Contents

1 What is Motivation? ........................................................................................................................ 3

1.1 Motive, Motivators and Motivating .......................................................................................... 3
1.2 Motivation Process .................................................................................................................. 3
2 Types of Motivation ......................................................................................................................... 4
3 Motivational Theories ...................................................................................................................... 5
4 Content Based Theories ................................................................................................................... 6
4.1 Maslow’s Motivation Theory .................................................................................................... 6
4.1.1 Maslow’s Extended Motivation Theory ............................................................................. 9
4.2 Alderfer's Hierarchy of Motivational Needs ............................................................................ 10
4.3 McClelland’s Theory of Needs (Achievement Theory of Motivation) ....................................... 12
4.4 Herzberg's Two Factor Theory ................................................................................................ 14
4.4.1 Herzberg's KITA .............................................................................................................. 17
4.4.2 Relationship between Herzberg and Maslow Models...................................................... 18
4.5 Relationship between above Maslow’s, Herzberg’s, Alderfer’s and McClelland’s Theory ........ 19
4.6 McGregor’s Theory X and Theory Y ........................................................................................ 19
4.7 Theory Z (US-Japanese Management Style) by William Ouchi ................................................. 21
4.8 Instinctive Theory of Motivation ............................................................................................ 22
5 System view of Motivation............................................................................................................. 23
5.1 Individual ............................................................................................................................... 23
5.2 Organization .......................................................................................................................... 23
5.3 Job Characteristics ................................................................................................................. 23
5.4 Exogenous Variable ................................................................................................................ 23
6 Job Satisfaction .............................................................................................................................. 23
6.1 Relationship between Job Satisfaction and Productivity ......................................................... 24
7 Importance of Motivation in an Organization ................................................................................. 24

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 1 What is Motivation?
Motivation is defined as the process that initiates, guides, and maintains goal-oriented
behaviors. Motivation is what causes us to act. For example, if Ram keeps on studying then
the reason might be because Ram is motivated to become a doctor. The formal definition of
motivation is that motivation is willingness of person to make intense and persistent efforts
to achieve desired goals.

1.1 Motive, Motivators and Motivating

Motive: Motive (also known as need) is the inner state of a person that he is lacking
something which moves him to engage in goal-directed behavior. For example, if you are
thirsty (inner state), you will drink water (goal directed behavior)

Motivators: A motivator is anything which satisfy your need. For example, for a thirsty
person, the motivator would be availability of water.

Motivating: Motivating is the process of inducing others to engage in goal-directed

behavior by presenting motivators. In organizational context, managers use a variety of
motivators (incentives) as part of motivating the employees.

1.2 Motivation Process

Motivation is a goal directed behavior. Feeling of need by an individual generates a feeling
that he lacks something.

1. Need: Arousal of need is starting step of motivation process. Need is inner state of a
person that he is lacking something. For example, if a person is thirsty then he needs
water.
2. Tension: Tension is a feeling of being worried which makes it difficult for a person to
relax. For example, a thirsty person will get tense if he is not able to get water.
3. Goal-Directed behavior: In order to overcome this tension, the person engages in goal-
directed behavior through which tension is overcome. For example, if a person is thirsty
then he may drink water.
4. Need Satisfaction: Goal-directed behavior may lead to satisfaction (goal fulfillment). For
example, drinking of water by thirsty person would lead to need satisfaction.

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 5. Feedback: Feedback involves the analysis whether need satisfaction is proper or not.
For example, if a very thirsty person is given only one glass of water, then his need
satisfaction may not be proper.

Consequences of Non-Satisfaction of Need:

If a need is not satisfied even after goal-directed behavior, the person will try to modify the
behavior. He may produce following behaviors

1. Flight: One way is to leave the field. For example, employee quits the job that
becomes frustrating.
2. Apathy: He will become indifferent towards the situation. For example, if a person
does not leave the frustrating job then he may not be serious anymore about the job
3. Aggression: He may become aggressive due to frustration. An employee frustrated
with the job may become aggressive towards his superior, family etc.
4. Rationalization: Rationalization involves justifying the outcome of goal-directed
behavior. For example, a person frustrated with his job might find fault in himself or
his superior who has not given them their due.

2 Types of Motivation
1. Positive vs. Negative: Motivating forces can be positive, as in impelling one to reach a
certain goal. They can also be negative, as in driving one away from an unwanted situation.
You can be positively motivated about going to work because you like your colleagues and
some parts of the work, and negatively motivated because you have bills to pay.

2. Basic vs. Learned: Motivation leans on motives. Basic or primary motives are unlearned and
common to both animals and humans. We’re talking hunger, thirst, sex, avoidance of pain,
and perhaps aggression and fear. The learned or secondary motives include achievement,
power, recognition, love.

