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EXTC SEM VI
EXTC SEM VI
Ch. 3
International Trade and economic crisis of 2008, Theory of international trade, balance of trade and payment, theory of protection, tariffs and subsidies, foreign exchange control, devaluation. Basic concept of management- Planning, organization, communication, Leadership & motivation. Marketing management and marketing Mix- Product, Place, price and promotion
Ch. 4
Notes
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The housing slump set off a chain reaction in the American economy. Individuals and investors could no longer flip their homes for a quick profit, adjustable rates mortgages adjusted skyward and mortgages no longer became affordable for many homeowners, and thousands of mortgages defaulted, leaving investors and financial institutions holding the bag. This caused massive losses in mortgage backed securities and many banks and investment firms began bleeding money. This also caused a glut of homes on the market which depressed housing prices and slowed the growth of new home building, putting thousands of home builders and labourers out of business. Depressed housing prices caused further complications as it made many homes worth much less than the mortgage value and some owners chose to simply walk away instead of pay their mortgage. The credit well dried up These massive losses caused many banks to tighten their lending requirements, but it was already too late for many of them the damage had already been done. Several banks and financial institutions merged with other institutions or were simply bought out. Others were lucky enough to receive a government bailout and are still functioning. The worst of the lot or the unlucky ones crashed. This effect of crash of the US economy had a cascading effect and resulted in an overall World Wide slump. RCN s Answer (You can write either the above answer or the following answer for SN):
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3. Now the investment bankers started accumulating mortgage-backed assets. Thus a large group of banks allowed financing of people regardless of their credit and thus they could get loans without proving their income. 4. The demand increased even more and the home rates/values turned inflationary. Also the investment bankers gave loans at high interest rates and ridiculous closing costs with payments to double after two years. 5. The high interest mortgages along with a rising housing market accompanied by a weak stock market became an alternative investment for banking firms and they began buying this mortgage debt expecting high returns on investment. 6. As the payments doubled after a few years, people could not afford the high rate mortgages. The mortgages also started going bad along with the decline of housing market thus dropping the home values. 7. More people started defaulting on their mortgages triggering the collapse of investment bankers. The speculative stock market bubble and the increasing oil prices worsened the situation. All these factors resulted in the Economic Crisis of 2008.
Consequences:
US:
Market Instability: y Drying up of money slowed down buying and selling of assets. y Speculation on higher oil prices and higher unemployment increased inflation. Real Estates: y Many homeowners stared defaulting on mortgages as they soared skyward. y New construction projects were stalled abruptly slowing down infrastructural development. Banking Sector: y Banks became stricter towards lending triggered by a collapse of many banking and financial firms. y Liquidity reached a record low. Employment Sector: y Employment decreased by 1.82% or in total by 35,590 people. y IT companies started downsizing people and US started downsizing people and outsourcing jobs.
INDIA:
The adverse affects: y More people sold their shares in the Indian stock market thus leading to lowering of SENSEX. y To cut costs, financial and IT sectors started downsizing people. y Due to light liquidity many projects remained half done. y India s export growth turned negative. y Led to close of garments, textiles and diamond industry. Hospitality and Airlines were also hit. The positive side: y It created IT and BPO outsourcing boom indirectly increasing the standard of living. y Indian IT companies started marketing in Latin American and Afro-Pacific countries and thus reduced dependency on US. y The financial sectors became more cautious on lending.
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Banks reduced the interest rates and made it half their original values. RBI cut down the CRR and provided finds to banks which were on the verge of bankruptcy.
Real Estate y y Subprime mortgages were abandoned. Housing sector dropped prices to woo back investors and was also helped by government backed fiscal stimulus.
Public sector y y y Government advised salary cuts rather than downsizing. Customs and excise duties were relaxed or reduced for needy items. Pressurized people to save rather than spending.
(a) Absolute Differences in Costs (b) Equal Differences in Costs (c) Comparative Differences in Costs (a) Absolute Differences in Costs Suppose a country has a monopoly in the production of a commodity. If other countries need this commodity, the country producing it will have an absolute advantage over them.
Example: India has almost a monopoly of manufactured Jute (with the exception of Bangladesh) and all other countries that need jute goods must buy them from India. Such absolute advantages are usually the result of differences in climate or other natural gifts.
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(b) Equal Differences in Costs The differences in costs will be called equal, when a unit of productive power produces. Import of specie into country A will raise prices there and export of goods to country B will make things cheaper in B. Thus, the difference between the price levels of the two countries tend to equalise. As a result, the trade between them will cease. (c) Comparative Differences in Costs It looks strange, but it is nevertheless true, that it may be more profitable for a country to import some goods from another country even though it can produce them cheaper itself. A country will do this when it finds that its labour and capital can be more profitably employed when used in producing some other goods in which it enjoys a greater comparative advantage in production. Suppose, Britain can produce both dairy products and steel cheaper than Holland, but she enjoys relatively greater advantage in producing steel. In that case, she gains more by concentrating on steel goods and exporting them to Holland and importing dairy products from Holland. Such a difference is called comparative difference and forms the basis of permanent international trade. In these circumstances, the trade between the two countries will not only start but will also continue.
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(ii)
(iii)
(iv) (v)
(vi)
(vii)
The productive resources of the world are utilised to the best advantage. Every country concentrates on the production of goods for which it is best fitted. There is economy of effort and a consequent fall in prices. Thus, every country receives the highest return from its resources. A country is able to consume goods which it cannot produce at all, or only at an impossibly high cost. Thus consumers can enjoy a large variety of products. Commodities produced in the tropics find their way to the temperate zone, and vice versa. This provides greater economic welfare and a higher standard of living. Violent price fluctuations are toned down. As the area of markets is enlarged by trade, the effects of the disturbing factors are spread over this large area and prices become more stable. If, at any time, the price of a commodity goes up abnormally, it can be imported from abroad and its price brought down. Shortages in times of famine and scarcity can be met from imports. Surplus produce can be sent out to needy countries. The world thus tends to be united into one economic unit. Countries economically backward but rich in unused resources are able to develop their industries. In the early stage, the industries of a backward country have to be protected but once they develop, free trade stimulates them still further. Trade develops racial sympathies and creates common interests. Man gains culturally and the cause of world peace is promoted. Exchange of goods is accompanied by exchange of ideas. This promotes international understanding. Since a war is bound to interrupt international trade and put the people to loss, every effort is made to avoid it. The existence of international trade promotes peace. No country, however big, can be selfsufficient. To achieve self-sufficiency, it will have to undertake expensive wars, conquer free areas and convert them into colonies. This is horrible. Free international trade supplies the essential needs of nations, and thus checks their greed and desire to conquer.
