievement of
organizational goals. Direction has following elements:
 Supervision
 Motivation
 Leadership
 Communication
Supervision- implies overseeing the work of subordinates by their superiors. It is
the act of watching & directing work & workers.
Motivation- means inspiring, stimulating or encouraging the sub-ordinates with
zeal to work. Positive, negative, monetary, non-monetary incentives may be used
for this purpose.
Leadership- may be defined as a process by which manager guides and
influences the work of subordinates in desired direction.
Communications- is the process of passing information, experience, opinion etc
from one person to another. It is a bridge of understanding.
5. Controlling
 It implies measurement of accomplishment against the standards and correction
of deviation if any to ensure achievement of organizational goals. The purpose of
controlling is to ensure that everything occurs in conformities with the standards.
An efficient system of control helps to predict deviations before they actually
occur. According to Theo Haimann, “Controlling is the process of checking
whether or not proper progress is being made towards the objectives and goals
and acting if necessary, to correct any deviation”. According to Koontz & O’Donell
“Controlling is the measurement & correction of performance activities of
subordinates in order to make sure that the enterprise objectives and plans
desired to obtain them as being accomplished”. Therefore controlling has
following steps:
a. Establishment of standard performance.
b. Measurement of actual performance.
c. Comparison of actual performance with the standards and finding out
deviation if any.
d. Corrective action
PLANNING
Planning is the process of thinking about the activities required to achieve a desired
goal. It involves the creation and maintenance of a plan, such as psychological aspects
that require conceptual skills. There are even a couple of tests to measure someone’s
capability of planning well. As such, planning is a fundamental property of intelligent
behavior. An important further meaning, often just called "planning" is the legal context
of permitted building developments.
Also, planning has a specific process and is necessary for multiple occupations
(particularly in fields such as management, business, etc.). In each field there are
different types of plans that help companies achieve efficiency and effectiveness. An
important, albeit often ignored aspect of planning, is the relationship it holds
to forecasting. Forecasting can be described as predicting what the future will look like,
whereas planning predicts what the future should look like for multiple scenarios.
Planning combines forecasting with preparationof scenarios and how to react to them.
Planning is one of the most important project management and time management
techniques. Planning is preparing a sequence of action steps to achieve some specific
goal. If a person does it effectively, they can reduce much the necessary time and effort
of achieving the goal. A plan is like a map. When following a plan, a person can see how
much they have progressed towards their project goal and how far they are from their
destination.
Planning process[edit]
Example of planning process framework.
Patrick Montana and Bruce Charnov outline a three-step result-oriented process for
planning:[7]
1. choosing a destination
2. evaluating alternative routes
3. deciding the specific course of the plan
In organizations, planning can become a management process, concerned with defining
goals for a future direction and determining on the missions and resources to achieve
those targets. To meet the goals, managers may develop plans such as a business
plan or a marketing plan. Planning always has a purpose. The purpose may involve the
achievement of certain goals or targets.
Major characteristics of planning in organizations include:
 Planning increases the efficiency of an organization.
 Planning reduces risks.
 Planning utilizes with maximum efficiency the available time and resources
 The following are the essential characteristics of planning which describe the
nature of planning:
 1. Planning is primary function of management:
 The functions of management are broadly classified as planning, organisation,
direction and control. It is thus the first function of management at all levels.
Since planning is involved at all managerial functions, it is rightly called as an
essence of management.
 2. Planning focuses on objectives:
 ADVERTISEMENTS:
 Planning is a process to determine the objectives or goals of an enterprise. It lays
down the means to achieve these objectives. The purpose of every plan is to
contribute in the achievement of objectives of an enterprise.
 3. Planning is a function of all managers:
 Every manager must plan. A manager at a higher level has to devote more time
 to planning as compared to persons at the lower level. So the President or
Managing director in a company devotes more time to planning than the
supervisor.
 4. Planning as an intellectual process:
 Planning is a mental work basically concerned with thinking before doing. It is an
intellectual process and involves creative thinking and imagination. Wherever
planning is done, all activities are orderly undertaken as per plans rather than on
the basis of guess work. Planning lays down a course of action to be followed on
the basis of facts and considered estimates, keeping in view the objectives, goals
and purpose of an enterprise.
 5. Planning as a continuous process:
 Planning is a continuous and permanent process and has no end. A manager
makes new plans and also modifies the old plans in the light of information
received from the persons who are concerned with the execution of plans. It is a
never ending process.
 6. Planning is dynamic (flexible):
 ADVERTISEMENTS:
 Planning is a dynamic function in the sense that the changes and modifications
are continuously done in the planned course of action on account of changes in
business environment.
 As factors affecting the business are not within the control of management,
necessary changes are made as and when they take place. If modifications
cannot be included in plans it is said to be bad planning.
 7. Planning secures efficiency, economy and accuracy:
 A pre- requisite of planning is that it should lead to the attainment of objectives
at the least cost. It should also help in the optimum utilisation of available human
and physical resources by securing efficiency, economy and accuracy in the
business enterprises. Planning is also economical because it brings down the
cost to the minimum.
 8. Planning involves forecasting:
 Planning largely depends upon accurate business forecasting. The scientific
techniques of forecasting help in projecting the present trends into future. ‘It is a
kind of future picture wherein proximate events are outlined with some
distinctness while remote events appear progressively less distinct.”
 9. Planning and linking factors:
 A plan should be formulated in the light of limiting factors which may be any one
of five M’s viz., men, money, machines, materials and management.
 10. Planning is realistic:
 A plan always outlines the results to be attained and as such it is realistic in
nature.
 

The following are the essential characteristics of planning which describe the nature
of planning:
1. Planning is primary function of management:
The functions of management are broadly classified as planning, organisation, direction
and control. It is thus the first function of management at all levels. Since planning is
involved at all managerial functions, it is rightly called as an essence of management.
2. Planning focuses on objectives:
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Planning is a process to determine the objectives or goals of an enterprise. It lays down
the means to achieve these objectives. The purpose of every plan is to contribute in the
achievement of objectives of an enterprise.
3. Planning is a function of all managers:
Every manager must plan. A manager at a higher level has to devote more time to
planning as compared to persons at the lower level. So the President or Managing
director in a company devotes more time to planning than the supervisor.
4. Planning as an intellectual process:
Planning is a mental work basically concerned with thinking before doing. It is an
intellectual process and involves creative thinking and imagination. Wherever planning
is done, all activities are orderly undertaken as per plans rather than on the basis of
guess work. Planning lays down a course of action to be followed on the basis of facts
and considered estimates, keeping in view the objectives, goals and purpose of an
enterprise.
5. Planning as a continuous process:
Planning is a continuous and permanent process and has no end. A manager makes
new plans and also modifies the old plans in the light of information received from the
persons who are concerned with the execution of plans. It is a never ending process.
6. Planning is dynamic (flexible):
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Planning is a dynamic function in the sense that the changes and modifications are
continuously done in the planned course of action on account of changes in business
environment.
As factors affecting the business are not within the control of management, necessary
changes are made as and when they take place. If modifications cannot be included in
plans it is said to be bad planning.
7. Planning secures efficiency, economy and accuracy:
A pre- requisite of planning is that it should lead to the attainment of objectives at the
least cost. It should also help in the optimum utilisation of available human and physical
resources by securing efficiency, economy and accuracy in the business enterprises.
Planning is also economical because it brings down the cost to the minimum.
8. Planning involves forecasting:
Planning largely depends upon accurate business forecasting. The scientific techniques
of forecasting help in projecting the present trends into future. ‘It is a kind of future
picture wherein proximate events are outlined with some distinctness while remote
events appear progressively less distinct.”
9. Planning and linking factors:
A plan should be formulated in the light of limiting factors which may be any one of five
M’s viz., men, money, machines, materials and management.
10. Planning is realistic:
A plan always outlines the results to be attained and as such it is realistic in nature.
 Organization: Meaning, Definition, Concepts and Characteristics!
Meaning:
An entrepreneur organizes various factors of production like land, labour, capital,
machinery, etc. for channelizing them into productive activities. The product finally
reaches consumers through various agencies. Business activities are divided into
various functions, these functions are assigned to different individuals.
Various individual efforts must lead to the achievement of common business goals.
Organization is the structural framework of duties and responsibilities required of
personnel in performing various functions with a view to achieve business goals
through organization. Management tries to combine various business activities to
accomplish predetermined goals.
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Present business system is very complex. The unit must be run efficiently to stay in the
competitive world of business. Various jobs are to be performed by persons most
suitable for them. First of all various activities should be grouped into different
functions. The authority and responsibility is fixed at various levels. All efforts should be
made to co-ordinate different activities for running the units efficiently so that cost of
production may be reduced and profitability of the unit may be increased.
Definitions:
Louis Allen, “Organization is the process of identifying and grouping work to be
performed, defining and delegating responsibility and authority and establishing
relationships for the purpose of enabling people to work most effectively together in
accomplishing objectives.” In the words of Allen, organization is an instrument for
achieving organizational goals. The work of each and every person is defined and
authority and responsibility is fixed for accomplishing the same.
Wheeler, “Internal organization is the structural framework of duties and responsibilities
required of personnel in performing various functions within the company………… It is
essentially a blue print for action resulting in a mechanism for carrying out function to
achieve the goals set up by company management”. In Wheeler’s view, organization is a
process of fixing duties and responsibilities of persons in an enterprise so that business
goals are achieved.
Koontz and O’Donnell, ‘The establishment of authority relationships with provision for
co-ordination between them, both vertically and horizontally in the enterprise structure.”
These authors view organization as a coordinating point among various persons in the
business.
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Oliver Sheldon, “Organization is the process so combining the work which individuals or
groups have to perform with the facilities necessary for its execution, that the duties so
performed provide the best channels for the efficient, systematic, positive and
coordinated application of the available effort”. Organization helps in efficient utilization
of resources by dividing the duties of various persons.
Spriegel, “In its broadest sense organisation refers to the relationship between the
various factors present in a given endeavor. Factory organisation concerns itself
primarily with the internal relationships within the factory such as responsibilities of
personnel, arrangement and grouping of machines and material control. From the
standpoint of the enterprise as a whole, organisation is the structural relationship
between the various factors in the enterprise”.
Spriegel has given a wide definition of the organization. He has described it as the
relationship among persons, factors in the enterprise. All factors of production are
coordinated in order to achieve organisational objectives.
George Terry, “Organising is the establishing of effective authority relationships among
selected work, persons, and work places in order for the group to work together
efficiently”. According to Terry organisation is the creation of relationship among
persons and work so that it may be carried on in a better and efficient way.
C.H. Northcott, ‘The arrangement by which tasks are assigned to men and women so
that their individual efforts contribute effectively to some more or less clearly defined
purpose for which they have been brought together”. According to Northcott the
purpose of organisation is to co-ordinate the activities of various individuals working in
the organisation for the attainment of enterprise goals.
L.H. Haney, “Organisation is a harmonious adjustment of specialised parts for
accomplishment of some common purpose or purposes”. Organisation is the
adjustment of various activities for the attainment of common goals.
Characteristics of Organisation:
Different authors look at the word ‘organisation’ from their own angle. One thing which
is common in all the viewpoints is that organisation is the establishment of authority
relationship among persons so that it helps in the achievement of organisational
objectives.
Some of the characteristics of organisation are studied as follows:
1. Division of Work:
Organisation deals with the whole task of business. The total work of the enterprise is
divided into activities and functions. Various activities are assigned to different persons
for their efficient accomplishment. This brings in division of labour. It is not that one
person cannot carry out many functions but specialisation in different activities is
necessary to improve one’s efficiency. Organisation helps in dividing the work into
related activities so that they are assigned to different individuals.
2. Co-Ordination:
Co-ordination of various activities is as essential as their division. It helps in integrating
and harmonising various activities. Co-ordination also avoids duplications and delays. In
fact, various functions in an organisation depend upon one another and the
performance of one influences the other. Unless all of them are properly co¬ordinated,
the performance of all segments is adversely affected.
3. Common Objectives:
All organisational structure is a means towards the achievement of enterprise goals.
The goals of various segments lead to the achievement of major business goals. The
organisational structure should build around common and clear cut objectives. This will
help in their proper accomplishment.
4. Co-operative Relationship:
An organisation creates co-operative relationship among various members of the group.
An organisation cannot be constituted by one person. It requires at least two or more
persons. Organisation is a system which helps in creating meaningful relationship
among persons. The relationship should be both vertical and horizontal among
members of various departments. The structure should be designed that it motivates
people to perform their part of work together.
5. Well-Defined Authority-Responsibility Relationships:
An organisation consists of various positions arranged in a hierarchy with well defined
authority and responsibility. There is always a central authority from which a chain of
authority relationship stretches throughout the organisation. The hierarchy of positions
defines the lines of communication and pattern of relationships.
5 Main Types of Organisation
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According to different methods of distribution of authorities and responsibilities, the
organisation are of following types: 1. Line or Scalar Organisation 2. Functional
Organisation 3. Line and Staff Organisation 4. Line, Staff and Functional Organisation 5.
Committee Organisation.
Type # 1. Line or Scalar Organisation:
This type of organisation is also known as departmental or military type of organisation.
In this type of organisation business activities are divided into three groups, namely
fi¬nance and accounts, production and sales. Each of this department is sub-divided
into certain self-contained departments, i.e., sections.
Each departmental head has sole control over his section and has full authority to select
his labour, staff, purchase of raw materials, stores and to set the standards of output,
etc. Foreman of each shop trains new men and supervises the quality of output.
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In such a system superior exercises a direct authority over his subordinates who
become entirely responsible for their performance to the commanding superior. No
operation is under two bosses:
The following is the chart of line organisation:

This is known as military type organisation, because in military discipline is of high

order. Orders and instructions issued from the top have to be followed by the lowers.
Similarly in this type of organisation, order of General Manager are to be carried out,
without any say by subor¬dinates and hence no chances of shifting of responsibility as
in military and hence known as military type organisation.
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As in this organisation, the flow of authority moves from top to bottom in vertical lines,
therefore, this is also called line or scalar organisation.
Advantages:
1. A clear-cut division of authority and responsibility, hence no scope of shifting the
responsibility.
2. Strong in discipline.
3. It permits quick decisions.
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4. As responsibility of each individual is fixed, hence faults can be easily and quickly
known.
5. Everybody from top to bottom remains busy like a machine and hence total cost of
product will be less.
6. It is simple to understand.
7. Flexible and able to extend or contract.
Disadvantages:
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1. It requires different departmental heads to be expert in their respective functions,
hence lack of specialisation.
2. Departmental heads are over-burdened with various routine jobs, hence no time for
further expansion and planning.
3. Certain people become key points and they are loaded maximum with work.
4. Chances of accidents, wastage of material and labour are more because of
insufficient knowledge of all the work by one man.
5. Chances of delay in reaching the orders of General Manager or any other
departmen¬tal head upto the workers and, therefore, possibility of distortion, due to
long chan¬nel.
6. Over-burdened foreman may not be able to give sufficient time for each job and will
cause wastage and error.
7. It has no means of rewarding good workers.
Applications:
1. Such organisations are suitable for factories of small and medium size, in which
sub¬ordinate and operational staff is not too much.
2. Suitable for continuous process such as sugar, paper, oil refining, spinning and
weav¬ing industries etc.
3. Suitable where labour problems are not difficult to solve.
4. Suitable where automatic plants are used.
Type # 2. Functional Organisation:
The difficulties in finding all round qualified man to be foreman in the line organisation
are overcome with this type of organisation. He is replaced by various functionalised
people.
This system is advantageous because each supervisor is specialised in a particular field
and he attends to one factor in all the departments. Below is its layout:
In chart (b) these different bosses are just like foreman. In some factory, they are called
foreman and in another factory they may be designated as gang boss, speed boss etc.
Each boss goes to individual workman for instructing and guiding about his activity.
Chart (b) is a short and simplified form showing the structure of functional type of
organisaion, chart (c) shows the order of authority and the stages in the organisation.
In this, specialised people like chemists, purchasers, engineers, designers etc. are
employed under the production superintendent and everybody is supposed to give his
functionalised ad¬vice to all other foreman (bosses) and workers. Every foreman (boss)
will go to individual worker for his related function.
This type of organisation is sometime called “Taylor’s organisation” as it was for the
first time introduced by F.W.Taylor. Taylor said that the well qualified foreman required
brain, education (special or technical knowledge), manual strength, tact, energy,
hon¬esty, judgment or common sense and good health.
He believed that a man with three of these qualities could be hired at any time. If four
were required, it was necessary to secure a higher priced man. The man combining five
of the qualities was hard to find and the one with six, seven or eight almost impossible
to discover.
Therefore, Taylor employed functionalised bosses and as far as the workman was
concerned, instead of coming in contact with the management at one point, only he was
to receive his daily orders and help directly from eight different bosses. Four of these
were located in the planning room and four in the shop as shown in chart (c).
Advantages:
1. Due to specialisation quality of work is better.
2. This system provides more specialised knowledge and guidance to individual
workers through experts.
3. It helps mass production by standardisation and specialisation.
4. If any operation needs improvement, it can be improved even upto the last moment.
5. Considerable expansion of the factory is possible.
6. Since for every operation expert guidance is there, hence wastage of material will be
minimum which will reduce prime cost.
7. Unnecessary overloading of responsibilities will not be there, as was in the case of
line organisation.
8. No special knowledge of workers is required as the instructions are supplied by
draw¬ing and experts.
Disadvantages:
1. It is complicated from control point of view as every functionalized expert feels
him¬self to be superior than the other and there is no one-man control over the workers.
Therefore, it makes discipline problem difficult to solve among lower level.
2. By employing high waged experts, the total cost of job may become high.
3. As line workers will not be using their skill, their initiative cannot be utilised.
4. Shifting of responsibility is possible.
5. The failure of any of the expert will largely affect the production because, if any expert
tells wrong operation, there is no other body to correct him. This will result in large
wastage of material.
6. Proper co-ordination of the work of different departments is required but it is difficult
to maintain as everybody is working individually.
Application:
In practice a pure functionalised system is rarely found. In fact, a factory where
responsibilities are divided on a functional basis, line relationship may also exist. This is
suitable for large manufacturing concerns which are capable of expansion in future.
Type # 3. Line and Staff Organisation:
In a firm of large size operating on big scale, managers cannot give careful attention to
every part of management. They are unable to think and plan. They are busy with
ordinary task of production and selling. Hence ‘Some Staff is deputed to do other works
like investiga¬tion, research, recording, planning and advising to managers.
Thus staff brings specialisation by assisting the line officers. The line maintains
discipline and stability. Staff provides expert information and helps to improve the
overall efficiency. Thus the staffs are ‘thinkers’ while lines are ‘doers’.
A staff man usually controls one function of business of which he is an expert. Usually
the staff has no administrative authority, but an expert in some phase of operation. He
reports to the executive and gives the advice on the subject of his specialty.
Advantages:
1. It is a planned specialised system.
2. Quality of product will be better.
3. Wastage will be less.
4. Expert knowledge is available.
5. Sufficient time is available to general manager for future planning and expansion.
6. Discipline problem is solved because of line relationship.
Disadvantages:
1. Sufficient expert knowledge and guidance is not available as compared with
func¬tional type.
2. Lack of responsibility among higher levels and hence the discipline as a whole will be
poor.
3. The overhead cost of product may rise, because of high salaried staff.
4. The slackness of any section or department will largely affect whole working.
Application:
Now-a-days this type of organisation is preferred for medium and large scale industries,
depending upon internal structure, nature of productive activities and span of business
area. It is applied in automobile industries and other intermittent nature of industries.

Type # 4. Line, Staff and Functional Organisation:

Because of scientific methods, enough market competition and complications in the
busi¬ness, to obtain a sound system, the combination of line, staff and functional type
of organisation is required.
In this system, as regards the discipline and output are concerned, the workers are kept
under the direct control of foreman.
As regards quality, the inspector will have the proper authority to control the quality and
he can directly order the workman as in the functional organisation.
In the staff relationship, there may be research department for the analysis of raw
materi¬als, semi-finished and finished products to withstand market competition.
In this way all the three are combined together and as this is complicated in nature,
there¬fore, also called complicated type of organisation.
Application:
Now-a-days this pattern is followed by all government and private concerns, in which
much complicated processes or operations are involved, i.e., in big chemical plants,
electricity boards, steel plants and other huge undertakings.
5. Committee Organisation:
A committee is a group of persons formed for the purpose of giving advice on certain
important problems, which cannot usually be solved by an individual. It helps by pooling
the thoughts of several persons on problems involving several functions and offered for
criticism. Therefore, now-a-days many large companies add a network of committees to
the line and staff organisation.
These committees may be either “Permanent” sometimes referred to as standing
committees or they may be organised to serve a temporary function only. Examples of
commit¬tees are Research Committee, Co-ordination, and Advisory Committee,
Purchase Committee, Education Committee etc.

A committee is a tool for the development of ideas and recommendations of policy and
procedure. It brings better plans and policies for operations and results in better co-
operation in their execution. The final decision to put committee recommendations into
action rests with the line. The committee simply performs advisory function.
Actually, the committee is similar to the staff and several owners think it a costly
substitute for staff but it is found that no other method is so effective in solving
common problems or in getting new ideas as committee organisation of collective
judgment.
Fundamental Principles:
Committee like other forms of organisation should be varied according to the needs of
a given organisation.
However, there are certain basic principles given below, which must be considered:
1. In this, members should be minimum, i.e., generally 3 to 5. This is found by
experi¬ence that too many members result in much wasted time by lengthy discussions
and delayed decisions.
2. The chairman of the committee must prepare the agenda to be discussed much in
advance of the meeting and circulate among the members so that they can get
suffi¬cient time to think over the problems to be discussed.
3. The chairman must control the behaviour and discipline among the members when
the meeting is held so that there is least wasted time and thought.
4. Meetings should begin and end at fixed time.
5. Duties, authorities and responsibilities must be clearly defined and owing to
circum¬stances they can be subject to changes.
6. The meetings should be conducted from an agenda containing those things which
require attention arranged in the order of their importance.
7. All the members must realise that more time can be wasted unless each member
co¬operates sincerely to save the time of other members.
Advantages:
1. Since “two” heads are better than “one”, quick and valuable decisions can be taken.
2. By this, time schedule and proper follow up are instituted which causes speedy
ac¬tion.
3. Decision taken is impersonal which leave the chairman free from personal criticism.
4. As the members are from the plant side, they know better what is going on in the
shops and can give the correct suggestions and team up with other persons and
de¬partments.
5. There is a stimulus towards co-operative action.
6. Expert knowledge is utilised.
Disadvantages:
1. Sometimes the committees may be too large in strength which cause delayed
actions and wasted time.
2. It is an expensive form of organisation as outside members are paid travelling
allow¬ance and honorarium for attending the meetings.
3. Committees tend to hang on after its usefulness is over.
4. As members are from different departments, they may not reach to a final conclusion
at all.
5. It functions very slowly.
6. As there is joint responsibility of members. Hence, it amounts to irresponsibility, as
“Every body’s business is no body’s business”.
Top 14 Principles of an Organization
1. Principle of Objective:
The enterprise should set up certain aims for the achievement of which various
departments should work. A common goal so devised for the business as a whole and
the organization is set up to achieve that goal. In the absence of a common aim, various
departments will set up their own goals and there is a possibility of conflicting
objectives for different departments. So there must be an objective for the organization.
2. Principle of Specialisation:
The organization should be set up in such a way that every individual should be
assigned a duty according to his skill and qualification. The person should continue the
same work so that he specialises in his work. This helps in increasing production in the
concern.
3. Principles of Co-ordination:
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The co-ordination of different activities is an important principle of the organization.
There should be some agency to co-ordinate the activities of various departments. In
the absence of co-ordination there is a possibility of setting up different goals by
different departments. The ultimate aim of the concern can be achieved only if proper
co-ordination is done for different activities.
4. Principle of Authority and Responsibility:
The authority flows downward in the line. Every individual is given authority to get the
work done. Though authority can be delegated but responsibility lies with the man who
has been given the work. If a superior delegates his authority to his subordinate, the
superior is not absolved of his responsibility, though the subordinate becomes liable to
his superior. The responsibility cannot be delegated under any circumstances.
5. Principle of Definition:
The scope of authority and responsibility should be clearly defined. Every person should
know his work with definiteness. If the duties are not clearly assigned, then it will not be
possible to fix responsibility also. Everybody’s responsibility will become nobody’s
responsibility. The relationship between different departments should also be clearly
defined to make the work efficient and smooth.
6. Span of Control:
Span of control means how many subordinates can be supervised by a supervisor. The
number of subordinates should be such that the supervisor should be able to control
their work effectively. Moreover, the work to be supervised should be of the same
nature. If the span of control is disproportionate, it is bound to affect the efficiency of
the workers because of slow communication with the supervisors.
7. Principle of Balance:
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The principle means that assignment of work should be such that every person should
be given only that much work which he can perform well. Some person is over worked
and the other is under-worked, then the work will suffer in both the situations. The work
should be divided in such a way that everybody should be able to give his maximum.
8. Principle of Continuity:
The organization should be amendable according to the changing situations. Everyday
there are changes in methods of production and marketing systems. The organization
should be dynamic and not static. There should always be a possibility of making
necessary adjustments.
9. Principle of Uniformity:
The organization should provide for the distribution of work in such a manner that the
uniformity is maintained. Each officer should be in-charge of his respective area so as
to avoid dual subordination and conflicts.
10. Principle of Unity of Command:
There should be a unity of command in the organization. A person should be
answerable to one boss only. If a person is under the control of more than one person
then there is a like-hood of confusion and conflict. He gets contradictory orders from
different superiors. This principle creates a sense of responsibility to one person. The
command should be from top to bottom for making the organization sound and clear. It
also leads to consistency in directing, coordinating and controlling.
11. Principle of Exception:
This principle states that top management should interfere only when something goes
wrong. If the things are done as per plans then there is no need for the interference of
top management. The management should leave routine things to be supervised by
lower cadres. It is only the exceptional situations when attention of top management is
drawn. This principle relieves top management of many botherations and routine things.
Principle of exception allows top management to concentrate on planning and policy
formulation. Important time of management is not wasted on avoidable supervision.
12. Principle of Simplicity:
The organizational structure should be simple so that it is easily understood by each
and every person. The authority, responsibility and position of every person should be
made clear so that there is no confusion about these things. A complex organizational
structure will create doubts and conflicts among persons. There may also be over-
lapping’s and duplication of efforts which may otherwise be avoided. It helps in smooth
running of the organization.
13. Principle of Efficiency:
The organization should be able to achieve enterprise objectives at a minimum cost.
The standards of costs and revenue are pre-determined and performance should be
according to these goals. The organization should also enable the attainment of job
satisfaction to various employees.
14. Scalar Principle:
This principle refers to the vertical placement of supervisors starting from top and going
to the lower level. The scalar chain is a pre-requisite for effective and efficient
organization.
 