3. Extrinsic motivation and Intrinsic Motivation:

Extrinsic motivation occurs when we are motivated to perform a behavior or engage in an
activity to earn a reward or avoid punishment. The motivation comes from outside.

Examples of behaviors that are the result of extrinsic motivation include:

• Studying because you want to get a good grade.
• Cleaning your room to avoid being reprimanded by your parents.
• Participating in a sport to win awards.
• Competing in a contest to win a scholarship.

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 Intrinsic motivation involves engaging in
behavior because it is personally
rewarding; essentially, performing an
activity for its own sake rather than the
desire for some external reward. It
comes from inside the individual and is
not done for external rewards. Examples
are.
• Participating in a sport because
you find the activity enjoyable.
• Solving a word puzzle because you
find the challenge fun and
exciting.
• Playing a game because you find it
exciting.

3 Motivational Theories
The motivational theories are basically categorized into the following

1. Content Theories (Traditional theories): Content Theories look at specific needs that
motivate people. Hence managers should know the needs of everyone. This set basically
concentrates on what motivates an individual.

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 2. Process Theories (Contemporary theories): Process theories attempt to explain how the
process of motivation works in an individual. Individuals make choices based on
preferences, rewards, and accomplishments and therefore managers need to
understand the process of motivation.

We will discuss Content Based theories in this document.

4 Content Based Theories

These are also called Need based theories or Humanistic approach to motivation. The basis
behind these theories is that individuals have certain needs which if not met create tension in
the mind of people. The individuals will then try to satisfy the need to reduce the tension.

4.1 Maslow’s Motivation Theory

Maslow has proposed that motivation of people depends on their needs and these needs may
be arranged in a hierarchy shown below.

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 Need hierarchy is based on following assumptions.
1. Needs are to be fulfilled from bottom to top. Individuals must satisfy lower-level needs
before they can satisfy higher order needs. This concept of lower-level needs being
satisfied first before moving higher is called satisfaction progression. Motivating a person
depends on knowing at what level that a person is on the hierarchy.
2. A satisfied need does not motivate a person, only a next higher order needs motivates
him.

There are five needs in Maslow need hierarchy – Physiological needs, safety needs, Social
needs, Self-Esteem needs, Self-Actualization needs. Let us discuss these needs one by one

1. Physiological needs: These primary needs are created in an individual by nature. Needs of
air, water, food, defecation etc. are such needs. These are the things without which we
cannot live. Example: If a child is hungry or thirsty, the teacher cannot motivate him for
learning in the class.

2. Safety needs (Security needs): After fulfilling physiological needs an individual wants
physical safety and well-being (emotional security, financial security). He wants to be
protected in the environment from his enemies whether they are his fellow being or the
fury of the environment in the form of heat, cold, rain etc. Example: A child must feel
that the classroom is a fair, orderly and safe place for learning at all the times. It must be a
place free from physical bullying

3. Needs of belongingness: Having the above two needs been fulfilled an individual wants a
sense of belonging to someone or a group. He wants love, affection, and friendship from
his fellow beings. Example: Students need to feel emotionally and physically safe and
accepted within the classroom to progress and reach their full potential. Children who are
not accepted in the groups in the class would not develop well.

4. Esteem needs: All humans have a need to feel respected; this includes the need to
have self-esteem and self-respect. Esteem presents the typical human desire to be
accepted and valued by others.

Most people have a need for stable self-respect and self-esteem. Maslow noted two
versions of esteem needs: a "lower" version and a "higher" version. The "lower" version
of esteem is the need for respect from others. This may include a need for status,
recognition, fame, prestige, and attention. The "higher" version manifests itself as the
need for self-respect. For example, the person may have a need for strength,

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 competence, mastery, self-confidence, independence, and freedom. This "higher" version
takes precedence over the "lower" version because it relies on an inner competence
established through experience. Deprivation of these needs may lead to an inferiority
complex, weakness, and helplessness.

Example: A child wants to become monitor of the class or captain of football or cricket
team, or a child wants to become best dancer in the school. To motivate such students for
learning, it is necessary that such needs of these students must be fulfilled to the
maximum level possible

5. Needs of self-actualization: An individual comes to recognize his strengths and

weaknesses fully before coming to this last level of needs. Based on potentialities, he
wants to do such an extra-ordinary work so that he may acquire the top place in the eyes
of the people. It can be achieved only when each of the other levels have been mastered,
not just understood. Example: Talented students after a period come to know that they
can achieve much more. A child can realize that he has the potential to become the best
scientist or a film actor. To achieve this target, they try their best. If a teacher fails to
recognize the abilities of these students and does not respond properly at their
achievement, these students lag their actual level of performance.