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(vi) Foreign trade may completely exhaust a country s natural resources like coal and oil which are irreplaceable. These goods are exported for the sake of profit. But the country suffers in the long run when their source is dried up completely. (vii) Imports of harmful drugs and luxuries, as opium in China, ruin the health of the nation. For the use of such harmful articles, the blame must be put on international trade which brings them into the country. (viii) Through foreign trade, the economic troubles of one country are transmitted to others. The economic disturbances in one country are transmitted to others and their economy is upset. For example, the collapse of American markets in 1929 resulted in a world-wide depression. (ix) Trade rivalry leads to war and friction. Germany s desire to secure markets for her goods was the most important cause of the last two World Wars. Commercial competition often strains relations. Here also, India and Pakistan find it difficult to come to an understanding due, to some extent, to a clash of trade interest.
Invisible Items:
Services India uses a good deal of foreign banking, shipping and insurance services. She does not have enough of her own ships, insurance companies and exchange banks. Hence foreign agencies, like Lloyds Bank provided these services. India has to pay for all such services.
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Tourists expenses When Indian students and tourists purchase goods and service Europe, it is like importing these goods and services. The only difference is instead of goods coming to the consumers, the consumers have gone to them. They have to be paid for in goods exported from India. In the case of Indian students receiving education abroad, India is importing education and has to pay for it. Interest on borrowed capital The services of capital have to be paid for by the borrowing country. An investment made abroad is an export item and remains so till withdrawn. Ultimately all loans borrowed in foreign money markets have to be paid back and adjusted through exports. Other invisible Items Besides the above, there are various minor items like gifts, donations and money remitted home by foreign settlers; these are also invisible items. All these invisible items produce exactly the same effect on a country's account with the rest of the world as the export and import of commodities. When they are added to the balance of trade, we have a complete list of all the items which have to be paid for or received by trading countries. Their sum total is called the Balance of Payments. Hence, the balance of payments is a comprehensive record of economic transactions of the residents of a country with the rest of the world during a given period of time. This record is so prepared as to provide meaning and measure to the various components of a country s external economic transactions. Thus, the aim is to present all receipts and payments on account of goods exported, service rendered and capital transferred by the residents of a country. The main purpose of keeping these accounts is to inform the government of the country of its international economic position and to help it in making decision on monetary and fiscal policies to be pursued as well as on the trade and payments issues. Any item that typically gives rise to a purchase of foreign currency is recorded as a debit item in the balance of payments accounts and any item that gives rise to a sale of foreign currency is recorded as credit item. The record of international transactions in balance of payments always balances. The BOP is divided in 2 parts: 1. Current Account. 2. Capital Account. 1. Current Account: The balance of payments on current account includes items like imports and exports, expenses on travel, transportation, insurance, investment, etc. These relate to current transactions. It basically records all transactions in goods and services. 2. Capital Account: The capital account is made up of capital transactions, e.g. borrowing and lending of capital, repayment of capital, sale and purchase of securities and other assets to and from foreigners individuals, government and international organisations. When both current and capital accounts are taken, it is called Overall Balance of Payments. It is overall balance of payments which must balance.
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INDUSTRIAL ECONOMICS & TELECOM REGULATIONS Differences between BOP & BOT (V.V.V.Imp)
Parameter Definition Balance of Payments The balance of payments is a comprehensive record of economic transactions of the residents of a country with the rest of the world during a given period of time. BOP is a wider and more comprehensive concept. BOP consists of overall receipts and payments out of all transactions that are visible as well as invisible items of international transactions. BOP, at least in accounting sense, always shows equilibrium. BOP has greater practical utility for formulating policy than BOT.
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Balance of Trade A comparison of the total imports and exports of a country is its Balance of Trade. BOT is a narrow and restricted concept. BOT consists of receipts and payments on account of exports and imports of visible items. BOT may show disequilibrium or imbalance. BOT has a smaller practical utility for formulating policy than BOP.
Concept Consists
Advantages of Protection
(I) To help Infant industries An infant has to be protected till it grows to manhood, Nurse the baby feed the infant and free the adult is a well-known maxim. Protective duties are crutches to teach new manufacturers to walk. The advantage thus gained often greater than the cost paid by consumers in the shape of higher prices. India extended protection to some important industries on the basis of this argument. (II) To keep money at home When we purchase swadeshi goods, we are keeping purchasing power in our own country. It is possible that we are paying more for the goods than we may have to pay for foreign goods of the same quality, if allowed to come in freely. But we do not mind paying more and feel a glow of pride, when making a little sacrifice. (Ill) To get an inflow of gold When you send goods to others and close your doors to other goods, you may have to be paid in gold. This will be possible, however, only when our goods have an inelastic demand and the others either cannot or do not retaliate.
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(iv)To develop key Industries Key industries are keys to further industrial expansion. They provide machines and materials for other industries. Chemical and metallurgical industries are of this type. They serve as a base for the national economy. They are essential for the defence of the country in war and its prosperity in peace. (v) To attain self-sufficiency When the government wants to make the country independent of foreign supplies, protection is necessary. Complete self-sufficiency, however, is impossible and even a partial one is costly. Therefore, self-sufficiency should be sought for only essential industries. (vi) To secure diversification of occupations The greater the number of openings for the people of a country, the better it is for their material progress. Too much reliance on any single industry is risky. Therefore, it may be necessary to encourage some industries with the artificial aid of protection. (vii) To prevent dumping of foreign goods When a foreign country plans to crush our industry by selling goods at a price even below the cost of production, it is a case of dumping. Such a supply of cheap goods might be welcome if it were permanent; but it is usually temporary. It is done to kill competition and then to make up all losses by charging higher prices. Anti-dumping duties are, therefore, justified to save the home industry. (viii) To create employment Protection helps to develop industries, and it creates more employment. There is no doubt that the development of sugar and other Indian industries under protection provided a large volume of employment. (ix) To correct adverse balance of payments Sometimes, protection is given with a view to correcting an adverse balance of payments. Protection reduces imports, and the balance of payments situation can thus be improved, although temporarily. (x) For the country s defence Certain industries which produce defence materials and equipment such as arms, ammunition, tanks must be protected. (xi) To safeguard the Interest of high-wage labour Sometimes it is argued that in the absence of protection, the highly-paid labour of the industrially advanced countries would he exposed to the competition of cheap foreign labour, and that the products of their high-wage labour can be under sold by those of pauper labour from abroad.