Centralization
In any business organization, concentration of authority and powers in the hands of top
management is referred to as centralization, everything which goes to reduce the
importance of subordinates role in an organization is known as centralization. In such a
type of office organization, the authority and powers of each and every activity lies in
the hands of top few, say office manager and his immediate subordinate, and other
subordinates play the second and subsequent fiddles. In fact, they are not to play any
role. Instead they asked to work and only work according to the dictates of what the
boss wants and orders.
Centralization of the powers in respect of planning and control in not a new thing in any
management. But centralization refers to the reduction of subordinates to a naught.
Thus, treatment accorded to them is only that of a machine. Subordinates are asked
 only to function as a machine whereas the top management functions as operators. In
fact, this position has brought disrepute to the term centralization in modern
management set-up.
Features of centralization:
1. Top level managers concentrate and reserve the decision-making power.
2. Execution decided by the top level management with the help from the other
levels of management.
3. Lower levels management do the jobs which directed and controlled by the top
managers
Advantages of Centralization
 Facility for personnel leadership.There is absolutely no doubt that the
centralized Office organization helps in establishing a personnel leadership which
may even be able to convert a losing business house into a profitable one because of
strong, efficient, purposeful and non controversial central leadership.
 Equitable distribution of work.  In order to group together and economies the
working as well as cost the grouping of two and more departments into one also
placing the same under one control goes a long way in equitably distributing in
workload not only between different departments but between individual worker as
well. This brings economy and speed.
 Uniformity of activities. Obviously when centralized, the activities will be either in
the hand of one individual or a few one but under his (one) direct, control. This will
result into uniformity of activities and thereby ensuring uniform decision and uniform
process.
 Specialization. Specialization of work as well as process and handling of the
work by the staff who has specialized in the work he is handling are a few of the
meaningful advantages of specialization.
 Economy.  The uniformity of activities and specialization of work lead to
economic operation and best utilization of the staff services. This brings efficiency
and smoothness as well. All these bring economy.
 No duplication of work. Centralized personal leadership, uniformity of activities
and specialization leave no scope for duplication of work in the office. Thus extra
labor and extra cost involved in duplication is avoided and economy is ensured.
 Quick decision. For taking advantage of rare opportunities coming in the way, it
is necessary that decision should be quickly taken lest the opportunity so available
may be slipped away. Centralized office organization helps in such a quick decision.
 Greater flexibility.  In case of any emergency arising the uniformity of activities
help in adjusting the activities, procedure and decisions taken. This adjustment
ensures flexibility the opportunity for which is available in centralized office
organization in greater degree.
 Standardization and training facilities enhanced. Centralized office organization
helps in standardizing the work and thereby helps in extending the training facilities to
everyone and every work in the organization which needs specialization,
standardization and attention The new staff member can easily pick up the work and
can easily be accommodated and adjusted in such a set-up.
 Effective control. Uniformity in activities, specialization and standardization
facilitates greater degree or supervision, effective co-ordination, self and
 departmental integration and thus ensure effective control.
 Fixing of responsibility is facilitated. It is possible in decentralized system to
locate the fault and detect the deviations and thus is able to pinpoint and take
effective measures to improve by knowing and then fixing the responsibility and
thereby improving the      working and efficiency.
Disadvantages of Centralization
However, a centralized set-up suffers from the following disadvantages:
 Delay in work. Quick decision is possible but only at the top level, since decision
is take only by the top, it is not possible to take quick decision whenever the top is
neither available nor is in a mood to take one. This results in delaying the work since
it is the top who is to take decision and none else.
 Bureaucracy. Bureaucracy leads to red tapism. A centralized set-up breads red-
tapism which does not only delay the work but also sometimes helps in the raining of
eye brows because bureaucracy always leads to discrimination.
 Distinctive to subordinates. Subordinate in such a set up only is required to
implement   whatever it is asked to carry out. No independent decision making
authority. A mechanical working always creates mental reservation. The subordinate
does not take imitative nor is he allowed to do so. Thus there remains no charm in
either the work or the organization as he knows fully well that no upper ladder is there
for him as he is not allowed to take any initiative.
 No loyalty. Since the initiative is not there, charm is not there. Zeal is absent. No
involvement is there. Only the implementation of job is there. This means “work like a
machine as ordered.” Such a psychology always never works. Thus neither the work
for the organization is treated as own one, obviously from a servant loyalty can be
expected only when he is allowed to think that he is very much the part of the
department and the organization. This is always missing. This brings lack of loyalty
among the working force.
 Lack of secrecy. Secrecy in a centralized set up cannot be maintained as the
orders and decisions flow from one place and conveyed to all. Moreover, all work at a
place, under one roof, one control and one office department. Thus secrecy even if
tried cannot be maintained as effectively as might be required.
 Decentralisation: Meaning, Advantages and Disadvantages of Decentralisation!
 Meaning:
 Decentralisation can be viewed as an extension of delegation.
 ADVERTISEMENTS:
 When a part of the work is entrusted to others, it is known as delegation.
Decentralisation extends to the lowest level of the organisation.
 A few definitions are given below:
 1. “Decentralisation refers to tire systematic effort to delegate to the lowest
levels all authority except that which can only be exercised at central points.”
—Louis A. Allen
 2. “Decentralisation means the division of a group of functions and activities into
relatively autonomous units with overall authority and responsibility for their
operation delegate to timd of cacti unit.’—Earl. P. Strong
 ADVERTISEMENTS:
 3. “Decentralisation is simply a matter of dividing up the managerial work and
 assigning specific duties to the various executive skills.”
 —Newman, summer and Wairen
 Thus, decentralisation is concerned with the decentralisation of decision-making
authority to the lower levels in managerial hierarchy.
 Degree of Decentralisation:
 The degree of decentralisation is determined by:
 (a) Nature of the authority delegated,
 (b) How far down in the organisation it is delegated,
 (c) How consistently it is delegated.
 So, the degree of decentralisation is determined by the authority given. For
example, manager A in a company is given the authority to buy certain material
worth Rs. 1500 whereas manager B is allowed to do similar type of work to the
extent of Rs. 4500.
 ADVERTISEMENTS:
 It is clear that the degree of decentralisation is less in case of A. Similarly
decisions about the matters referred, measure the degree of decentralisation
depending upon the power to take decisions vested in an officer without the need
of getting consent of somebody else.
 Advantages of Decentralisation:
 1. Reduces the burden on top executives:
 Decentralisation relieves the top executives of the burden of performing various
functions. Centralisation of authority puts the whole responsibility on the
shoulders of an executive and his immediate group. This reduces the time at the
disposal of top executives who should concentrate on other important
managerial functions. So, the only way to lessen their burden is to decentralise
the decision-making power to the subordinates.
 2. Facilitates diversification:
 Under decentralization, the diversification of products, activites and markets etc.,
is facilitated. A centralised enterprise with the concentration of authority at the
top will find it difficult and complex to diversify its activities and start the
additional lines of manufacture or distribution.
 3. To provide product and market emphasis:
 A product loses its market when new products appear in the market on account
of innovations or changes in the customers demand. In such cases authority is
decentralised to the regional units to render instant service taking into account
the price, quality, delivery, novelty, etc.
 4. Executive Development:
 When the authority is decentralised, executives in the organisation will get the
opportunity to develop their talents by taking initiative which will also make them
ready for managerial positions. The growth of the company greatly depends on
the talented executives.
 5. It promotes motivation:
 To quote Louis A. Allen, “Decentralisation stimulates the formation of small
cohesive groups. Since local managers are given a large degree of authority and
local autonomy, they tend to weld their people into closely knit integrated
groups.” This improves the morale of employees as they get involved in decision-
 making process.
 6. Better control and supervision:
 Decentralisation ensures better control and supervision as the subordinates at
the lowest levels will have the authority to make independent decisions. As a
result they have thorough knowledge of every assignment under their control and
are in a position to make amendments and take corrective action.
 7. Quick Decision-Making:
 Decentralisation brings decision making process closer to the scene of action.
This leads to quicker decision-making of lower level since decisions do not have
to be referred up through the hierarchy.
 Disadvantages of Decentralisation:
 Decentralisation can be extremely beneficial. But it can be dangerous unless it is
carefully constructed and constantly monitored for the good of the company as a
whole.
 Some disadvantages of decentralisation are:
 1. Uniform policies not Followed:
 Under decentralisation, it is not possible* to follow uniform policies and
standardised procedures. Each manager will work and frame policies according
to his talent.
 2. Problem of Co-Ordination:
 Decentralisation of authority creates problems of co-ordination as authority lies
dispersed widely throughout the organisation.
 3. More Financial Burden:
 Decentralisation requires the employment of trained personnel to accept
authority, it involves more financial burden and a small enterprise cannot afford
to appoint experts in various fields.
 4. Require Qualified Personnel:
 Decentralisation becomes useless when there are no qualified and competent
personnel.
 5. Conflict:
 Decentralisation puts more pressure on divisional heads to realize profits at any
cost. Often in meeting their new profit plans, bring conflicts among managers.
Communication Process
Definition: The Communication is a two-way process wherein the message in the form
of ideas, thoughts, feelings, opinions is transmitted between two or more persons with
the intent of creating a shared understanding.
Simply, an act of conveying intended information and understanding from one person to
another is called as communication. The term communication is derived from the Latin
word “Communis” which means to share. Effective communication is when the
message conveyed by the sender is understood by the receiver in exactly the same way
as it was intended.
Communication Process
The communication is a dynamic process that begins with the conceptualizing of ideas
by the sender who then transmits the message through a channel to the receiver, who in
turn gives the feedback in the form of some message or signal within the given time
frame. Thus, there are Seven major elements of communication process:
1. Sender: The sender or the communicator is the person who initiates the
conversation and has conceptualized the idea that he intends to convey it to others.
2. Encoding: The sender begins with the encoding process wherein he uses certain
words or non-verbal methods such as symbols, signs, body gestures, etc. to translate
the information into a message. The sender’s knowledge, skills, perception, background,
competencies, etc. has a great impact on the success of the message.
3. Message: Once the encoding is finished, the sender gets the message that he
intends to convey. The message can be written, oral, symbolic or non-verbal such as
body gestures, silence, sighs, sounds, etc. or any other signal that triggers the response
of a receiver.
4. Communication Channel: The Sender chooses the medium through which he
wants to convey his message to the recipient. It must be selected carefully in order to
make the message effective and correctly interpreted by the recipient. The choice of
medium depends on the interpersonal relationships between the sender and the
receiver and also on the urgency of the message being sent. Oral, virtual, written, sound,
gesture, etc. are some of the commonly used communication mediums.
5. Receiver: The receiver is the person for whom the message is intended or
targeted. He tries to comprehend it in the best possible manner such that the
communication objective is attained. The degree to which the receiver decodes the
message depends on his knowledge of the subject matter, experience, trust and
relationship with the sender.
6. Decoding: Here, the receiver interprets the sender’s message and tries to
understand it in the best possible manner. An effective communication occurs only if
 the receiver understands the message in exactly the same way as it was intended by the
sender.
7. Feedback: The Feedback is the final step of the process that ensures the receiver
has received the message and interpreted it correctly as it was intended by the sender.
It increases the effectiveness of the communication as it permits the sender to know
the efficacy of his message. The response of the receiver can be verbal or non-verbal.
A communication channel is a type of media that is used to transfer a message from
one person to another.  In business specifically, communication channels are the way
information flows in the organization within, and with other companies. 

Importance of a Communication Channel

Communication channels affect how inefficient or efficient the flow of information is
within a company. This lack of communication could cause employees to lack
the knowledge of what the company expects of them, leaving them uninformed.   Also
without an effective communication channel, employees lose focus on the big picture
and lose their company mind, which goes on to  affects their decision making and
productivity in the workplace.