Implication at Workplace:

1. Maslow’s hierarchy of needs applied to work situations implies that managers have the
responsibility, firstly, to make sure their people’s deficiency needs are met. Only once the
deficiency needs are met, one can go for self-actualization

2. Secondly, it implies creating a proper climate in which employees can develop their fullest
potential. Failures to do so would theoretically increase employee frustration and could
result in inferior performance, lower job satisfaction, and increased withdrawal from the
organization. For example, in this theory job insecurity and the threat of layoffs will block
the person from their higher growth needs.

Criticism of Maslow’s theory

1. Wrong Order of Needs:
a. The order in which the hierarchy is arranged has been criticized as being ethnocentric
by Geert Hofstede. Maslow's hierarchy of needs fails to illustrate and expand upon the
difference between the social and Self-esteem/self-actualization needs of those raised
in individualistic societies and those raised in collectivist societies. The needs and
drives of those in individualistic societies tend to be more self-centered focusing on

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 improvement of the self, with self-actualization whereas in collectivist societies, the
social needs of acceptance and community will outweigh other needs
b. Some people may be deprived of lower order needs but still try for self-actualization.
Mahatma Gandhi is an example of the same. For some people self-esteem need is
more important than social needs and they may try to assert themselves on others
even at the cost of social needs
2. The position and value of sex on the pyramid has also been a source of criticism regarding
Maslow's hierarchy.
3. It is wrong to assume that only one motive is present at any point of time. Some people
may be aspiring to fulfill multiple needs at one point in time.
4. Needs other than those identified by Maslow also motivate people – e.g., spiritual needs.

Concept Check:

Question – Motivation is defined as the process that initiates, guides, and maintains goal-oriented behaviors. In the
same regard, which of the following is not need as per Maslow’s Theory?

A. Esteem Need
B. Self-Actualization Need
C. Physical Need
D. Physiological Need

Answer – Option C

4.1.1 Maslow’s Extended Motivation Theory

The three new additions to Maslow’s original Hierarchy of
Needs model are:

• Knowledge and Understanding (Cognitive Needs)

• Need for Aesthetics
• Transcendence

1. Knowledge and Understanding (Cognitive Needs):

People have a desire to explore and learn new things or
understand the world around them. The inability to
meet the cognitive needs may make it difficult to reach
Self-Actualization. For example, Ram has a curiosity to
solve complicated algebra problems. He solves these
problems in her free time.

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 2. Need for Aesthetics: This is about the desire for beauty and pleasing surroundings in our life.
Through the chaos, we seek order and balance. We want to appreciate the things we find
beautiful. For example, Tiya wants to arrange her wardrobe in a way that looks balanced
and pretty.

3. Transcendence (helping others find fulfillment): Transcendence is the desire to move beyond
ourselves. In the expanded hierarchy it is placed after Self-Actualization, making it the highest
level in the hierarchy. For example, an IAS Officer after attaining self-actualization helping
other needy IAS aspirants crack IAS exam.

4.2 Alderfer's Hierarchy of Motivational Needs

Clayton P. Alderfer’s proposed ERG theory in 1969 which condenses Maslow's five human
needs into three categories: Existence, Relatedness and Growth.

1. Existence refers to our concern with basic material existence requirements; what
Maslow called physiological and safety needs.
2. Relatedness refers to the desire we have for maintaining interpersonal relationships;
like Maslow's social/love need,
3. Growth refers to an intrinsic desire for personal development, Maslow's esteem need,
and self-actualization.

Even though the priority of these needs differs from person to person, Alderfer's ERG theory
prioritizes in terms of the categories' concreteness. Existence needs are the most concrete, and
easiest to verify. Relatedness needs are less concrete than existence needs, which depend on a
relationship between two or more people. Finally, growth needs are the least concrete in that
their specific objectives depend on the uniqueness of each person.

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 Difference between Alderfer’s Theory and Maslow’s Theory

Implications in Workplace
1. On a work level, Alderfer’s model implies that managers must recognize their
employees’ multiple simultaneous needs. Focusing exclusively on one need at a time
will not motivate your people.
2. The frustration-regression principle impacts workplace motivation. For example, if
growth opportunities are not provided to employees, they may regress to relatedness
needs, and socialize more with co-workers.

Concept Check

Ram is currently working in the XYZ company, and he is employed in company for a long period of time. Another
company which is very much in the news is ABC company. ABC company is operating on small scale, and it has huge
growth potential. Ram got fascinated by the growth prospectus of the ABC company and thereby he decided to join
the ABC company. ABC company offered a high reputed job position to Ram and thereby Ram accepted the job offer.

Question – As Ram shifted from XYZ company to the ABC company, this change of job can be explained by which of
the following Theory of motivation?