Disadvantages of Protection
(I) When foreign competition is removed, the home manufacturers become lethargic. Protection acts like an opiate. It sends the home producer to sleep. All improvements are neglected. There is no incentive to cut down the costs or to improve the quality. Technical progress thus comes to a standstill. Another disadvantage is that there is a loss in public revenues. If high protective duties are imposed, imports will shrink and revenue from customs will fall.
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(II)
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(IV)
(V)
(VI)
Burden on consumers. The most important objection to protection comes from the consumers. The burden of protective duties does not fall on the foreign manufacturers. The burden is on the home consumer because he has to pay a higher price than before on account of the imposition of import duties. It is said that it does not look fair that a poor consumer should be penalised to enrich the already rich manufacturer. Thus, inequalities of wealth distribution are further aggravated. Tariff is said to be the mother of trusts. As soon as protection has removed foreign competition, the home manufacturers are induced to form combinations of their own in order to remove the internal competition also. In India, the sugar factory owners formed the Indian Sugar Syndicate to eliminate competition among them, and to charge a monopoly price from the consumers. There is also the danger of corruption. It is very well known that in America the legislators used to be offered bribes by industrialists. The object was that no legislative measure may be adopted which might adversely affect them, and legislation which suits them may be passed. Misdirection of resources. Protection diverts labour and capital and other factors of production into set channels. They are prevented from seeking their most remunerative employment. This is bound to decrease the national dividend. Misallocation of the available resources into unsuitable channels cannot be economically justified. Vested interests are created which refuse to give up protection. The infants refuse to admit that they are grown up. They start kicking at the slightest indication of withdrawal of protection. There is a danger of retaliation from abroad. As a result, some home industries might suffer. Choice limited. Protection limits the choice of consumer goods. Through tariffs, quotas and exchange control, the availability of foreign goods is severely limited. The various protective policies drastically cut down the availability of foreign movies, books, magazines, pictures, clothing, food, etc. Goods imported from other countries also bring with them ideas and styles and other ways of living. Indeed, they enrich life.
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A tariff is a tax levied on imports or exports. Tariffs are usually associated with protectionism, a government's policy of controlling trade between nations to support the interests of its own citizens. For economic reasons, tariffs are usually imposed on imported goods. A subsidy is a form of financial assistance paid to a business or economic sector. The import duties (tariffs) and export subsidies affect the prices and quantities of goods and government revenue.
Tariffs
y y y Tariff is an important tool of protection used mainly to cut imports as imposition of import duties increases the prices of imported goods. It diverts the demand from imported goods to indigenous goods providing promotional environment for indigenous industries. Tariff is also useful for reducing the wide deficit in balance of payments as it discourages import reducing the burden on BOP.
The main effects of imposition of tariffs are: 1. Protective Effect Tariff reduces the imports of competing goods thus affording protection to the domestic producer. Domestic production is increased as a result of the imposition of tariff. This is known as Protective effect. 2. Consumption Effect When tariff is imposed, price of the commodity rises and domestic consumption is reduced. This is called the Consumption effect. 3. Revenue Effect The government derives revenue from the tariff which is measured by the quantity of the imports multiplied by the rate of tariff. This is the Revenue effect. 4. Redistribution Effect The imposition of the tariff increases the price of the commodity and thus reduces the consumers surplus. In this way, some income is transferred from the consumers to the producers. This affects distribution of income. It is called Redistribution effect. 5. Terms of Trade Effect Take the case of two countries A and B with different factor endowments giving comparative advantage to each in the production of a certain commodity. Tariff will reduce the volume of trade and the terms of trade will improve for the country imposing the tariff. 6. Effect on National Income If a country is facing unemployment problem, imposition of tariff will increase employment and thus increase national income. This happens because with the imposition of tariff consumers demands are diverted to the domestically produced goods. To meet this increased demand new production units will be set up. As a result lot of employment will be created and national income increased. Optimum Tariff A tariff is said to be optimum when its rate maximises the welfare of the country i.e. when the rate is considered best from all points of view; it is neither high nor low. It is the ideal rate.
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Subsidies are provided to the exporting industries so that they can compete in the world market. Goods that are exported are usually lower priced and abundant in the country that exports it. Exports are thus encouraged to utilise the surplus and avoid the further fall in prices of such exportable commodities. This encouragement to such industries is given with the view to earn more foreign exchange as well as protect the interest of such export industries having excess capacities.
There are three possible ways that a country adopting exchange control may like to pursue, considering the economic situation in which it may find itself. (1) It may like to undervalue or depreciate currency (2) It may decide on over-valuation (3) It may decide to avoid fluctuations and maintain a stable rate.
1. Under Valuation
Undervaluation is advocated for curing depression. When a country decides on undervaluation or depreciation, i.e., fixing a rate lower than it would be in a free exchange market, exports are stimulated and imports are discouraged. It will give stimulus to export industries and domestic industries will also benefit because imports have been discouraged. Thus, undervaluation will increase economic activity in the country, add to the total output (GDP) and will create more employment.