This harms the overall organizational objectives as well.  For an organization to be run
effectively, a good manager should be able to communicate to their employees what is
expected of them, make sure they are fully aware of company policies and any
upcoming changes. Communication channels should be included by managers to
enhance the productivity of their workers and to also ensure the well being and smooth
running of their company.

Types of Communication

With technology advancing, the number of communication channels has significantly

increased over the past few years. Many new types of channels exist today including
video conferencing, mobile technology, electronic bulletin boards and also fax machines.
As time progresses so many more channels will be introduced and implemented within
the work place. These new types of channels help organizations communicate with the
several workers to ensure their message has been sent. Choosing the type of
communication channel is very important, these channels are grouped into three main
categories:  formal, informal and unofficial.

Formal Communication Channels

 Sends information including goals, policies and procedures of an organization

 Messages follow a chain of command
 Flows from managers to their subordinates
 Examples include business plan, customer satisfaction survey, annual reports,
employer's manual, review meetings. 
Informal Communication Channels
 The strict hierarchical web of communication cannot function efficiently on its
 own and hence there exists a different communication channel. 
  This type of communication channel may disrupt the chain of command, a good
manager needs to find the fine balance between the formal and informal
communication channel to ensure the best type of communication.
 Examples include, lunch time gathering, water cooler talk etc. 
 Quality circles, team work, different training programs are outside of the chain of
command are also informal communication channels.
Unofficial Communication Channels
 Sometimes communication that takes place in an organization are interpersonal. 
 Talks of sports, politics and TV shows are seen between co-workers. 
 The unofficial communication channel in an company is the company's
'grapevine.' It is this that cause rumors.
  'Grapevine' discussions often form groups, which translate into friendships
outside of the organization. 
  A good manager should be aware of information circulating in this unofficial
communication channel and should take positive measures to prevent false
information from spreading.
 Social gatherings between co-workers are a type of unofficial communication
channel.
Types of Communication Medium
We divide the different types of communication medium into two different categories:
1. Physical media
2. Mechanical media (everything that is not No. 1)
This site focus on the internal communication. Our listings of types of communication
medium therefore exclude external media.
Physical media
With physical media we mean channels where the person who is talking can be seen
and heard by the audience. The whole point here is to be able to not only hear the
messages but also to see the body language and feel the climate in the room. This does
not need to be two-way channels. In certain situations the receiver expect physical
communication. This is the case especially when dealing with high concern messages,
e.g. organizational change or down sizing. If a message is perceived as important to the
receiver they expect to hear it live from their manager.
 Large meetings, town hall meetings
 Department meetings (weekly meetings)
 Up close and personal (exclusive meetings)
 Video conferences
 Viral communication or word of mouth
Large meetings
Large meetings have got great symbolic value and should be used only at special
occasions. This channel works very well when you need to get across strategic and
important messages to a large group of people at the same time, creating a wide
attention, get engagement or communicate a sense of belonging. Large meetings are
excellent when you want to present a new vision or strategy, inform about a
reorganisation or share new values. The opportunity for dialogue is limited at large
meeting, of course but you can create smaller groups where dialogue can be performed.
 Weekly departmental meetings
In the weekly meetings you and your group communicate daily operative issues, gives
status reports and solves problems. Weekly meetings are also used to follow up on
information from large meetings, management team meetings etc from a “what’s-in-it-
for-us-perspective”. This type of smaller group meetings gives good opportunities for
dialogue. This channel is often the most important channel you have as a manager,
because that’s where you have the opportunity to build the big picture, you can prepare
for change, you can create ownership of important strategies and goals etc. This is a
favourite among the types of communication medium.
Up close and personal
This is a form of meetings where, often, a senior manager meets with a “random”
selection of employees to discuss and answer questions. Some managers use this as a
on going activities on a monthly basis. It can also be used in specific projects or
campaigns e.g. launching new strategies.
Viral communication
Or viral marketing as it is also called works external as well as internal and refer to
marketing techniques that use pre-existing social networks to produce increases in
awareness or knowledge through self-replicating viral processes. It can be word-of-
mouth delivered or enhanced by the network effects of social media.
Mechanical media
The second of the two types of communication medium is mechanical media. With
mechanical media we mean written or electronic channels. These channels can be used
as archives for messages or for giving the big picture and a deeper knowledge. But they
can also be very fast. Typically though, because it is written, it is always interpret by the
reader based on his or her mental condition. Irony or even humour rarely travels well in
mechanical channels.
 E-mail
 Weekly letters or newsletters
 Personal letters
 Billboards
 Intranet
 Magazines or papers
 Sms
 Social media
E-mail
E-mail is a good channel for the daily communication to specific target groups. It is
suitable mainly for up-to-date and “simple” messages and where there is no risk of
misunderstanding, E-mail is an important supplement to weekly meetings and the
Intranet. Invitation to and agenda for meetings can with advantage be sent out with e-
mail before the meeting, while background facts and minutes from meetings is well
suited to be stored on the Intranet.
Some short e-mail tips:
 Write short and to the point.
 Target your messages to the audience and avoid sending unnecessary all-
employees-e-mails.
 Set up your subject line to describe what the e-mail is about.
 Clearly state if the message is for information or for action.
 Avoid attaching large documents if possible. Post a link or direct to the source
instead.
Weekly letters
Managers that have large groups of employees and who has difficulties in meeting all
of them often choose to publish a personally weekly letter. It is sort of a short summary
of news with personally reflections. Many employees often appreciate it because it has
the potential to give the “what’s-in-it-for-us” angle. They can also contain summaries
and status in tasks, projects or issues – yesterday, today and tomorrow.
Personal letters
At special occasions it can be justified to send a personal letter to employees in order
to get attention to a specific issue. E.g. pat on the back letter after extra ordinary
achievements. Or it can be a letter with your personal commentary on an ongoing
reorganisation that affects many employees. One other example is a letter that
summarizes the past year and wishes all the best for the holidays.
Billboard
One of the most forgotten types of communication medium is clearly the billboard.
Especially today, when everything is about social media. But the good thing with the
billboard is that you can use billboards to inform people who does not have computers
and/or access to the Intranet or to reach people that work part time and does not attend
weekly meetings.
 News summary
 Weekly letters
 Minutes from meetings
 Schedules
 Holiday lists
You can also use the billboard to gather ideas e.g. for items for upcoming meetings
Intranet
The Intranet is of course one of the most used types of communication medium and a
very important communication channel and work tool for you as a manager, but it is
also your job to help your employees prioritise and pick out the information on the
Intranet, as well as translating messages into local consequences. Ask your self: what
information concerns you employees? In what way are they concerned? How do I best
communicate this to my employees? Weekly meeting or your weekly letter can be a
suitable channel to discuss or inform of information found on the Intranet.
Employee magazine
A Magazine offers the opportunity to deepen a specific issue, explain context,
describing consequences or tell a story. It also has the opportunity to reach many
employees. If you want to create a broad internal understanding of strategic messages
the magazine can be a good vehicle to use e.g. by writing an article based on an
interview with you. As were the case with the Intranet you also have to “translate” the
information in the magazine to your employees. You can ask yourself: What does the
content in a specific article mean to us? How shall I best communicate it to the
employees?
Sms
Or text messaging to the mobile phone is one of the new types of communication
medium and not a very widely used channel but where it is used it is proven very
effective. Some companies use it as an alert system e.g. for giving managers a head
start when something important will be published on the Intranet. The advantage with
Sms is that it is fast. But it should be used rarely as an exclusive channel. Some
companies use it as a subscription tool where you can subscribe to e.g press-releases.
Social media Wikipedia describe social media as “Media designed to be disseminated
through social interaction, created using highly accessible and scalable publishing
techniques. Social media supports the human need for social interaction, using Internet-
and web-based technologies to transform broadcast media monologues (one to many)
into social media dialogues (many to many). It supports the democratization of
knowledge and information, transforming people from content consumers into content
producers. Businesses also refer to social media as user-generated content (UGC) or
consumer-generated media (CGM).”
More and more companies are using social media in their external marketing, setting up
twitter and Facebook accounts etc. But these channels are also used internal where
managers become “friends” on Facebook with their employees or where managers use
blog and twitter targeting their employees.

Some of the important barriers to communication have been discussed below:

1. Physical Barriers:
A communication is a two-way process, distance between the sender and the
receiver of the message is an important barrier to communication. Noise and
environmental factors also block communication. 
2. Personal Barriers:
Personal factors like difference in judgment, social values, inferiority complex,
bias, attitude, pressure of time, inability to communicate, etc. widen the
psychological distance between the communicator and the communicate.
Credibility gap i.e., inconsistency between what one says and what one does,
also, acts as a barrier to communication.
3. Semantic or Language Barriers:
Semantic is the science of meaning. The same words and symbols carry
different meanings to different people. Difficulties in communication arise when
the sender and the receiver of the message use words or symbols in different
senses. The meaning intended by the sender may be quite different from the
meaning followed by the receiver. People interpret the message in terms of their
own behaviour and experience. Sometimes, the language used by the sender may
not at all be followed by the receiver.
4. Status Barriers (Superior-Subordinate Relationship):
Status or position in the hierarchy of an organization is one of the fundamental
barriers that obstructs free flow of information. A superior may give only selected
information to his subordinates so as to maintain status differences.
Subordinates, usually, tend to convey only those things which the superiors
would appreciate.
This creates distortion in upward communication. Such selective communication
is also known as filtering. Sometimes, “the superior feels that he cannot fully
admit to his subordinates those problems, conditions or results which may affect
adversely on his ability and judgment. To do so would undermine his position as
a superior being in the formal organization.” This causes distortion in downward
communication. A subordinate may also feel reluctant to report his
shortcomings or may not seek clarification on instructions which are subject to
different interpretations for fear of loss of prestige in the eyes of the superior.
5. Organizational Structure Barriers:
Effective communication largely depends upon sound organizational structure. If
the structure is complex involving several layers of management, the breakdown
or distortion in communication wall arise. It is an established fact that every layer
cuts off a bit of information. In the words of W.C. Bennis, “Communication gets
distorted particularly as it goes up the hierarchy.”
Moreover, information travelling through formal structure introduces rigidity and
causes-delay because of long lines of communication. Similarly, lack of
instructions for further conveying information to the subordinates and heavy
pressure of work at certain levels of authority also act as barriers to effective
communication.
6. Barriers Due to Inadequate Attention:
Inadequate attention to the message makes communication less effective and
the message is likely to be misunderstood. Inattention may arise because of over
business of the communicate or because of the message being contrary to his
expectations and beliefs. The simple failure to read notices, minutes and reports
is also a common feature.
Whatever be the reason, communication remains only a one-way process and
there is no understanding of the message, if the receiver pays little attention to
the message. In the words of Joseph Dooher. “Listening is the most neglected
skill of communication.” “half listening is like racing your engine with the gears in
neutral. You use gasoline but you get nowhere.”
7. Premature Evaluation:
Some people have the tendency to form a judgment before listening to the entire
message. This is known as premature evaluation. As discussed in the previous
point, “half-listening is like racing your engine with the gears in neutral. You use
gasoline but you get nowhere.” Premature evaluation distorts understanding and
acts as a barrier to effective communication.
8. Emotional Attitude:
Barriers may also arise due to emotional attitude because when emotions are
strong, it is difficult to know the frame of mind of other person or group.
Emotional attitudes of both, the communicator as well as the communicate,
obstruct free flow of transmission and understanding of messages.
9. Resistance to Change:
It is a general tendency of human beings to stick to old and customary patterns
of life. They may resist change to maintain status quo. Thus, when new ideas are
being communicated to introduce a change, it is likely to be overlooked or even
opposed. This resistance to change creates an important obstacle to effective
communication.
10. Barriers Due to Lack of Mutual Trust:
Communication means sharing of ideas in common. “When we communicate, we
 are trying to establish a commonness.” Thus, one will freely transfer information
and understanding with another only when there is mutual trust between the two.
When there is a lack of mutual trust between the communicator and the
communicate, the message is not followed. Credibility gaps, i.e., inconsistency in
saying and doing, also causes lack of mutual trust which acts as a basic obstacle
to effective communication.
11. Other Barriers:
There may be many other barriers, such as un-clarified assumptions, lack of
ability to communicate, mirage of too much knowledge of closed minds,
communication overload, shortage of time, etc., which cause distortion or
obstruction in the free flow of communication and thus make it ineffective.
Failure to retain or store information for future use becomes a barrier to
communication when the information is needed in future.
STAFFINIG:

Staffing is one of the most important functions of management. In fact, it is the process
of filling vacant position by appointing the right personnel at the right job, at the right
time. Hence, everything will occur in the right manner. It is universal truth that human
resource is one of the greatest parts of every organization, because in any organization
all other resources like- money, material, machine etc can be utilized efficiently and
effectively by the positive efforts of the human resource. Thus, it is too important that
each and every personnel in organization should be appointed at the right job, according
to their ability, talent, aptitude and specializations. So that, organization can achieve it’s
pre-set goals in the proper way by the hundred percent contribution of man-power. On
the whole it is clear that staffing is an essential function of every business organization.
  