A. Existence needs – Alderfer Theory of motivation

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 B. Achievement needs – David McClelland Theory of motivation
C. Belonginess Needs – Maslow Theory of Motivation
D. Growth Needs - Alderfer Theory of motivation

Answer – Option D
It’s clearly given in the question that, Ram got fascinated by the growth prospectus of the ABC company. Hence the
correct answer will be option D.

4.3 McClelland’s Theory of Needs (Achievement Theory of Motivation)

David McClelland identified three learned or acquired needs, called manifest needs. These
needs are:

1. Need for Achievement (n-Ach):

a. The need for achievement is characterized by the wish to take responsibility for finding
solutions to problems, master complex tasks, set goals, and get feedback on level of
success. There is a strong need for feedback as to achievement and progress, and a need
for a sense of accomplishment.
b. McClelland found that people with a high need for achievement:
• 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 n-ach individuals prefer work that has a
moderate probability of success, ideally a 50% chance. They prefer either to work
alone or with other high achievers.
• They do not like having external events or other people interfere with their
progress towards the goals.

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 2. Need for Affiliation (n-Affil):
a. The need for affiliation is characterized by a desire to belong, an enjoyment of
teamwork, a concern about interpersonal relationships, and a need to reduce
uncertainty.
b. These people are team players. They tend to conform to the norms of their work group.
High n-affil individuals prefer work that provides significant personal interaction.
c. This person favors collaboration over competition and does not like situations with
substantial risk or high uncertainty.

3. Need for Power (n-Pow):

a. The need for power is characterized by a drive to control and influence others, a need to
win arguments, a need to persuade and prevail.
b. 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.
c. People in this category enjoy work and place a high value on discipline.

Henry Murray’s Manifest Needs Theory:

Manifest needs theory assumes that human behavior is driven by the desire to satisfy needs.
• Manifest needs theory laid the groundwork for later theories, most notably McClelland’s learned needs
theory.
• Murray identified needs as one of two types:
o Primary needs: Primary needs are basic needs that are based upon biological demands, such as the
need for oxygen, food, and water.
o Secondary needs: Secondary needs are generally psychological, such as the need for nurturing,
independence, and achievement. While these needs might not be fundamental for basic survival, they
are essential for psychological well-being.

Implication in Workplace

People with diverse needs are motivated differently.

1. High need for achievement - High achievers should be given challenging projects with
reachable goals. They should be provided frequent feedback. While money is not an
important motivator. Rather, it is an effective form of feedback.

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 2. High need for Affiliation - Employees with a high affiliation need perform best in a
cooperative environment.
3. High need for power - Management should provide power seekers the opportunity to
manage others. While n-pow people are attracted to the leadership role, they may not
possess the required flexibility and people-centered skills.
4. According to the research by McClelland and others, Effective managers show high on
achievement and power and low on affiliation.

Concept Check:
Suppose a Company is starting an overly critical project with the client. The success of this project is especially
important for the company. The company has three Roles and three people to whom those roles need to be assigned.

Roles:
Role A: Business Analyst which requires lot of clients interactions.
Role B: Tech Lead which requires finding solutions for challenging tasks.
Role C: Project Manager which requires meeting deadlines, planning, and delegating tasks and decides rewards and
Punishments.

People:
Ram: He has need for achievement
Sham: He has need for Power
Laxman: He has need for Affiliation.

Question - What should be the right combination of roles to be assigned to Ram, Sham and Laxman
A) Ram (Tech Lead), Sham (Project Manager), Laxman (Business Analyst)
B) Ram (Tech Lead), Sham (Business Analyst), Laxman (Project Manager)
C) Ram (Business Analyst), Sham (Tech Lead), Laxman (Project Manager)
D) Ram (Project Manager), Sham (Tech Lead), Laxman (Business Analyst)

Answer – Option A.
• Ram has need for achievement which means he likes challenges and hence role of tech lead is perfect for him.
• Sham has need for power and since project manager requires delegating tasks and deciding rewards and
punishments. Hence, Project Manager has the Power and is fitting role for Sham.
• Laxman has need for affiliation. Business analyst role requires interaction with client which means affiliation
with people. Hence, he is fit for Business Analyst

4.4 Herzberg's Two Factor Theory

Herzberg's Two Factor Theory is also known as the Motivation Hygiene Theory. It states two
different facets of motivation, the first being ‘hygiene’ factors or job context. The second factor
is ‘satisfiers’ or job content, i.e. the intrinsic qualities of the job. According to Herzberg, there

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 are some job factors that result in satisfaction while there are other job factors that prevent
dissatisfaction. According to Herzberg, the opposite of “Satisfaction” is “No satisfaction” and
the opposite of “Dissatisfaction” is “No Dissatisfaction”.