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The second object of exchange control may be overvaluation or fixing the value of its currency at a level higher than it would be if there was no intervention in foreign exchange. This course is indicated in the following situations: (i) When there is a serious imbalance in the country s trade relationship. As a consequence, the supply of national currency may far exceed the demand for it. (ii) The country may be in great need of foreign goods either for prosecution of a war or for reconstruction after the war or for economic development. (iii) If a country is suffering from inflation, the exchange value of the national currency will go down when exchanges are left free to move. If foreign trade plays a very important part in the economy of the country, this downward trend must be arrested by overvaluing the domestic currency, otherwise imports will become very dear and the exporters will have windfall profits. (iv) A policy of overvaluation is also in the interest of a country which has to meet a large debt payments expressed in foreign currency.
2. Controlling Exchange Rate There are two methods generally adopted for controlling exchange: (a) Intervention In this case, the government enters the exchange market either to purchase or to sell foreign exchange in order to bring the rate up or down to the desired level. This method has been called intervention and leads to exchange pegging . (b) Restriction In this case, the government can prevent the existing demand for, or supply of, the currency, in which they are interested, from reaching the exchange market. This method has been called restriction. The second method has been more popular because intervention proved a weak weapon and was also expensive.
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(a) All foreign dealings are centralised, usually in the central bank. (b) The national currency cannot be offered for exchange without previous permission. (c) It is made a criminal offence to enter into an unauthorised foreign exchange transaction. The usual procedure is to order all exporters to surrender claims in foreign currency to the central bank and ration the foreign exchange made so available among the licensed importers. Exchange control thus involves import control.
3.8 Devaluation
A very common method of correcting an adverse balance of payments is the devaluation of the home currency. The devalued currency falls in value against foreign currencies so that the foreigners have to pay less in terms of their own currencies for our goods. The importers in the country, on the other hand, have now to pay more in terms of the devalued currency for foreign goods. Hence, they (i.e., foreigners) are induced to import more from such a country. Thus imports decrease and exports increase, and the balance of payments is corrected.
Example:
India, following the U.K. devalued her currency in terms of the dollar in September 1949. Her trade balance had been very unfavourable. There used to be a big gap between her exports and imports. After the devaluation, however, her balance of payments was set right. In June 1966, again, India had to devalue the rupee. This resulted in some improvement in the balance of payments position.
Objectives of Devaluation
1. Correction of Balance of Payments: when the country is faced with chronic deficit in the balance of payments, it becomes essential for her to devalue her currency. The purpose is to eliminate the deficit in BOP completely or reduce it to the maximum possible extent. 2. Prevention of dumping: It means that preventing the sale of a product by one country in another country at a price lower than its cost of production. A country dumping goods wants to capture the market and thus in the beginning it sells at almost throw-away prices.
Advantages of Devaluation
1. Exports become cheaper, more competitive to foreign buyers. Therefore, this provides a boost for domestic demand. 2. Higher level of exports should lead to an improvement in the current account deficit. This was important in the case of the UK who had a large current account deficit of over 3% of GDP in 2008 3. Higher exports and aggregate demand can lead to higher rates of economic growth.
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1. Is likely to cause inflation because: y Imports more expensive y Firms / exporters have less incentive to cut costs because they can rely on the devaluation to improve competitiveness 2. Reduces the purchasing power of citizens abroad. e.g. more expensive to holiday in Europe. 3. A large and rapid devaluation may scare off international investors. It makes investors less willing to hold government debt because it is effectively reducing the value of their holdings.
Limitations of Devaluation
1. Elasticity of supply & demand: The policy of devaluation is likely to get successful only when the elasticity of supply & demand are more than one. This situation is rarely found especially in a country like India. 2. Devaluation is limited: The effectiveness of policy of devaluation is limited when the demand for imported goods is inelastic. It implies that even though prices of imported goods may go up, demand may not get reduced to extent of devaluation of rupee.
Question Bank
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4.2 Planning
Planning means looking ahead and chalking out future courses of action to be followed. It is a preparatory step. In simple words, planning is deciding in advance what is to be done, when, where, how and by whom it is to be done. Planning is a detailed programme regarding future courses of action. According to Urwick, Planning is a mental predisposition to do things in orderly way, to think before acting and to act in the light of facts rather than guesses .
Importance of planning:
The importance of planning lies in the fact that it is like a navigator of business circumstances. A business organisation has to work in an environment which is uncertain and ever changing. Without effective planning it would be difficult, if not impossible, to anticipate future uncertain events. It is proper planning only that enables a manager to carve out the future course of action. Thus, Planning is the foundation of most successful action of an enterprise. It brings orderliness, efficiency and stability to managerial actions and decisions. It provides a rational approach to managerial activities.
1. Planning Offsets Future Uncertainty and Change Future is uncertain and full of changes. These both elements make planning a necessity. Planning brings a higher degree of certainty rationality and order into the organisation than would be present without planning. Without planning a manager is forced to react to situations or problems. Planning permits a manager to act with initiative and to create situations to the organisation s advantage. It help a manager in shaping the future of his organisation rather than let him be caught in an endless trap of reacting only to current crisis.
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2. Planning helps In Management by Objectives (MBO) The first element of planning is setting the goals and objectives for the organisation as a whole and all its components. This gives a sense of direction to the working of the organisation and saves It from going astray or drifting about aimlessly. As efforts are directed towards desired and well defined objectives, haphazard approaches are minimized, efforts are co-ordinated and duplications are avoided. 3. Better Co-ordination Planning helps the management in the co-ordination process also. The well defined objectives, well publicized policies, well developed programmes and procedures these all things help In coordination. it avoids duplication of work and inter-departmental conflicts also. 4. Economy in Operation Planning is the only way to realise the business objectives in the cheapest and the best way. It paves the way for proper utilization of company resources. Planning involves the development of one best way of doing things which is economical in its sense also. 5. Helps In Control Planning is always a pre-requisite for controlling. No control can be exercised without planning. Planning distributes the responsibilities of different persons and jobs, develops the standards for comparison of actual performance estimates the time and cost of the operations through forecasts and budgeting process etc. It brings effectiveness and smoothness in the process of control. It is planning only that enables a manager to check the performance of his subordinates. 6. Help In Executive Development Planning helps in executive development also. The formal planning leads to disciplined thinking, because executives have to put their approach, improvement in thinking and imagination in their minds.