Some important definitions of Staffing:

According to A. K. Singh, “Staffing is the process of providing jobs to deserving people,

through the function of recruitment, selection and training with-a-view to getting
benefits from them, for the achievement of pre-set goals of organization.

According to Theo Heimann, “Staffing is concerned with the placement, growth and
development of all those members of the organization whose function is to get the
things done through the efforts of other individuals. 
 Unit-II
ECONOMICS – DEFINITION AND NATURE & SCOPE OF ECONOMICS – DIVISIONS OF
ECONOMICS
MEANING OF ECONOMICS: Economics is the science that deals with production,
exchange and consumption of various commodities in economic systems. It shows
how scarce resources can be used to increase wealth and human welfare. The central
focus of economics is on scarcity of resources and choices among their alternative
uses. The resources or inputs available to produce goods are limited or scarce. This
scarcity induces people to make choices among alternatives, and the knowledge of
economics is used to compare the alternatives for choosing the best among them. For
example, a farmer can grow paddy, sugarcane, banana, cotton etc. in his garden land.
But he has to choose a crop depending upon the availability of irrigation water. Two
major factors are responsible for the emergence of economic problems. They are: i) the
existence of unlimited human wants and ii) the scarcity of available resources. The
numerous human wants are to be satisfied through the scarce resources available in
nature. Economics deals with how the numerous human wants are to be satisfied with
limited resources. Thus, the science of economics centres on want - effort - satisfaction.
Economics not only covers the decision making behaviour of individuals but also the
macro variables of economies like national income, public finance, international trade
and so on.
DEFINITIONS OF ECONOMICS: Several economists have defined economics taking
different aspects into account. The word ‘Economics’ was derived from two Greek
words, oikos (a house) and nemein (to manage) which would mean ‘managing an
household’ using the limited funds available, in the most satisfactory manner possible.
i) Wealth Definition Adam smith (1723 - 1790), in his book “An Inquiry into Nature and
Causes of Wealth of Nations” (1776) defined economics as the science of wealth. He
explained how a nation’s wealth is created. He considered that the individual in the
society wants to promote only his own gain and in this, he is led by an “invisible hand” to
promote the interests of the society though he has no real intention to promote the
society’s interests. Criticism: Smith defined economics only in terms of wealth and not
in terms of human welfare. Ruskin and Carlyle condemned economics as a ‘dismal
science’, as it taught selfishness which was against ethics. However, now, wealth is
considered only to be a mean to end, the end being the human welfare. Hence, wealth
definition was rejected and the emphasis was shifted from ‘wealth’ to ‘welfare’.
ii) Welfare Definition Alfred Marshall (1842 - 1924) wrote a book “Principles of
Economics” (1890) in which he defined “Political Economy” or Economics is a study of
mankind in the ordinary business of life; it examines that part of individual and social
action which is most closely connected with the attainment and with the use of the
material requisites of well being”.
The important features of Marshall’s definition are as follows: a) According to Marshall,
economics is a study of mankind in the ordinary business of life, i.e., economic aspect
of human life. b) Economics studies both individual and social actions aimed at
promoting economic welfare of people. c) Marshall makes a distinction between two
types of things, viz. material things and immaterial things. Material things are those that
can be seen, felt and touched, (E.g.) book, rice etc. Immaterial things are those that
cannot be seen, felt and touched. (E.g.) skill in the operation of a thrasher, a tractor etc.,
cultivation of hybrid cotton variety and so on. In his definition, Marshall considered only
the material things that are capable of promoting welfare of people. Criticism: a)
Marshall considered only material things. But immaterial things, such as the services of
a doctor, a teacher and so on, also promote welfare of the people. b) Marshall makes a
distinction between (i) those things that are capable of promoting welfare of people and
(ii) those things that are not capable of promoting welfare of people. But anything, (E.g.)
liquor, that is not capable of promoting welfare but commands a price, comes under the
purview of economics. c) Marshall’s definition is based on the concept of welfare. But
there is no clear-cut definition of welfare. The meaning of welfare varies from person to
person, country to country and one period to another. However, generally, welfare
means happiness or comfortable living conditions of an individual or group of people.
The welfare of an individual or nation is dependent not only on the stock of wealth
possessed but also on political, social and cultural activities of the nation.
iii) Welfare Definition Lionel Robbins published a book “An Essay on the Nature and
Significance of Economic Science” in 1932. According to him, “economics is a science
which studies human behaviour as a relationship between ends and scarce means
which have alternative uses”. The major features of Robbins’ definition are as follows: a)
Ends refer to human wants. Human beings have unlimited number of wants. b)
Resources or means, on the other hand, are limited or scarce in supply. There is scarcity
of a commodity, if its demand is greater than its supply. In other words, the scarcity of a
commodity is to be considered only in relation to its demand. c) The scarce means are
capable of having alternative uses. Hence, anyone will choose the resource that will
satisfy his particular want. Thus, economics, according to Robbins, is a science of
choice. Criticism: a) Robbins does not make any distinction between goods conducive
to human welfare and goods that are not conducive to human welfare. In the production
of rice and alcoholic drink, scarce resources are used. But the production of rice
promotes human welfare while production of alcoholic drinks is not conducive to
human welfare. However, Robbins concludes that economics is neutral between ends. b)
In economics, we not only study the micro economic aspects like how resources are
allocated and how price is determined, but we also study the macro economic aspect
like how national income is generated. But, Robbins has reduced economics merely to
theory of resource allocation. c) Robbins definition does not cover the theory of
economic growth and development.
iv) Growth Definition Prof. Paul Samuelson defined economics as “the study of how
men and society choose, with or without the use of money, to employ scarce productive
resources which could have alternative uses, to produce various commodities over time,
and distribute them for consumption, now and in the future among various people and
groups of society”. The major implications of this definition are as follows: a)
Samuelson has made his definition dynamic by including the element of time in it.
Therefore, it covers the theory of economic growth. b) Samuelson stressed the problem
of scarcity of means in relation to unlimited ends. Not only the means are scarce, but
they could also be put to alternative uses. c) The definition covers various aspects like
production, distribution and consumption. Of all the definitions discussed above, the
‘growth’ definition stated by Samuelson appears to be the most satisfactory. However,
in modern economics, the subject matter of economics is divided into main parts, viz., i)
Micro Economics and ii) Macro Economics. Economics is, therefore, rightly considered
as the study of allocation of scarce resources (in relation to unlimited ends) and of
determinants of income, output, employment and economic growth.
SCOPE OF ECONOMICS: Scope means province or field of study. In discussing the
scope of economics, we have to indicate whether it is a science or an art and a positive
science or a normative science. It also covers the subject matter of economics.
i) Economics - A Science and an Art
a) Economics is a science: Science is a systematized body of knowledge that traces
the relationship between cause and effect. Another attribute of science is that its
phenomena should be amenable to measurement. Applying these characteristics, we
find that economics is a branch of knowledge where the various facts relevant to it have
been systematically collected, classified and analyzed. Economics investigates the
possibility of deducing generalizations as regards the economic motives of human
beings. The motives of individuals and business firms can be very easily measured in
terms of money. Thus, economics is a science. Economics - A Social Science: In order
to understand the social aspect of economics, we should bear in mind that labourers
are working on materials drawn from all over the world and producing commodities to
be sold all over the world in order to exchange goods from all parts of the world to
satisfy their wants. There is, thus, a close inter-dependence of millions of people living
in distant lands unknown to one another. In this way, the process of satisfying wants is
not only an individual process, but also a social process. In economics, one has, thus, to
study social behaviour i.e., behaviour of men in-groups.
b) Economics is also an art. An art is a system of rules for the attainment of a given
end. A science teaches us to know; an art teaches us to do. Applying this definition, we
find that economics offers us practical guidance in the solution of economic problems.
Science and art are complementary to each other and economics is both a science and
an art.
METHODS OF ECNOMICS;
ii) Positive and Normative Economics Economics is both positive and normative
science.
a) Positive science: It only describes what it is and normative science prescribes what it
ought to be. Positive science does not indicate what is good or what is bad to the
society. It will simply provide results of economic analysis of a problem.
b) Normative science: It makes distinction between good and bad. It prescribes what
should be done to promote human welfare. A positive statement is based on facts. A
normative statement involves ethical values. For example, “12 per cent of the labour
force in India was unemployed last year” is a positive statement, which could is verified
by scientific measurement. “Twelve per cent unemployment is too high” is normative
statement comparing the fact of 12 per cent unemployment with a standard of what is
unreasonable. It also suggests how it can be rectified. Therefore, economics is a
positive as well as normative science.
iii) Methodology of Economics Economics as a science adopts two methods for the
discovery of its laws and principles, viz.,
(a) deductive method and (b) inductive method.
a) Deductive method: Here, we descend from the general to particular, i.e., we start
from certain principles that are self-evident or based on strict observations. Then, we
carry them down as a process of pure reasoning to the consequences that they
implicitly contain. For instance, traders earn profit in their businesses is a general
statement which is accepted even without verifying it with the traders. The deductive
method is useful in analyzing complex economic phenomenon where cause and effect
are inextricably mixed up. However, the deductive method is useful only if certain
assumptions are valid. (Traders earn profit, if the demand for the commodity is more). b)
Inductive method: This method mounts up from particular to general, i.e., we begin with
the observation of particular facts and then proceed with the help of reasoning founded
on experience so as to formulate laws and theorems on the basis of observed facts. E.g.
Data on consumption of poor, middle and rich income groups of people are collected,
classified, analyzed and important conclusions are drawn out from the results. In
deductive method, we start from certain principles that are either indisputable or based
on strict observations and draw inferences about individual cases. In inductive method,
a particular case is examined to establish a general or universal fact. Both deductive
and inductive methods are useful in economic analysis.
iv) Subject Matter of Economics Economics can be studied through
a) traditional approach and (b) modern approach.
a) Traditional Approach: Economics is studied under five major divisions namely
consumption, production, exchange, distribution and public finance. 1.Consumption:
The satisfaction of human wants through the use of goods and services is called
consumption. 2.Production: Goods that satisfy human wants are viewed as “bundles of
utility”. Hence production would mean creation of utility or producing (or creating)
things for satisfying human wants. For production, the resources like land, labour,
capital and organization are needed. 3. Exchange: Goods are produced not only for self-
consumption, but also for sales. They are sold to buyers in markets. The process of
buying and selling constitutes exchange. 4. Distribution: The production of any
agricultural commodity requires four factors, viz., land, labour, capital and organization.
These four factors of production are to be rewarded for their services rendered in the
process of production. The land owner gets rent, the labourer earns wage, the capitalist
is given with interest and the entrepreneur is rewarded with profit. The process of
determining rent, wage, interest and profit is called distribution. 5. Public finance: It
studies how the government gets money and how it spends it. Thus, in public finance,
we study about public revenue and public expenditure.
b) Modern Approach
The study of economics is divided into:
i) Microeconomics and ii) Macroeconomics.
1. Microeconomics analyses the economic behaviour of any particular decision making
unit such as a household or a firm. Microeconomics studies the flow of economic
resources or factors of production from the households or resource owners to business
firms and flow of goods and services from business firms to households. It studies the
behaviour of individual decision making unit with regard to fixation of price and output
and its reactions to the changes in demand and supply conditions. Hence,
microeconomics is also called price theory.
2. Macro economics studies the behaviour of the economic system as a whole or all
the decision-making units put together. Macroeconomics deals with the behaviour of
aggregates like total employment, gross national product (GNP), national income,
general price level, etc. So, macroeconomics is also known as income theory.
Microeconomics cannot give an idea of the functioning of the economy as a whole.
Similarly, macroeconomics ignores the individual’s preference and welfare. What is true
of a part or individual may not be true of the whole and what is true of the whole may
not apply to the parts or individual units. By studying about a single small-farmer,
generalization cannot be made about all small farmers, say in Tamil Nadu state.
Similarly, the general nature of all small farmers in the state need not be true in case of
a particular small farmer. Hence, the study of both micro and macroeconomics is
essential to understand the whole system of economic activities.
BASIC ASSUMPTION OF ECONOMICS
1. Economic Rationality: Economics deals with economic behaviour of man, which is highly
unpredictable and uncertain. Man is not a machine, which will work according a set pattern. He
has a free will. It is, thus, very hard to predict which taste individuals have (why some prefer
cake to ice cream, white to red cars and so on) and in which way they will respond to various
economic stimuli. Despite this empirical truths there are also, however, distinct regularities
about human behaviour. For example, if the price of a commodity the good increases and all
other things remaining same, people will tend to buy less, if inflation takes place, workers will
ask for more money wages for the same work. These regularities indicate normal behaviour or
normal responses and considered any deviation as abnormal such as buying less when price
falls. While deducing any theory, economists assume that human being acts in a normal rational
manner. Rationality in economics means maximization of gains. It means that a consumer will
allocate his scares resources towards various wants in such a manner that his satisfaction is
maximum, producer being rational will try to maximize his profits. Rational human behaviour is
thus the most basic assumption in economics. If we did not make this assumption, we would
never “reach anywhere” in economics.
2.Ceteris paribus is another assumption, which is often made. Ceteris paribus means other
things being equal. By other things we mean factors other than the one under observation. For
example, if we are studying demand of coffee in relation to its price, we assume other factors;
which affect the demand for coffee, such as income of consumers, taste and preference etc., as
given. If we allow these factors also to change, we will not be able to measure the effect of price
of tea on its demand correctly and objectively. Therefore we make the assumption – ceteris
paribus.
3. Perfect Competition: Another as very common assumption amongst economists is the
assumption of perfect competition. Economists, especially classical economists, assumed that
competition was perfect. However, this assumption was introduced more for theoretical
convenience than for practical utility. Equilibrium: Another common assumption, which forms
the basis of most of the economic theories, is that of ‘equilibrium’. Equilibrium is a condition
from which no deviation is desired. It is the optimal position for decision making.
4.Capitalist Economy: Economic 'analysis, especially price theory, has been developed in the
context of a developed capitalist economy. Such an economy assumes the existence of private
property, freedom of enterprise, profit motive, private initiative, perfect competition and absence
of government interference. The existence of free market conditions with free demand and
supply is a necessary feature of a capitalist system. These conditions may not be present in any
other economic system, particularly in backward and developing economies. Hence the
conclusion and policy formulations applicable to developed capitalist .economies cannot be
applied to developing and underdeveloped economies which are partially or fully controlled
economies.
5.Static Economy: Economics studies the problem of allocation of limited resources as
between different goods and services on the assumption that the technology and resources are
given in an economy. The economy is producing maximum amount of national income with the
given technology and resources. In other words, economics studies a static economy with a
given system of wants, resources and technology. Naturally, the conditions and policy
formulations derived from static economy will have to be changed for a dynamic economy.