So the satisfiers/motivators provides satisfaction or motivation. Hygiene factors just decides

employee being dissatisfied or not dissatisfied

1. SATISFACTION (MOTIVATION): According to Herzberg, the hygiene factors cannot be

regarded as motivators. The motivational factors yield positive satisfaction. These factors
are inherent to work. These factors motivate the employees for a superior performance.
These factors are called satisfiers. These are factors involved in performing the job.
Employees find these factors intrinsically rewarding. Motivational factors include:
• Achievement and Recognition
• Work itself.
• Responsibility and advancement
• Growth and Promotion

2. DISSATISFACTION (HYGIENE): Hygiene factors also known as maintenance factors are not
intrinsic part of the job but are related to conditions under which job is performed. Hygiene
factors are those factors which when adequate/reasonable in a job, pacify the employees
and do not make them dissatisfied but do not motivate them. But if these factors are

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 absent / if these factors are non-existent at workplace, then they lead to dissatisfaction.
These factors are extrinsic to work. Hygiene factors are also called as dissatisfiers or
maintenance factors as they are required to avoid dissatisfaction. Hygiene factors include:
• Company policy
• Administrative policies
• Supervision and Salary
• Interpersonal relations and working conditions.
• Job Security

Herzberg also says that it is not only these factors but the personality of the individual also
an important factor. Based on personality there are 2 types of individuals – motivation seekers
and maintenance seekers. The motivation seekers generally are individuals who are primarily
motivated by the satisfiers. On the other hand, maintenance seekers are more concerned
about dissatisfiers.

Another point mentioned by Herzberg is that today’s motivators would be tomorrow’s

hygiene because once they get anything it does not motivate them any longer.

Four Situations as per Herzberg

According to the Two-Factor Theory there are four possible combinations:

1. High Hygiene + High Motivation: The ideal situation where employees are highly motivated
and have few complaints.
2. High Hygiene + Low Motivation: Employees have few complaints but are not highly
motivated. The job is viewed as a paycheck.
3. Low Hygiene + High Motivation: Employees are motivated but have a lot of complaints. A
situation where the job is exciting and challenging, but salaries and work conditions are not
up to par.
4. Low Hygiene + Low Motivation: This is the worst situation where employees are not
motivated and have many complaints.

Criticism of Herzberg’s theory

1. Herzberg drew conclusions from a limited experiment covering engineers and accountants.
Engineers, accountants, and other professionals like them may like responsibility and
challenging jobs. But the general body of workers are motivated by pay and other benefits
(Hygiene factors)
2. Herzberg’s inference regarding differences between satisfiers and hygiene factors cannot
be completely accepted. People generally attribute the causes of satisfaction to their

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 achievements. But more likely they attribute their dissatisfaction to obstacles presented by
the company’s policies or superiors than to their deficiencies.

Implication of Herzberg’s theory

1. The Two-Factor theory suggests that the managers should focus on ensuring the
acceptability of the hygiene factors to avoid employee dissatisfaction.
2. Furthermore, the managers must make certain that the work is motivating and rewarding
so that the employees are motivated to work and perform firmer and better.
3. The basic purpose and characteristic of a job is to make use of the employee’s expertise and
competencies to the maximum. A continuous concentration on the motivational factors
can strengthen work-quality.

4.4.1 Herzberg's KITA

Herzberg often referred to hygiene factors as "KITA" factors, which is an acronym for "kick in
the ass", the process of providing incentives or threat of punishment to make someone do
something. There are three types of KITA’s.
1. Negative Physical KITA: Threatening the employee to do work.
2. Negative Psychological KITA: Playing emotional games to get the work done.
3. Positive KITA: Giving just promotion or status without recognition.

Concept Check:

Question – Identify the framework developed by Frederick Herzberg, that suggests, there are certain factors in the
workplace that can cause job satisfaction and a separate set of factors can cause dissatisfaction. Which theory are we
talking about?
A. Equity Theory
B. Two Factor Theory
C. Self-Efficacy Theory
D. Competency Theory

Answer – Option B

Question – In the field of motivation, which of the following is not a hygiene factor as per Two Factor Theory?
A. Supervision
B. Recognition
C. Salary
D. Job Security

Answer – Option B

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 4.4.2 Relationship between Herzberg and Maslow Models
There is great similarity between Herzberg and Maslow models. The maintenance/hygiene and
Motivator factors of Herzberg theory can be mapped to lower and higher order needs of
Maslow as shown in figure below:

Maslows physiological, security and social needs come under Herzberg maintenance factors
whereas self-fulfillment needs come under Herzberg’s motivators. It must be noted that part
of esteem need comes under maintenance factors and another under motivational factors. The
esteem needs are divided because esteem can be related to status or recognition.