Steps in Planning:
1. Determination of Objectives The first step in planning work is to determine the enterprise objectives. These objective set the pattern of the proposed course of action and shape the future policies. The objectives should be for the organisation as a whole and then it must be broken down into departmental, sectional and individual objectives. Objectives indicate the end points of what is to be done, where the emphasis is to be placed and what is to be accomplished by the network of policies. Objectives must be specific, clear and informative. 2. Establishment of Planning Premises The second step in planning is to establish planning premises. Premises are planning assumptions, the future setting in which planning takes place. Thus, it is a forecast of those business conditions under which a plan is to operate, for example, population trends, production costs government policies and availability of material, power or labor, etc. Forecasts and trends analysis provide most of the information required in planning. 3. Determination of Alternative Courses The third step in planning is to search for and examine alternative courses of action. There is hardly a plan for which a number of alternatives cannot be found out. In business, there exist a number of alternative courses of action for achieving the desired objectives. All possible alternatives should be found out for their comparative and analytical evaluation.
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The next step is the evaluation of alternative courses of action and selecting a suitable and best course of action. All the possible alternatives should be compared and evaluated in the light of promises and goals. With reference to considerations like cost, speed and quality, all possible alternatives appraised to select a satisfactory course of action. The selection of a satisfactory course of action is the point at which the plan is adopted. 5. Preparation of Derivative Plans The next step in the planning process is to formulate the derivative plans in support of the basic plan. There are sub-plans or departmental plans. The basic plan prepared for the whole enterprise cannot be effectively operated in the absence of such plans, so within the framework of a primary or basic plan, derived plans are developed in each area of the business to integrate objectives with a network of policies, programmes, procedures, etc. 6. Timing and Sequence of Operation Timing is an essential consideration in planning. After developing the sub plans, the starting and finishing times should be fixed for each plan. Scheduling is very useful not only in sales and production areas but in other functional areas also. 7. Securing Participation of Employees. The execution of a successful plan depends to a large extent upon the loyalty and sincerity of the subordinates. It can be secured only when their proper participation is secured in planning. Plans must be communicated explained and consulted with them thoroughly. 8. Considering the Strategy Strategy has a significant contribution towards the execution of a plan. So, consideration of different strategies becomes an integral part of the planning process. Suitable strategy should be planned and followed for the success planning. 9. Providing Follow up to the Proposed Course of Action A provision for follow up measure should be made for the time when a plan is put into action. In the context of current problems and situation, necessary adjustment in plans become imperative, so necessary provision should be made for it before hand.
Merits of Planning:
1. 2. 3. 4. 5. 6. Minimises risk. Facilitates control. Generates efficiency. Facilitates co-ordination. Facilitates proper direction. Facilitates decision making.
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Demerits of Planning:
1. 2. 3. 4. 5. 6. Generates frustration. Danger of human error. Inter departmental rivalries. Problems of changing situations. Dangers of over and under targeting. Time consuming and expensive process.
Decision Making
The decision making process is an important integral part of the management process. Decision-making is the act of choosing from among alternatives. It involves a conscious choice of a particular course of action in the solution of a business problem. Decision-making without considering the alternatives, like deciding to call heads or tails when a coin is flipped, may be very easy. What is particularly difficult is to make a good decision. A good decision is based on a choice of calculated alternatives based on judgment. To make good decisions, managers (individuals) should follow a sequential set of steps. If managers do not go through this sequence, they are likely to make a decision that will solve the wrong problem.
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7. Monitoring the solution The decision maker needs to check the implementation at regular intervals, so as to find out whether the implementation is moving in the right direction.
4.3 Communication
Communication is the exchange of messages between people for the purpose of achieving common goals. Communication is the vital skill of any professional. No one can be effective in an important task without being a good communicator. Communication is the activity of conveying information. Communication requires a sender, a message, and an intended recipient.
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Types of Communication:
A. B. C. D. Communication can be broadly classified as Verbal & Non-Verbal Communication. The two types can be further divided in different types based on various attributes: Formal & Informal Communication Vertical & Horizontal Communication Oral & Written Communication Non-Verbal Communication
B. Organizational Communication
Organizational communication deals with how information flows through the various parts of the company. There exist two major directions in which organizational Communication takes place: 1. Vertical Communication. a) Upward Communication. b) Downward Communication. 2. Horizontal Communication.
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a) Downward Communication: Downward Communication is the transmission of information from the top level to the bottom level of the organisation through various levels. Downward communication may be in the form of staff meeting, company policy statement, compay newsletters, informational memos, face-to-face contact and speeches. Most downward communication is related to: 1. Job instructions or specific jobs. 2. Procedures & Practices to adopt. 3. Performance feedback. 4. Encouragement / Appreciation / Reprimanding
b) Upward Communication: Upward communication is when the information flows from the lower levels to the higher levels in the organisation. Forms of upward communication involve meetings, memos, reports, suggestions, and grievances. Most upward communication is related to: 1. Progress report 2. Subordinates conveying their problems. 3. Suggestions for improvements. 4. Complaints/ appeals 5. Exit interviews
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Barriers to Communication:
1. Lack of Planning: Usually people start communicating without thinking and planning. Also if proper transmission medium is not used according to the necessity, it may cause problems. 2. Status: Every management position has a status attached to it. Subordinates usually do not feel free to express their view in front of their seniors which hampers the communication process. 3. Organization structure: Sometimes the organization s hierarchy structure is too complex with several levels of supervisors, managers etc. Effective communication becomes difficult then. 4. Language misinterpretation: Misinterpretation of language results in distortion in communication because the meaning of the message may change. This is also known as semantic noise. 5. Communication gap: communication gap exists when idea is not properly transmitted from one mind to another when mutual understanding is presumed. The communicator s idea is not exactly reproduced by the receiver. 6. Faulty listening: If message is not received carefully, listener understands things according to his intellectual capacity and tries to evaluate them accordingly. 7. Poorly expressed message: A poorly expressed message is transmitted because of sender s mistake. When proper words are not chosen to send the information, if there is a lack of coherence and poor organization of words exists, this leads to misinterpretation of message. 8. Physical Barriers: It becomes very difficult to pass on the message orally, if another confirmation giving information simultaneously within hearing distance, sometimes-loud music or traffic noise creates barrier in the communication process. Due to sleeplessness, ill health, consumption of drugs, mental strain etc. communicator cannot interpret the message in desired manner.