FACTORS OF PRODUCTION:
In economics, factors of production, resources, or inputs are which is used in the
production process to produce output—that is, finished goods and services. The utilized
amounts of the various inputs determine the quantity of output according to the
relationship is called the production function. There are three basic resources or factors
of production: land, labour and capital. The factors are also frequently labelled
"producer goods or services" to distinguish them from the goods or services purchased
by consumers, which are frequently labeled "consumer goods". All three of these are
required in combination at a time to produce a commodity.
There are two types of factors: primary and secondary. The previously mentioned
primary factors are land, labour (the ability to work), and capital goods. Materials and
energy are considered secondary factors in classical economics because they are
obtained from land, labor and capital. The primary factors facilitate production but
neither become part of the product (as with raw materials) nor become significantly
transformed by the production process (as with fuel used to power machinery). Land
includes not only the site of production but natural resources above or below the soil.
Recent usage has distinguished human capital (the stock of knowledge in the labour
force) from labour.[1] Entrepreneurship is also sometimes considered a factor of
production.[2] Sometimes the overall state of technology is described as a factor of
production.[3] The number and definition of factors varies, depending on theoretical
purpose, empirical emphasis, or school of economicsThe classical economics of Adam
Smith, David Ricardo, and their followers focuses on physical resources in defining its
factors of production, and discusses the distribution of cost and value among these
factors. Adam Smith and David Ricardo referred to the "component parts of price"[6] as
the costs of using:

 Land or natural resource — naturally occurring goods like water, air, soil,

minerals, flora, fauna and merryweather that are used in the creation of products.
The payment for use and the received income of a land owner is rent,loyalties,
commission and goodwill .

  — human effort used in production which also includes technical and marketing
expertise. The payment for someone else's labor and all income received from one's
own labor is wages. Labor can also be classified as the physical and mental
contribution of an employee to the proLaborduction of the good(s).

 The capital stock — human-made goods which are used in the production of
other goods. These include machinery, tools, and buildings. They are of two types,
fixed and working. Fixed are one time investments like machines, tools and working
comprises of liquid cash or money in hand and raw material
The classical economists also employed the word "capital" in reference to money.
Money, however, was not considered to be a factor of production in the sense of capital
stock since it is not used to directly produce any good. The return to loaned money or to
loaned stock was styled as interest while the return to the actual proprietor of capital
stock (tools, etc.) was styled as profit. See also returns
Marx considered the "elementary factors of the labor-process" or "productive forces" to
be:

 Labor

 The subject of labor (objects transformed by labor)

 The instruments of labor (or means of labor).

The "subject of labor" refers to natural resources and raw materials, including land. The
"instruments of labor" are tools, in the broadest sense. They include factory buildings,
infrastructure, and other human-made objects that facilitate labor's production of goods
and services.
This view seems similar to the classical perspective described above. But unlike the
classical school and many economists today, Marx made a clear distinction between
labor actually done and an individual's "labor power" or ability to work. Labor done is
often referred to nowadays as "effort" or "labor services." Labor-power might be seen as
a stock which can produce a flow of labor.
Labor, not labor power, is the key factor of production for Marx and the basis for
Marx's labor theory of value. The hiring of labor power only results in the production of
goods or services ("use-values") when organized and regulated (often by the
"management"). How much labor is actually done depends on the importance of conflict
or tensions within the labor process.
Neoclassical economic
Neoclassical economics, one of the branches of mainstream economics, started with
the classical factors of production of land, labor, and capital. However, it developed an
alternative theory of value and distribution. Many of its practitioners have added various
further factors of production (see below).
Further distinctions from classical and neoclassical microeconomics include the
following:

 Capital — This has many meanings, including the financial capital raised to

operate and expand a business. In much of economics, however, "capital" (without
any qualification) means goods that can help produce other goods in the future, the
result of investment. It refers to machines, roads, factories, schools, infrastructure,
and office buildings which humans have produced to create goods and services.

 Fixed capital — This includes machinery, factories, equipment, new technology,

buildings, computers, and other goods that are designed to increase the productive
potential of the economy for future years. Nowadays, many consider
computer software to be a form of fixed capital and it is counted as such in
the National Income and Product Accounts of the United States and other countries.
This type of capital does not change due to the production of the good.

 Working capital — This includes the stocks of finished and semi-finished goods
that will be economically consumed in the near future or will be made into a finished
consumer good in the near future. These are often called inventory. The phrase
"working capital" has also been used to refer to liquid assets (money) needed for
immediate expenses linked to the production process (to pay salaries, invoices,
taxes, interests...) Either way, the amount or nature of this type of capital usually
changes during the production process.

 Financial capital — This is simply the amount of money the initiator of the
business has invested in it. "Financial capital" often refers to his or her net worth tied
up in the business (assets minus liabilities) but the phrase often includes money
borrowed from others.

 Technological progress — For over a century, economists have known that

capital and labor do not account for all of economic growth. This is reflected in total
factor productivity and the Solow residual used in economic models
called production functions that account for the contributions of capital and labor,
yet have some unexplained contributor which is commonly called technological
progress. Ayres and Warr (2009) present time series of the efficiency of primary
energy (exergy) conversion into useful work for the US, UK, Austria and Japan
revealing dramatic improvements in model accuracy. With useful work as a factor of
production they are able to reproduce historical rates of economic growth with
 considerable precision and without recourse to exogenous and unexplained
technological progress, thereby overcoming the major flaw of the Solow Theory of
economic growth.[8]

FORMS OF BUSINESS ORGANISATION:

Business Organisations 5 FORMS OF BUSINESS ORGANISATION
(1) Sole proprietorship
(2) Partnership
(3) Joint Hindu Family
(4) Cooperative Society
(5) Joint Stock Company Let us now learn in detail the exact nature of these forms of
business organisation, excluding Joint Stock Company which will be taken up in the
next lesson. 5.3 1.SOLE PROPRIETORSHIPEx: Gopal runs a grocery shop in the local
market. He buys goods from the wholesale market and sells it to the customers as per
their requirement. By doing so he earns some profit. He had started his business two
years ago by investing Rs. 1 lakh, which he had borrowed from his friend. Today, he is
running his business successfully, earning a good profit, prietor or a sole trader.
Definition of Sole Proprietorship J.L. Hanson: “A type of business unit where one
person is solely responsible for providing the capital and bearing the risk of the
enterprise, and for the management of the business.” Thus, ‘Sole Proprietorship’ from of
business organisation refers to a business enterprise exclusively owned, managed and
controlled by a single person with all authority, responsibility and risk. Now you can
workout certain characteristics of sole proprietorship form of business organisation.
CHARACTERISTICS OF SOLE PROPRIETORSHIP FORM OF BUSINESS ORGANISATION
(a) Single Ownership: The sole proprietorship form of business organisation has a
single owner who himself/herself starts the business by bringing together all the
resources.
(b) No Separation of Ownership and Management: The owner himself/herself manages
the business as per his/her own skill and intelligence. There is no separation of
ownership and management as is the case with company form of business
organisation. A sole proprietor contributes and organises the resources in a systematic
way and controls the activities with the objective of earning profit.
(c) Less Legal Formalities: The formation and operation of a sole proprietorship form
of business organisation does not involve any legal formalities. Thus, its formation is
quite easy and simple.
(d) No Separate Entity: The business unit does not have an entity separate from the
owner. The businessman and the business enterprise are one and the same, and the
businessman is responsible for everything that happens in his business unit.
(e) No Sharing of Profit and Loss: The sole proprietor enjoys the profits alone. At the
same time, the entire loss is also borne by him. No other person is there to share the
profits and losses of the business. He alone bears the risks and reaps the profits.
(f) Unlimited Liability: The liability of the sole proprietor is unlimited. In case of loss, if
his business assets are not enough to pay the business liabilities, his personal property
can also be utilised to pay off the liabilities of the business.
(g) One-man Control: The controlling power of the sole proprietorship business always
remains with the owner. He/she runs the business as per his/her own will. Gopal is
happy in running his business in sole proprietorship form because he enjoys many
benefits in doing this business.
MERITS OF SOLE PROPRIETORSHIP FORM OF BUSINESS ORGANISATION (a) Easy to
Form and Wind Up: It is very easy and simple to form a sole proprietorship form of
business organisation. No legal formalities are required to be observed. Similarly, the
business can be wind up any time if the proprietor so decides.
(b) Quick Decision and Prompt Action: As stated earlier, nobody interferes in the affairs
of the sole proprietary organisation. So he/she can take quick decisions on the various
issues relating to business and accordingly prompt action can be taken.
(c) Direct Motivation: In sole proprietorship form of business organisations. the entire
profit of the business goes to the owner. This motivates the proprietor to work hard and
run the business efficiently.
(d) Flexibility in Operation: It is very easy to effect changes as per the requirements of
the business. The expansion or curtailment of business activities does not require many
formalities as in the case of other forms of business organisation.
(e) Maintenance of Business Secrets: The business secrets are known only to the
proprietor. He is not required to disclose any information to others unless and until he
himself so decides. He is also not bound to publish his business accounts.
(f) Personal Touch: Since the proprietor himself handles everything relating to business,
it is easy to maintain a good personal contact with the customers and employees.
LIMITATIONS OF SOLE PROPRIETORSHIP FORM OF BUSINESS ORGANISATION (a)
Limited Resources: The resources of a sole proprietor are always limited. Being the
single owner it is not always possible to arrange sufficient funds from his own sources.
Again borrowing funds from friends and relatives or from banks has its own
implications. So, the proprietor has a limited capacity to raise funds for his business.
(b) Lack of Continuity: The continuity of the business is linked with the life of the
proprietor. Illness, death or insolvency of the proprietor can lead to closure of the
business. Thus, the continuity of business is uncertain.
(c) Unlimited Liability: You have already learnt that there is no separate entity of the
business from its owner. In the eyes of law the proprietor and the business are one and
the same. So personal properties of the owner can also be used to meet the business
obligations and debts.
(d) Not Suitable for Large Scale Operations : Since the resources and the managerial
ability is limited, sole proprietorship form of business organisation is not suitable for
large-scale business. (e) Limited Managerial Expertise: A sole proprietorship from of
business organisation always suffers from lack of managerial expertise. A single
person may not be an expert in all fields like, purchasing, selling, financing etc.