Difference between Maslow and Herzberg Model

1. Basis of theory: Maslow’s theory is based on the hierarchy of human needs. He

identified five sets of human needs (on priority basis) and their satisfaction in motivating
employees while Herzberg refers to hygiene factors and motivating factors in his theory.
2. Nature of theory: Maslow’s theory is rather simple and descriptive; the theory is based
long experience about human needs. While Herzberg’s theory is more prescriptive. It
suggests the motivating factors which can be used effectively. The theory is based on
actual information collected by Herzberg after interviewing 203 engineers and
accountants.
3. Motivator: According to Maslow’s model, any need can act as a motivator provided it is
not satisfied while Herzberg in his dual factor model, hygiene factors (lower levels) do
not act as motivators, only higher order needs(achievement, recognition, challenging
work) act as motivators.

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 4.5 Relationship between above Maslow’s, Herzberg’s, Alderfer’s and McClelland’s Theory
Although the Content theories are different from each other, but the overall essence remains
the same. There are lower and higher-level needs, Higher level needs are intrinsic motivators
whereas lower-level needs are extrinsic motivators and Manager needs to motivate an
individual as per his/her needs.

The figure below shows the relationship between various theories. For example, the Hygiene
factors in the Herzberg theory are the same as lower-level needs in Maslow’s Hierarchy.

4.6 McGregor’s Theory X and Theory Y

Douglas McGregor developed the theory that there are two basic management behavior types,
Theory X managers and Theory Y managers, each of which has a quite different set of
assumptions about others.

Theory X managers - Theory X managers are authoritarian and controlling, using threat and
punishment to coerce people into working hard. The carrot and stick approach to motivation is
followed. People are shown carrot (rewards) to get the work done and if they are not able to
meet the targets then they are punished. They tend not to produce elevated levels of
performance from their teams. Following are the assumption of theory X -
1. People have an inherent dislike of work and will try to avoid it at all costs.
2. People need to be coerced, controlled, and threatened to work hard.
3. People are not ambitious and dislike responsibility, preferring to be directed.
4. Above all else, people want security.

Theory Y managers - Theory Y managers are democratic, consultative and empowering, helping
people to develop and encouraging them to take the initiative. These enlightened managers
tend to achieve the best results from their teams. Theory “Y" managers gravitate towards
relating to the worker on a more personal level, as opposed to a more conductive and teaching

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 based relationship. As a result, Theory Y followers may have a better relationship with their
higher ups, as well as potentially having a healthier atmosphere in the workplace.

Theory Y Assumptions:
1. People naturally put as much effort into their work as they do into play or rest.
2. People will exercise self-direction and self-control if they are committed to a goal
3. People will be committed to an organization if they are satisfied in their job
4. People relish and seek responsibility.

Interpretation/Difference between Theory X and Theory Y

1. Level of Needs: Theory of X assumes Maslow’s lower-level needs dominate in employees.

Whereas Theory of Y, assumes Maslow’s higher-level needs dominate in employees.
2. Type of Leadership: Theory X focusses on autocratic leadership whereas theory Y focusses
on democratic leadership
3. Situations: Theory X is more applicable to handle unskilled and uneducated low-level
employees whereas theory Y is more applicable for skilled and educated employees
4. Centralization or Decentralization: Theory X emphasizes scalar chain system and
centralization of authority in the organization while Theory Y emphasizes decentralization of
authority and greater participation in decision making.

Concept Check

Question - Ram and his wife are managers in the company. Ram is more of a person who believes that
salary and Job security are more important in life. He likes to threaten and motivate people. Ram’s wife is
an outgoing person who gives importance to achievement and recognition and doing what one can do.
Which of the following is true statement?
A) Ram and his wife have opposing views in life as Ram wants security, and his wife wants recognition.
Ram is theory X type while his wife is theory Y type. Both are at lower level of Maslow.
B) Ram and his wife have same views as Job Security will ultimately lead to recognition. Both are theory
X leaders. Both are at lower level of Maslow.
C) Ram and his wife have opposing views in life as Ram wants security, and his wife wants recognition.
Ram is theory X type while his wife is theory Y type. Ram is at lower-level needs of Maslow while his
wife at higher level needs to Maslow.
D) Ram and his wife have same views as Job Security will ultimately lead to recognition. Both are theory
X leaders. Ram is at lower-level needs of Maslow while his wife at higher level needs of Maslow.

Answer - Option C

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 4.7 Theory Z (US-Japanese Management Style) by William Ouchi
The founder of Theory Z is William Ouchi, he wrote a book called “Theory Z: How American
Business Can Meet the Japanese Challenge (1981)”. In this book, Ouchi shows how
American corporations can meet the Japanese challenges by adopting a highly effective
Japanese Management Style with little variations.