4.4 Leadership
Leadership has been described as the process of social influence in which one person can enlist the aid and support of others in the accomplishment of a common task . A leader is someone who advances organizational goals by influencing the attitudes and actions of others. The word leadership implies responsibility, authority and status but power and decision making provides the foundation for leadership.
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Laissez-Faire or Free Rein: Let it be the leadership responsibilities are shared by all Can be very useful in businesses where creative ideas are important Can be highly motivational, as people have control over their working life Can make coordination and decision making time-consuming and lacking in overall direction Relies on good team work Relies on good interpersonal relations Paternalistic Leadership: Leader acts as a father figure Paternalistic leader makes decision but may consult Believes in the need to support staff
4.5 Motivation
Motivation is a term derived from the word motive . We can define motive as that which makes person act in a particular way. It is an inner impulse causing man to act. A person works to satisfy his needs. So, the human needs are the cause of action and motivation is a process of causing men to realise these needs. Motivation can be defined as a willingness to expend energy to achieve a goal or a reward.
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Importance of Motivation:
1. High Performance Level: Motivated employees put higher performance as compared to other employees. The high performance is a must for an organisation and motivation is a vital requirement for high performance. 2. Low Employee Turnover and Absenteeism: A motivated employee stays in the organisation more and their absenteeism is quite low. High turnover and absenteeism create many problems in the organisation. Recruiting, training and development of number of new personnel takes long time and it is expensive too. Moreover, this also affects the reputation of the firm adversely. Motivation brings these rates lower. 3. Acceptance of Organisatlonal Changes: The changes in organisation are a usual phenomenon due to various reasons such as change in technology, value system etc. Organisation has to cope with these changes to cope up with the requirement of time. When the changes are introduced in the organisation, there is a tendency to resist them by the employees. However, if they are properly motivated they accept those changes with zeal and enthusiasm and support in their proper implementation too.
1. Need for Power: A person's need for power can be one of two types - personal and institutional. Those who need personal power want to direct others, and this need often is perceived as undesirable. Persons who need institutional power (also known as social power) want to organize the efforts of others to further the goals of the organization. Managers with a high need for institutional power tend to be more effective than those with a high need for personal power.
2. Need for Achievement: People with a high need for achievement (nAch) seek to excel and thus tend to avoid both low-risk and high-risk situations. Achievers avoid low-risk situations because the easily attained success is not a genuine achievement. In high-risk projects, achievers see the outcome as one of chance rather than one's own effort. High nAch individuals prefer work that has a moderate probability of success, ideally a 50% chance. Achievers need regular feedback in order to monitor the progress of their acheivements. They prefer either to work alone or with other high achievers.
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Those with a high need for affiliation (nAff) need harmonious relationships with other people and need to feel accepted by other people. They tend to conform to the norms of their work group. High nAff individuals prefer work that provides significant personal interaction. They perform well in customer service and client interaction situations
1. Telling: Where followers are both unable and unwilling to do the job, they require specific directions as to what, how and when to do various tasks. The subordinates are neither competent nor confident hence they need directions from the leader.
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2. Selling: For members of moderate maturity who are unable but willing to do the job, the leader behaviour must be both supportive and directive. It is because the followers are currently confident but lack the skills. This style involves high task and high relationship behaviour. 3. Participating: Here subordinates are able but unwilling to do the job and they require adequate motivation. These capable subordinates need and want support but not direction. The leader and subordinate share the decision making process with the leader s role being facilitating and communicating. It involves high relationship & low task behaviour. 4. Delegating: Subordinates who are at high maturity levels and are willing and capable of doing a job need delegation of work. They are confident and neither need or want directions or support. Low relationship & low task behaviour characterise this style.
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(i) Physiological needs: These are important needs for sustaining the human life. Food, water, warmth, shelter, sleep, medicine and education are the basic physiological needs which fall in the primary list of need satisfaction. Maslow was of an opinion that until these needs were satisfied to a degree to maintain life, no other motivating factors can work. (ii) Security or Safety needs: These are the needs to be free of physical danger and of the fear of losing a job, property, food or shelter. It also includes protection against any emotional harm. (iii) Social needs: Since people are social beings, they need to belong and be accepted by others. People try to satisfy their need for affection, acceptance and friendship. (iv) Esteem needs: According to Maslow, once people begin to satisfy their need to belong, they tend to want to be held in esteem both by themselves and by others. This kind of need produces such satisfaction as power, prestige status and self-confidence. It includes both internal esteem factors like self-respect, autonomy and achievements and external esteem factors such as states, recognition and attention. (v) Need for self-actualization: Maslow regards this as the highest need in his hierarchy. It is the drive to become what one is capable of becoming, it includes growth, achieving one s potential and self-fulfillment. It is to maximize one s potential and to accomplish something.
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Employees inherently do not like work and whenever possible, will attempt to avoid it. Because employees dislike work, they have to be forced, coerced or threatened with punishment to achieve goals. Employees avoid responsibilities and do not work till formal directions are issued. Most workers place a greater importance on security over all other factors and display little ambition.
In contrast under the assumptions of theory Y: Physical and mental effort at work is as natural as rest or play. People do exercise self-control and self-direction if they are committed to those goals. Average human beings are willing to take responsibility and exercise imagination, ingenuity and creativity in solving the problems of the organization. That the way the things are organized, the average human being s brainpower is only partly used.
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Marketing Functions:
The study of marketing management is nothing but the critical evaluation of various marketing functions. The functions necessary to determine consumer wants and needs and supplying necessary goods and services to meet those demands can be broadly classified as: 1. Marketing Research. 2. Product Planning and Development. 3. Standardization and Grading. 4. Packaging. 5. Pricing. 6. Advertising and Sales Promotion. 7. Distribution including channels of Distribution, etc. 8. Personal Selling and Management of Sales Force.