II.PARTNERSHIP : ‘Partnership’ is an association of two or more persons who pool their

financial and managerial resources and agree to carry on a business, and share its
profit. The persons who form a partnership are individually known as partners and
collectively a firm or partnership firm. Let’s assume that Gopal joins hand with Rahim to
start a big grocery shop. Here both Gopal and Rahim are called partners who are
running the partnership firm jointly. Both of them will pool their resources and carry on
business by applying their expertise. They will share the profits and losses in the agreed
ratio. In fact, for all terms and conditions of their working, they have to sit together to
decide about all aspects. There must be an agreement between them. The agreement
may be in oral, written or implied. When the agreement is in writing it is termed as
partnership deed. However, in the absence of an agreement, the provisions of the Indian
Partnership Act 1932 shall apply. Partnership form of business organisation in India is
governed by the Indian Partnership Partnership Deed contains the terms and conditions
for starting and continuing the partnership firm It is always better to insist on a written
agreement in order to avoid future litigation.
Defintion: Business Organisations Act, 1932 which defines partnership as “the relation
between persons who have agreed to share the profits of the business carried on by all
or any of them acting for all”.
CHARACTERISTICS OF PARTNERSHIP FORM OF BUSINESS ORGANISATION Based on
the definition of partnership as given above, the various characteristics of partnership
form of business organisation, can be summarised as follows:
(a) Two or More Persons: To form a partnership firm atleast two persons are required.
The maximum limit on the number of persons is ten for banking business and 20 for
other businesses. If the number exceeds the above limit, the partnership becomes
illegal and the relationship among them cannot be called partnership.
(b) Contractual Relationship: Partnership is created by an agreement among the
persons who have agreed to join hands. Such persons must be competent to contract.
Thus, minors, lunatics and insolvent persons are not eligible to become the partners.
However, a minor can be admitted to the benefits of partnership firm i.e., he can have
share in the profits without any obligation for losses.
(c) Sharing Profits and Business: There must be an agreement among the partners to
share the profits and losses of the business of the partnership firm. If two or more
persons share the income of jointly owned property, it is not regarded as partnership.
(d) Existence of Lawful Business: The business of which the persons have agreed to
share the profit must be lawful. Any agreement to indulge in smuggling, black marketing
etc. cannot be called partnership business in the eyes of law.
(e) Principal Agent Relationship: There must be an agency relationship between the
partners. Every partner is the principal as well as the agent of the firm. When a partner
deals with other parties he/she acts as an agent of other partners, and at the same time
the other partners become the principal.
(f) Unlimited Liability: The partners of the firm have unlimited liability. They are jointly
as well as individually liable for the debts and obligations of the firms. If the assets of
the firm are insufficient to meet the firm’s liabilities, the personal properties of the
partners can also be utilised for this purpose. However, the liability of a minor partner is
limited to the extent of his share in the profits.
(g) Voluntary Registration: The registration of partnership firm is not compulsory. But
an unregistered firm suffers from some limitations which makes it virtually compulsory
to be registered. Following are the limitations of an unregistered firm. (i) The firm
cannot sue outsiders, although the outsiders can sue it. (ii) In case of any dispute
among the partners, it is not possible to settle the dispute through court of law. (iii) The
firm cannot claim adjustments for amount payable to, or receivable from, any other
parties.
MERITS OF PARTNERSHIP FORM OF BUSINESS ORGANISATION (a) Easy to Form: A
partnership can be formed easily without many legal formalities. Since it is not
compulsory to get the firm registered, a simple agreement, either in oral, writing or
implied is sufficient to create a partnership firm.
(b) Availability of Larger Resources: Since two or more partners join hands to start
partnership firm it may be possible to pool more resources as compared to sole
proprietorship form of business organisation.
(c) Better Decisions: In partnership firm each partner has a right to take part in the
management of the business. All major decisions are taken in consultation with and
with the consent of all partners. Thus, collective wisdom prevails and there is less
scope for reckless and hasty decisions.
(d) Flexibility: The partnership firm is a flexible organisation. At any time the partners
can decide to change the size or nature of business or area of its operation after taking
the necessary consent of all the partners.
(e) Sharing of Risks: The losses of the firm are shared by all the partners equally or as
per the agreed ratio.
(f) Keen Interest: Since partners share the profit and bear the losses, they take keen
interest in the affairs of the business.
(g) Benefits of Specialisation: All partners actively participate in the business as per
their specialisation and knowledge. In a partnership firm providing legal consultancy to
people, one partner may deal with civil cases, one in criminal cases, another in labour
cases and so on as per their area of specialisation. Similarly two or more doctors of
different specialisation may start a clinic in partnership.
(h) Protection of Interest: In partnership form of business organisation, the rights of
each partner and his/her interests are fully protected. If a partner is dissatisfied with any
decision, he can ask for dissolution of the firm or can withdraw from the partnership.
(i) Secrecy: Business secrets of the firm are only known to the partners. It is not
required to disclose any information to the outsiders. It is also not mandatory to publish
the annual accounts of the firm.
LIMITATIONS OF PARTNERSHIP FORM OF BUSINESS ORGANISATION A partnership
firm also suffers from certain limitations. These are as follows:
(a) Unlimited Liability: The most important drawback of partnership firm is that the
liability of the partners is unlimited i.e., the partners are personally liable for the debt and
obligations of the firm. In other words, their personal property can also be utilised for
payment of firm’s liabilities.
(b) Instability: Every partnership firm has uncertain life. The death, insolvency, incapacity
or the retirement of any partner brings the firm to an end. Not only that any dissenting
partner can give notice at any time for dissolution of partnership.
(c) Limited Capital: Since the total number of partners cannot exceed 20, the capacity
to raise funds remains limited as compared to a joint stock company where there is no
limit on the number of share holders.
(d) Non-transferability of share: The share of interest of any partner cannot be
transferred to other partners or to the outsiders. So it creates inconvenience for the
partner who wants to transfer his share to others fully and partly. The only alternative is
dissolution of the firm.
(e) Possibility of Conflicts: You know that in partnership firm every partner has an equal
right to participate in the management.
TYPES OF PARTNERS. (A) Based on the extent of participation in the day-to-day
management of the firm partners can be classified as ‘Active Partners’ and ‘Sleeping
Partners’. The partners who actively participate in the day-to-day operations of the
business are known as active partners or working partners. Those partners who do not
participate in the day-to-day activities of the business are known as sleeping or dormant
partners. Such partners simply contribute capital and share the profits and losses. (B)
Based on sharing of profits, the partners may be classified as ‘Nominal Partners’ and
‘Partners in Profits’. Nominal partners allow the firm to use their name as partner.
(C) Based on Liability, the partners can be classified as ‘Limited Partners’ and ‘General
Partners’. The liability of limited partners is limited to the extent of their capital
contribution. This type of partners is found in Limited Partnership firms in some
European countries and USA. So far, it is not allowed in India. However, the Limited
liability Partnership Act is very much under consideration of the Parliament. The
partners having unlimited liability are called as general partners or Partners with
unlimited liability. It may be noted that every partner who is not a limited partner is
treated as a general partner.
(D) Based on the behaviour and conduct exhibited, there are two more types of partners
besides the ones discussed above. These are (a) Partner by Estoppel; and (b) Partner by
Holding out. A person who behaves in the public in such a way as to give an impression
that he/she is a partner of the firm, is called ‘partner by estoppel’. Such partners are not
entitled to share the profits of the firm, but are fully liable if some body suffers because
of his/her false representation. Similarly, if a partner or partnership firm declares that a
particular person is a partner of their firm, and such a person does not disclaim it, then
he/she is known as ‘Partner by Holding out’. Such partners are not entitled to profits but
are fully liable as regards the firm’s debts.
III. JOINT HINDU FAMILY FORM OF BUSINESS ORGANISATION After knowing about
sole proprietorship and partnership forms of business organisation let us now discuss
about a unique form of business organisation that prevails only in India and that too
among the Hindus. The Joint Hindu Family (JHF) business is a form of business
organisation run by Hindu Undivided Family (HUF), where the family members of three
successive generations own the business jointly. The head of the family known as Karta
manages the business. The other members are called co-parceners and all of them
have equal ownership right over the properties of the business. The membership of the
JHF is acquired by virtue of birth in the same family. There is no restriction for minors to
become the members of the business. As per Dayabhaga system of Hindu Law, both
male and female members are the joint owners. But Mitakashara system of Hindu Law
says only male members of the family can become the coparceners. While the
Dayabhaga system is applicable to the state of West Bengal, Mitakshara system of
Hindu Law is applicable to the rest of the country. Business Studies 103 Notes MODULE
-2 Business Organisations.
CHARACTERISTICS OF JHFFORM OF BUSINESS ORGANISATION From the above
discussion, it must have been clear to you that the Joint Hindu family business has
certain special characteristics which are as follows: (a) Formation: In JHF business
there must be at least two members in the family, and family should have some
ancestral property. It is not created by an agreement but by operation of law. (b) Legal
Status: The JHF business is a jointly owned business. It is governed by the Hindu
Succession Act 1956. (c) Membership: In JHF business outsiders are not allowed to
become the coparcener. Only the members of undivided family acquire co-parcenership
rights by birth.. (d) Profit Sharing: All coparceners have equal share in the profits of the
business. (e) Management: The business is managed by the senior most member of the
family known as Karta. Other members do not have the right to participate in the
management. The Karta has the authority to manage the business as per his own will
and his ways of managing cannot be questioned. If the coparceners are not satisfied,
the only remedy is to get the HUF status of the family dissolved by mutual agreement. (f)
Liability: The liability of coparceners is limited to the extent of their share in the
business. But the Karta has an unlimited liability. His personal property can also be
utilised to meet the business liability. (g) Continuity: Death of any coparceners does not
affect the continuity of business. Even on the death of the Karta, it continues to exist as
the eldest of the coparceners takes position of Karta. However, JHF business can be
dissolved either through mutual agreement or by partition suit in the court. MERITS OF
JHF FORM OF BUSINESS ORGANISATION Since Joint Hindu Family business has
certain peculiar features as discussed above, it has the following merits.
(a) Assured Shares in Profits: Every coparcener is assured of an equal share in the
profits irrespective of his participation in the running of the business. This safeguards
the interest of minor, sick, physically and mentally challenged coparceners.
(b) Quick Decision: The Karta enjoys full freedom in managing the business. It enables
him to take quick decisions without any interference.
(c) Sharing of Knowledge and Experience: A JHF business provides opportunity for the
young members of the family to get the benefits of knowledge and experience of the
elder members.
(d) Limited Liability of Members: The liability of the coparceners except the Karta is
limited to the extent of his share in the business. This enables the members to run the
business freely just by following the instructions or direction of the Karta.
(e) Unlimited Liability of the Karta: Because of the unlimited liability of the Karta, his
personal properties are at stake in case the business fails to pay the creditors. This
clause of JHF business makes the Karta to manage business most carefully and
efficiently.
(f) Continued Existence: The death or insolvency of any member does not affect the
continuity of the business. So it can continue for a long period of time.
(g) Tax Benefits: HUF is regarded as an independent assessee for tax purposes. The
share of coparceners is not to be included in their individual income for tax purposes.
After knowing the merits let us see the limitations of Joint Hindu Family form of
business organisation. 5.5.3 LIMITATION OF JHFFORM OF BUSINESS ORGANISATION
(a) Limited Resources: JHF business has generally limited financial and managerial
resource. Therefore, it is not considered suitable for large business.
(b) Lack of Motivation: The coparceners get equal share in the profits of the business
irrespective of their participation. So generally they are not motivated to put in their best.
(c) Scope for Misuse of Power: Since the Karta has absolute freedom to manage the
business, there is scope for him to misuse it for his personal gains. Moreover, he may
have his own limitations.
(d) Instability: The continuity of JHF business is always under threat. A small rift within
the family may lead to seeking partition.
IV.COOPERATIVE SOCIETY You have learnt about Sole Proprietorship, Partnership and
Joint Hindu Family as different forms of business organisation. You must have noticed
that while there are many differences among them in respect of their formation,
operation, capital contribution and liabilities, there is one similarity that they all are
engaged in business to earn profit. However, there are certain organisations which
undertake business activities with the prime objective of providing service to the
members. Although they also earn some amount of profit, but their main intention is to
look after some common interest of its members. They pool available resources from
the members, utilise the same in the best possible manner and share the benefits.
These organisations are known as Cooperative Societies. Let us learn in detail about
this form of business organisation. The term cooperation is derived from the Latin word
‘co-operari’, where the word ‘Co’ means ‘with’ and ‘operari’ mean ‘to work’. Thus, the
term cooperation means working together. So those who want to work together with
some common economic objectives can form a society, which is termed as cooperative
society. The important objectives of cooperative society form of business organisation
are service in place of profit, Mutual help in place of competition, Self help in place of
dependence, and moral solidarity in place of unethical business practices.
The Section 4 of the Indian Cooperative Societies Act 1912 defines Cooperative
Society as “a society, which has its objectives for the promotion of economic interests
of its members in accordance with cooperative principles.”
CHARACTERISTICS OF COOPERATIVE SOCIETY Based on the above definition we can
identify the following characteristics of cooperative society form of business
organisation: (a) Voluntary Association: Members join the cooperative society
voluntarily i.e., by their own choice. Persons having common economic objective can
join the society as and when they like, continue as long as they like and leave the society
and when they want.
(b) Open Membership: The membership is open to all those having a common
economic interest. Any person can become a member irrespective of his/her caste,
creed, religion, colour, sex etc. (c) Number of Members: A minimum of 10 members are
required to form a cooperative society. In case of multi-state cooperative societies the
minimum number of members should be 50 from each state in case the members are
individuals. The Cooperative Society Act does not specify the maximum number of