The major features of Theory Z are as follows.

1. Strong bond between Company and the Employees: Theory Z suggests long term
employment without any layoffs.

2. Participation of Employees in decision making and Mutual Trust or High degree of

confidence.

3. Human Resource Development: Ouchi explains that the employees must be very
knowledgeable about the various issues of the company, as well as possess the competence
to make those decisions. Theory Z stresses the need for the workers to become
generalists, rather than specialists, and to increase their knowledge of the company and its
processes through job rotations and constant training. No Unions of workers is formed in
this style.

4. Integrated Structure: No formal structure is recommended in Theory Z. The organization

should be based on teamwork and employees must develop team spirit, but there should
be Equality in terms of common uniforms, canteens, parking etc. for all categories of
employees.

5. Down-up Decision-Making system called Ringi System: Ringi (also ringi seido, ringi system)
is a decision making process in Japanese management systems. It is a bottom-up
approach of decision making in which suggestions are forwarded by workers to managers
related to improvement areas

6. Employment of Quality Circles: A quality circle is a participatory management technique

that enlists the help of employees who are your colleagues in solving problems related to
their own jobs.

Assumptions of theory Z manager.

Workers tend to want to build happy and intimate working relationships with those that they
work for and with, as well as the people that work for them and workers have a high need to

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 be supported by the company, and highly value a working environment in which such things as
family, cultures and traditions, and social institutions are regarded as equally important as the
work itself. These types of workers have a very well-developed sense of order, discipline, and a
moral obligation to work hard, and a sense of cohesion with their fellow workers.
Workers can be trusted to do their jobs to their utmost ability, so long as management can be
trusted to support them and look out for their well-being.
Concept Check:
Question - Identify the Motivation theory in which a person aims at gaining new knowledge, has desire for beauty
and wants to help others etc. is known as __________?

A. Maslow’s Extended Theory of Motivation

B. Alderfer’s ERG Theory
C. Herzberg’s Two Factor Theory
D. Adam’s Equity Theory

Answer – Option A

Question - There are various theories of motivation given by different people from time to time, one such theory is
ERG theory, in the same regard, what does R for in ERG theory of motivation?

A. Relation
B. Relatedness
C. Relative
D. Recycle

Answer – Option B

4.8 Instinctive Theory of Motivation

This theory says that the root of all motivations is the motivation to survive. From our
motivation to survive, all other motivations emerge. And, as we act or behave with this kind of
motivation, all our actions are therefore considered as instincts. Learning or Conditioning does
not affect the motivation to behave in certain way-

Some More Examples where the motivation to act is because of biological factors

• Bees communicating the location of food to each other.

• Army ants embarking on synchronized hunting expeditions.
• Spider making a spider web so it can catch food.
• A baby crying for food because it is hungry.
• Humans salivate when they are about to eat.
• A dog barking when it senses danger.

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 • Wolf pups are born with more natural aggression than domestic dogs.
• A fly circling a light bulb.
• A cat raises his tail when it senses danger.

The motivation in instinctive theory is driven by biological needs such as hunger, thirst etc.

5 System view of Motivation

System view of motivation tells a manager that motivation is interplay of following 4 factors.

5.1 Individual
Every induvial has different needs and interest. So, motivation is also different for everyone.

5.2 Organization
The culture of the organization depends on following 8 values known as OCTAPACE value,
where, O stands for Openness & Risk Taking, likewise, C – Confrontation, T – Trust, A –
Autonomy, P – Proactivity A – Authenticity, C – Collaboration, E - Experimentation

5.3 Job Characteristics

Job characteristics are another important determination of motivation. As per Hackman, the
job characteristics which impact motivation are

1. Skill Variety: Refers to usage of different skills.

2. Task Identity: Refers to extent to which the job is a complete module in itself.
3. Task Significance: Refers to importance of task to the pride of the organization.
4. Autonomy: Freedom in executing the task
5. Feedback: Refers to information regarding progress or performance in the task

The above characteristics create psychological states in a worker leading to positive work
motivation.

5.4 Exogenous Variable

Workers professional life is strongly assonated with personal life. They cannot be separated.
Exogenous variable can impact the motivation of a person. For example, a bad relationship with
wife can impact his motivation

6 Job Satisfaction
Job satisfaction is pleasurable state or feeling in an individual with respect to his work. Some
theories of Job satisfaction are -

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 1. Herzberg’s Motivation Hygiene theory: As per this the presence of satisfiers such as
recognition. Achievement will lead to more job satisfaction as compared to presence of
hygiene factors.
2. Need-Fulfillment theory: As per this the person is satisfied if he gets what he wants. We can
connect this with Maslow theory of needs where the need of a person would depend on
where he is the pyramid.