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Marketing research is the careful and objective study of product design, markets and such transfer activities as physical distribution, warehousing, advertising and sales management. Its main aim is to provide management with factual information as a basis for marketing decisions and actions. It is a staff activity within the marketing department. The major areas in which marketing research helps management to formulate its policies are as follows: products, markets, marketing policies and sales methods. Marketing research provides information about: a. Demand for the product in future. b. Market potential and market share. c. Analyses distribution, economic trends & profitability. d. Competitor products, its merits & demerits. e. Policy changes & technological changes. f. Advertising effectiveness, consumer reaction & dealer reaction. 2. Product Planning and Development Product planning is the act of making out and supervising the search, screening, development and commercialization of new products The modification of existing lines and the discontinuance of marginal or unprofitable products.
3. Standardization and Grading Standardization is the process of setting up standards to manufacture products in conformity with those standards and includes the process by which this conformity is assured. Thus, it ensures the uniformity of size, shape, design, colour and physical properties of the product. Grading is a part of the process of standardization. It is the process of sorting out goods into a number of grades or classes according to some characteristics such as quality and size. It helps not only to the producer but to the sellers and consumers also.
4. Packaging Packaging is also an important marketing function. A package is used to contain, protect and identify a product. Besides, it is an important sales tool which makes a product attractive and attention catching. Good and attractive packing is a plus point in facilitating the sales of a product. Hence, the marketing manager has to take decisions regarding the type and material of packing; its shape, size, design and colour, etc.
5. Product Pricing Pricing is a very important and crucial decision as it affects all the parties involved in the production distribution and consumption of goods. Prices of the product affect volume of production and the amount of profit. It is the source of income to the distributors of the product. Hence, the marketing manager has to take pricing decisions very carefully.
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Advertising is a method of business communication to the prospective customers. Such communication includes information about its product s quality, the time and places of availability of the products etc. The main object of advertising is to promote the sale of the products. The marketing manager has to take a number of decisions relating to advertising such as selections of a suitable and economical medium, planning advertising programme, preparing the advertising budget, etc.
7. Distribution Management Distribution of products is also an important function of marketing management. It involves the decision relating to channels of distribution and their management. A long series of middlemen, sole selling agent, whole sellers and retailer etc., work between the producer and consumer. The marketing manager has to manage all these distribution channel.
8. Personal Selling and Management of Sales Force Personal selling is a very important component of the marketing activity. The success of a business concern depends considerably upon the performance of its salesman. Salesmen play a crucial role in communicating company and product information to customers. Hence, the company should have a retained sales force. Marketing manager will be intimately concerned with the task of selection, orientation, training, supervision, motivation, compensation and evaluation of the sales force of the company.
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Such activities are varied in nature and are useful for establishing reasonably good rapport with the consumers. Promotion includes two broad areas of advertising and personal selling. The promotion mix includes: Advertising and publicity of the product: what type of media, display is used to do it. Personal selling techniques for e.g. salesmen offering special discounts. Sales and promotion measures introduced at different levels, markets. Public and press relation techniques used to keep cordial relations with dealers and consumers.
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In management, organisation is both the process as well as the end-product of that process which is referred to as organisation structure. According to Louis A. Allen, Organisation is "the process of identification and grouping the 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". Viewed broadly, organising includes the provision of physical facilities, capital and personnel. The term 'Organisation' is derived from the word 'organism' which means a structure of body divided into parts that are held together by a fabric of relationship as one organic whole. In an enterprise, many managers and employees work together for achieving common objectives. It is the organisation structure which binds them together and brings proper adjustment and coordination in their work. The division of work and authority and the establishment of relationship among individuals or groups are possible due to the organisation structure.
Importance of Organisation
1. Ensures optimum utilisation of human resources: Every enterprise appoints employees for the conduct of various business activities and operations. They are given the work according to their qualifications and experience. Organisation ensures that every individual. Is placed on the job for which he is best suited. 2. Facilitates coordination: It acts as a means of bringing coordination and integration among the activities of individuals and departments of the enterprise. It establishes clear-cut relationships between operating departments and brings proper balance in their activities. 3. Facilitates division of work: Different departments are created for division of work, specialization and orderly working of the enterprise. Similarly, delegation relieves top level managers from routine duties. 4. Ensures growth, expansion & diversification: Sound Organisation structure facilitates expansion or diversification of an enterprise. Organisation structure has in-built capacity to absorb additional activities and also effective control on them. A business enterprise brings diversification in its activities within the framework of its Organisation. 5. Stimulates creativity: Organisation provides training and self-development facilities to managers and subordinates through delegation and departmentation. It also encourages initiative and creative thinking on the part of managers and others. 6. Facilitates administration: Effective administration of business will not be possible without the support of sound organisation structure. Delegation, departmentation and decentralisation are the tools for effective administration. 7. Determines optimum use of technology: Sound Organisation structure provides opportunities to make optimum use of technology. It facilitates proper maintenance of equipment and also meets high cost of installation. 8. Determines individual responsibility: Responsibility is an obligation to perform an assigned work. In a sound Organisation, the manager finds it easy to pinpoint individual responsibility when the work is spoilt.
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Structure is the means for achieving group action. As Newman pointed out, organisation structure is like the architectural plan of a building. Just as the architect considers various factors like: cost, space, special structure needed, etc while designing a good structure, the manager must look into various factors like benefits of specialization, communication problems, limitations of various authority levels created, before designing the organisation structure. The term organisation, from a structural point of view implies that it is: Ii) a purposive creation, (ii) it is created to coordinate the isolated pieces of activity, (iii) through people, and (iv) to achieve a common goal.
1. Organisations are created purposefully, deliberately to achieve specific goals. They act as intervening elements between human needs and their ultimate realisation. Structure provides a framework for converting the disorganised resources of men, machines and materials into a useful, productive enterprise. 2. Organisations set the relationship between people, work and resources. Actually organisations are collectivities established to achieve goals by coordinating isolated pieces of activity. The parts of an organisation are so integrated that their relations to each is governed by their relation to the whole. 3. Organisations are social units, assemblages of people working toward common goals. It is not necessary for people to know each other; it is sufficient if they have some working relationship permitting flow of resources and information facilitating goal accomplishment. 4. According to Mooney, organisation is the form of every human association for the attainment of a common purpose .