members for any cooperative society. However, after the formation of the society, the
member may specify the maximum member of members.
(d) Registration of the Society: In India, cooperative societies are registered under the
Cooperative Societies Act 1912 or under the State Cooperative Societies Act. The Multi-
state Cooperative Societies are registered under the Multi-state Cooperative Societies
Act 2002.
Once registered, the society becomes a separate legal entity and attain certain
characteristics. These are as follows. (i) The society enjoys perpetual succession (ii) It
has its own common seal (iii) It can enter into agreements with others (iv) It can sue
others in a court of law (v) It can own properties in its name (e) State Control: Since
registration of cooperative societies is compulsory, every cooperative society comes
under the control and supervision of the government. The Cooperative Societies having
area of operation in more than one state are known as Multi-state Cooperative Societies.
Every society has to get its accounts audited from the cooperative department of the
government. (f) Capital: The capital of the cooperative society is contributed by its
members. Since, the members contribution is very limited, it often depends on the loan
from government. and apex cooperative institutions or by way of grants and assistance
from state and Central Government. (g) Democratic Set Up: The cooperative societies
are managed in a democratic manner. Every member has a right to take part in the
management of the society. However, the society elects a managing committee for its
effective management. The members of the managing committee are elected on the
basis of one-man one-vote irrespective of the number of shares held by any member. It
is the general body of the society which lays down the broad framework within which
the managing committee functions. (h) Service Motive: The primary objective of all
cooperative societies is to provide services to its members. (i) Return on Capital
Investment: The members get return on their capital investment in the form of dividend.
(j) Distribution of Surplus: After giving a limited dividend to the members of the society,
the surplus profit is distributed in the form of bonus, keeping aside a certain percentage
as reserve and for general welfare of the society.
TYPES OF COOPERATIVE SOCIETIES You know cooperative organisations are set up in
different fields to promote the economic well-being of different sections of the society.
So, according to the needs of the people, we find different types of cooperative
societies in India. Some of the important types are given below. (a) Consumers’
Cooperative Societies: These societies are formed to protect the interest of consumers
by making available consumer goods of high quality at reasonable price. (b) Producer’s
Cooperative Societies: These societies are formed to protect the interest of small
producers and artisans by making available items of their need for production, like raw
materials, tools and equipments etc. (c) Marketing Cooperative Societies: To solve the
problem of marketing the products, small producers join hand to form marketing
cooperative societies. (d) Housing Cooperative Societies: To provide residential houses
to the members, housing cooperative societies are formed generally in urban areas. (e)
Farming Cooperative Societies: These societies are formed by the small farmers to get
the benefit of large-scale farming. (f) Credit Cooperative Societies: These societies are
started by persons who are in need of credit. They accept deposits from the members
and grant them loans at reasonable rate of interest.
MERITS OF COOPERATIVE SOCIETY The cooperative society is the only form of
business organisation which gives utmost importance to its members rather than
maximising its own profits. After studying its characteristics and different types, we
may now study the merits of this form of business organisation. (a) Easy to Form: Any
ten adult members can voluntarily form an association get it registered with the
Registrar of Cooperative Societies. The registration is very simple and it does not
require much legal formalities. (b) Limited Liability: The liability of the members of the
cooperative societies is limited upto their capital contribution. They are not personally
liable for the debt of the society. (c) Open Membership: Any competent like-minded
person can join the cooperative society any time he likes. There is no restriction on the
grounds of caste, creed, gender, colour etc. The time of entry and exit is also generally
kept open. (d) State Assistance: The need for country’s growth has necessitated the
growth of the economic status of the weaker sections. (e) Stable Life: The cooperative
society enjoys the benefit of perpetual succession. The death, resignation, insolvency of
any member does not affect the existence of the society because of its separate legal
entity. (f) Tax Concession: To encourage people to form co-operative societies the
government generally provides tax concessions and exemptions, which keep on
changing from time to time. (g) Democratic Management: The cooperative societies are
managed by the Managing Committee, which is elected by the members. The members
decide their own rules and regulations within the limits set by the law. LIMITATIONS OF
COOPERATIVE SOCIETY Although the basic aim of forming a cooperative society is to
develop a system of mutual help and cooperation among its members, yet the feeling of
cooperation does not remain for long. Cooperative societies usually suffer from the
following limitations. (a) Limited Capital: Most of the cooperative societies suffer from
lack of capital. Since the members of the society come from a limited area or class and
usually have limited means, it is not possible to collect huge capital from them. Again,
government’s assistance is often inadequate for them. (b) Lack of Managerial Expertise:
The Managing Committee of a cooperative society is not always able to manage the
society in an effective and efficient way due to lack of managerial expertise. Again due
to lack of funds they are also not able to derive the benefits of professional
management. (c) Less Motivation: Since the rate of return on capital investment is less,
the members do not always feel involved in the affairs of the society. (d) Lack of
Interest: Once the first wave of enthusiasm to start and run the business is exhausted,
intrigue and factionalism arise among members. This makes the cooperative lifeless
and inactive. (e) Corruption: Inspite of government’s regulation and periodical audit of
the accounts of the cooperative society, the corrupt practices in the management
cannot be completely ignored.
JOINT STOCK COMPANY
A Joint Stock Company is a voluntary association of persons to carry on the business. It
is an association of persons who contribute money which is called capital for some
common purpose. These persons are members of the company. The proportion of
capital to which each member is entitled is his share and every member holding such
share is called shareholders and the capital of the company is known as share capital.
The Companies Act 1956 defines a joint stock company as an artificial person created
by law, having separate legal entity from its owner with perpetual succession and a
common seal. Shareholders of Joint Stock Company have limited liability i.e liability
limited by guarantee or shares. Shares of such company are easily transferable. From
the above definition the following characteristics of a Joint Stock Company can be
easily identified:
1. Artificial Person : A Joint Stock Company is an artificial person as it does not
possess any physical attributes of a natural person and it is created by law. Thus it has
a legal entity separate from its members.
2. Separate legal Entity : Being an artificial person a company has its own legal entity
separate from its members. It can own assets or property, enter into contracts, sue or
can be sued by anyone in the court of law. Its shareholders can not be held liable for any
conduct of the company.
3. Perpetual Existence : A company once formed continues to exist as long as it is
fulfilling all the conditions prescribed by the law. Its existence is not affected by the
death, insolvency or retirement of its members.
4. Limited liability of shareholders : Shareholders of a joint stock company are only
liable to the extent of shares they hold in a company not more than that. Their liability is
limited by guarantee or shares held by them.
5. Common Seal : Being an artificial person a joint stock company cannot sign any
documents thus this common seal is the company’s representative while dealing with
the outsiders. Any document having common seal and the signature of the officer is
binding on the company.
6. Transferability of Shares : Members of a joint stock company are free to transfer
their shares to anyone.
7. Capital : A joint stock company can raise large amount of capital by issuing its shares.
8. Management : A joint stock company has a democratic management which is
managed by the elected representatives of shareholders, known as directors of the
company.
9. Membership : To form a private limited company minimum number of members
prescribed in the companies Act is 2 and the maximum number is 50. But in the case of
public limited company the minimum limit is 7 and no limit on maximum number of
members.
10. Formation : Generally a company is formed with the initiative of group of members
who are also known as promoters but it comes into existence after completing all the
formalities prescribed in Companies Act 1956.
Advantages and Disadvantages of Joint Stock Company
The advantages of forming a company rather than carrying on partnership business
are as follows:
1. Large Capital:
The outstanding advantage is that it allows vast mobilization of capital which otherwise
is not possible to arrange. In a public company, there is no limit to the number of
members. A very large number of people acquire interest in the company by purchasing
shares.
The fact that shares are transferable given an added advantage to the company for
attracting greater number of people. No other form of business organisation is so well
adopted in raising large amounts of capital as the Joint Stock Company.
2. Vast Scope of Expansion:
The vast capital collected by means of shares coupled with the earnings of the
company contribute sufficient scope for its expansion. The company offers an excellent
scope of self-generating growth. The managerial talents supported by vast finance
leads to huge earnings and to ultimate expansion of the business and growth.
3. Limited Liability:
The liability of the members of the company is limited. Members cannot be called upon
to pay anything more than the nominal value of the shares held by them. This
encourages people who have little to save to invest money in the company, thus
providing ample capital for initial outlay and expansion of the business.
4. Permanent Existence:
The life of the company does not depend on the life of its members. Law creates the
company and can dissolve it. The death, insolvency or the transfer of shares of
members does not, in any way, affect the existence of the company.
In nut shell it may be said:
“Members may come, members may go;
But the company goes on forever.”
5. Transferability of Shares:
The shares in a company are transferable and members can transfer their shares
without the consent of other members of the company. The company is listed with the
Stock Exchange and hence company’s shares are readily sold and purchased. As shares
are freely transferable, a shareholder can convert his holding into cash. This facility
coupled with the limited liability has an encouraging investment by general public.
6. Democratization of Ownership:
The fact that relatively small amount of capital can be mobilised and employed
collectively results in what Marshall call ‘Democratization’ of ownership as
distinguished from the control of business.
While it permits all types of people, big or small, venturesome or cautious, to become
part owners, it permits the use of skill and initiative of the able entrepreneur, his expert
knowledge and business ability which would otherwise be lost to the community.
7. Diffused Risk:
The risk of loss is to be shared by the large number of shareholders and the possibility
of huge hardship on few persons as in the case of partnership or sole trader does not
exist. Moreover, the risk of loss is also limited to the extent of the value of share.
There is no need for the wealthy men to bear the burden of the business as large capital
can be collected from far and wide, and from rich and poor, controlled under one
management.
8. Organized Intelligence:
The power of capital is supplemented by organised intelligence which makes for
increased efficiency of direction and management. The skill and flexibility of
administration is enhanced as a result of limited liability and entity idea.
The wisest and the most skillful directors may be chosen and one found inefficient or
indifferent could be removed. The company being independent on any single man, the
organized intelligence of the Board of Directors and other top managers is available for
sound and bold policies.
9. Tax Relief:
A company pays income-tax as a separate legal person at a flat rate fixed by the
Finance Act from year to year. In case of higher incomes, the- rate is lower than that
charged in case of sole proprietors and partners.
10. Social Advantage:
The social advantage of company form of organisation is that it affords employment to
so many persons, produces articles which otherwise would have been imported and
affords opportunity to middle and lower class of people to become members of the
company and earn profits.
Disadvantages of Joint Stock Company:
Despite so many advantages it has got many disadvantages which are as follows:
1. Difficulty in Formation:
The legal requirements and formalities required to be completed are so many. The cost
involved is quite heavy. It has to approach large number of people for its capital. It
cannot start its business unless certificate of incorporation has been obtained. This is
granted after a long time when all the formalities are completed.
2. Reckless Speculation Encouraged:
This form of organisation encourages reckless speculation in shares at stock
exchanges. This is an evil of great magnitude in our country because in many cases
stock exchanges act as ‘bush agencies’, rather than aid to sound investment or stability.
Sometimes the management of Joint Stock Company encourages speculation in shares
for its personal gains.
3. Fraudulent Management:
Frauds have been a common feature of many a company. The promoters and directors
may indulge in fraudulent practices. The company law has devised various methods to
check the fraudulent practices but they have not proved to check them completely.
4. Delay in Decision-Making:
In this form of organisation, decisions are not made by single individual. All important
decisions are taken by the Board of Directors. Decision-making process is time-
consuming. So many opportunities may be costly because of delay in decision-making.
Promptness of decisions which is a common feature of sole tradership and partnership
is not found in a company.
5. Monopolistic Powers:
There is, generally, tendency for company organisation to form themselves into
combinations exercising monopolistic powers which may react detrimentally to other
producers in the same line or to consumers of the commodity produced.
6. Excessive Regulation by Law:
The State that creates the company, minutely watches the activities of the company
organisation. A company and the management have to function well within the law and
the provisions of Companies Act are quite elaborate and complex.
At every step, it is necessary to comply with its provisions lest the company and the
management should be penalised. The penalties are quite heavy and in several cases,
officers in default can be punished with imprisonment. This hampers the proper
functioning of the company.
7. Conflict of Interests:
The management does not care for the interest of shareholders because the
management is not the owner. Actually, the management body is not composed of
owners, it is composed of those who have no interest in the business.
It is only the few who govern the way they like. Though, in theory, company is a
democracy but in actual practice it is oligarchy. The lack of interest between the
company and its management encourages manipulation and speculation.
8. Lack of Secrecy:
The management of companies remains in the hands of many persons. Every important
thing is discussed in the meetings of Board of Directors. Hence secrets of the business
cannot be maintained. In case of sole proprietorship and partnership forms of
organisation, such secrecy is possible because a few persons are involved in the
management.
9. Bureaucratic Approach:
The bureaucratic habit of company officials to shirk trouble of some initiative because
they get no direct benefit from it; often retard the growth. This leads to classification of
social organism and leveling down the character. The company organisation does not
enjoy the same flexibility and promptness in the making as other organisations do. The
delays in taking the decision affect the growth of the business.