Organisation as a Process
As a process, organisation refers to one of the important functions of management: organising. According to Allen, Organising is the process of: (i) Identifying and grouping the work to be performed (ii) Defining and delegating responsibility and authority (iii) Establishing relationship for the purpose enabling people to work most effectively together in accomplishing objectives. Thus, as a process the term organisation refers to certain dynamic aspects like: What tasks are to be done? Who is to do & when? How the tasks are to be grouped? Which decisions are to be made? The process of organisation involves five steps: identification of activities, grouping of activities, establishing relationships, allocation of responsibilities for actions, providing measures for evaluation and control.
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1. Identification of activities The purpose of organising is to give each person a separate, distinct task and to ensure that tasks are coordinated in such a way that the organisation achieves its goals. Work must be divided and distributed because no one can handle the total work load single-handed. The total work necessary to achieve the goals must be spelt out clearly and must be classified and grouped in systematic way. 2. Grouping of activities All closely related and similar activities are grouped together to create departments or divisions in the organisation. The need for creation of departments arises because of division of labour only. Division of labour creates specialists who need coordination. This co-ordination is facilitated by putting specialists together in departments under the direction of a manager. Departmentalisation is conducted based on: functions, product, services offered, customers covered, territories served, the process used to convert inputs into outputs, etc. 3. Specifying source of authority and establishing relationships There must, obviously, be some way of securing compliance of individual members of the group in contributing their efforts to the common goal. A central directing agency is needed to achieve goals in an orderly fashion and reporting relationship between individuals must be specified. This enables answering such questions: what is to be done, when to be done, how it is to be done, to whom the matters must be referred, etc. 4. Delegation of authority and creation of responsibilities Assignment of duties would be futile without delegation of authority. Without requisite authority, an individual cannot perform the tasks with confidence and show results. Requisite authority implies striking a happy balance between authority and responsibility. Imbalances between the two create problems, as authority without responsibility may be abused and responsibility without authority may be totally frustrating. 5. Providing measures for evaluation and control Goals cannot be achieved effectively without proper feedback. There must be a systematic procedure to control the effort of the subordinates at regular intervals. Periodic reviews help in spotting the deviations and taking appropriate rectification steps in time.
(Since syllabus doesn t explicitly mention whether types of organisation structures is a part of syllabus, hence we won t be studying each one in detail. Flat Organisation structure was there in earlier syllabus hence we shall focus only on it)
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A Flat organization structure is also known as a horizontal organisation. It is a level wherein there is no level between the staff and managers. In such an organisation the most trained employees are involved in the decision making process. This structure mostly takes place in smaller organisation or also on a small scale within large organisation. However, when these organisations began to grow and expand, the company turns into a hierarchical organisation structure. In fact most of the organisations worldwide start with a flat organisation structure.
Advantages: Quick decisions and actions Superiors may not dominate Creates fewer levels of management Reduces overhead cost of supervision Permits better co-ordination Effective communication between levels Disadvantages: Quality of performance affected Creates problem of close control and supervision Creates problems over discipline.
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Span of control or span of management refers to the number of subordinates who can be supervised and managed effectively. The number should not be too large or too small. If number of subordinates is too high, personal supervision becomes difficult and it may lead to loss of control. And if the number of subordinates is too small, the organisational task may not be performed effectively.
Delegation of Authority
A manager alone cannot perform all the tasks assigned to him. In order to meet the targets, the manager should delegate authority. Delegation of Authority means division of authority and powers downwards to the subordinate. Delegation is about entrusting someone else to do parts of your job. Delegation of authority can be defined as subdivision and sub-allocation of powers to the subordinates in order to achieve effective results.
Elements of Delegation
1. Authority - In context of a business organization, authority can be defined as the power and right of a person to use and allocate the resources efficiently, to take decisions and to give orders so as to achieve the organizational objectives. Authority must be well- defined. All people who have the authority should know what is the scope of their authority is and they shouldn t misutilize it. 2. Responsibility - It is the duty of the person to complete the task assigned to him. A person who is given the responsibility should ensure that he accomplishes the tasks assigned to him. If the tasks for which he was held responsible are not completed, then he should not give explanations or excuses. Responsibility without adequate authority leads to discontent and dissatisfaction among the person. Responsibility flows from bottom to top. The middle level and lower level management holds more responsibility. The person held responsible for a job is answerable for it.
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3. Accountability - means giving explanations for any variance in the actual performance from the expectations set. Accountability cannot be delegated. For example, if A is given a task with sufficient authority, and A delegates this task to B and asks him to ensure that task is done well, responsibility rest with B , but accountability still rest with A . The top level management is most accountable.
Obstacles to Delegation
Obstacles related to the Supervisor: A supervisor who resists delegating his authority to subordinates because he cannot bear to part with any authority. Two other supervisor related obstacles are the fear that the subordinates will not do a job well and the suspicion that surrendering some authority may be seen as a sign of weakness. If supervisors are insecure in their jobs or believe certain activities are extremely important to their personal success, they may find it hard to put the performance of these activities into the hands of the others. Obstacles related to Subordinates: Subordinates may be reluctant to accept delegated authority because they are afraid of failing, lack self confidence, or feel the supervisor doesn t have the confidence in them. These obstacles will be especially apparent in subordinates who have never before used delegated authority. Other subordinate related obstacles are the fear that the supervisor will be unavailable for guidance when needed and the reluctance to exercise authority that may complicate comfortable working relationships.
Decentralisation
Decentralisation is just opposite to centralisation. Under centralisation, authority is mostly concentrated at the top level management. Whereas, decentralisation implies conscious/systematic effort to bring dispersal (spreading) of decision making power to the lower levels of the Organisation. In decentralisation, only broad powers will be reserved at the top level. Such powers include power to plan, organise, direct and control and maximum powers will delegated to the authority at the lower level. Advantages of Decentralisation: Avoids red tapism. Encourages initiatives Beneficial for large companies Provides relief to top management Boosts morale of middle and lower level managers. Disadvantages of Decentralisation: Delays decisions. Doesn t ensure uniformity More operating costs Difficulties in co-ordination Requires highly efficient managers
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Question Bank
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