6.1 Relationship between Job Satisfaction and Productivity

There are 2 views on this.

1. Job satisfaction impacts productivity: The logic is happier person will more effort in Job
performance.
2. Happier worker is not necessarily a productive worker: The logic is given by set of
reasons listed below-
a. It is the Job performance which leads to Job Satisfaction and not that Job
satisfaction leads to Job performance.
b. The expectations of a person form the job may be low. So, by performing less he is
happy, but he is not productive.

7 Importance of Motivation in an Organization

The importance of motivation in an organization may be summed up as follows:

1) High Performance Level: A motivated employee put higher performance as compared to

other employees because a motivated employee attempts to use their maximum ability in
performing a job while other employees just use a part of their ability. Moreover, a motivated
employee increases their ability through learning which further increases their performance.

2) Low Employee Turnover and Absenteeism: Motivated employee stay in the organization and
lower their absenteeism. High turnover and absenteeism not only affect the productivity of an
organization but recruiting and developing large number of new employees take a lot of time
and resources. Moreover, high employee turnover also affects the reputation of the
organization in a negative way.

3) Acceptance of Organizational changes: An organization has to keep changing with the

changing environment, and motivated employees will react to all the changes proactively.

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 Summary Sheet
Chapter – Motivation Part 2

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 Contents
1 Motivational Theories ...................................................................................................................... 3
2 Process Based Theories.................................................................................................................... 3
2.1 Vroom’s Expectancy Theory ..................................................................................................... 3
2.2 Motivational Force ................................................................................................................... 5
2.2.1 Implications of Vroom Expectancy Theory ........................................................................ 5
2.2.2 Criticism of Expectancy Theory ......................................................................................... 5
2.3 Adam’s Equity Theory .............................................................................................................. 6
2.3.1 Three Types of Inequity .................................................................................................... 7
2.3.2 Re-establishing Equity ...................................................................................................... 7
2.3.3 Referents in Equity Theory ............................................................................................... 8
2.3.4 Implications in Workplace ................................................................................................ 8
2.3.5 New Perspective on Equity Theory ................................................................................... 8
2.3.6 Organizational Justice ....................................................................................................... 9
2.3.7 Criticism of Adams Equity ................................................................................................. 9
3 Concept of Morale ......................................................................................................................... 10
3.1 Nature of Morale ................................................................................................................... 11
3.2 Factors Affecting Morale ........................................................................................................ 11
3.3 Significance of Morale ............................................................................................................ 11
3.4 Relation between Morale and Productivity ............................................................................ 12
3.5 Difference Between Motivation and Morale ........................................................................... 13
4 Financial and Non-financial Incentives ........................................................................................... 13
5 Application of Motivation .............................................................................................................. 14

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 1 Motivational Theories
In the motivation part 1, we have understood that motivational theories are basically
categorized into the following two categories.

1. Content Theories (Traditional Theories): Content Theories look at specific needs that
motivate people. This category basically concentrates on what motivates an individual.

2. Process Theories (Contemporary Theories): Process theories attempt to explain how the
process of motivation works in an individual.

In this document we will be covering process bases motivational theories.

2 Process Based Theories

First, we will start with one of the world-famous theories of motivation, which is Vroom
Expectancy Theory of motivation.

2.1 Vroom’s Expectancy Theory

According to this theory, individuals ask themselves three questions.

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 I - The First Question

The first question is whether the person believes that prominent levels of effort will lead to
outcomes of interest, such as performance or success. This perception is labeled expectancy.
For example, do you believe that the effort you put forth in an office is related to performing
well (performing the Job well) in that class? If you do, you are more likely to put forth effort.
This is also called Effort ➡️ Performance i.e. Whether effort put in will lead to the desired
performance.

II - The Second Question

The second question is the degree to which the person believes that performance is related
to subsequent outcomes, such as rewards. This perception is labeled instrumentality. For
example, do you believe that performing your Job well in office is related to rewards such as
promotion? If you do, you are more likely to put forth effort. This is also called Performance
➡️ Outcome i.e., whether the desired performance will result in the outcome or the rewards.

III - The third Question

Finally, individuals are also concerned about the value of the rewards awaiting them
because of performance. The anticipated satisfaction that will result from an outcome is
labeled Valence. For example, do you value getting promoted? If these outcomes are
desirable to you, your expectancy and instrumentality is high, and you are more likely to put
forth effort. But in case you do not value promotion then you will not be motivated to work
hard because you do not value the rewards.
The valence refers to the value the individual personally places on the rewards, it can range
between -1 to 1. Wherein,
• -1 (Minus one), represents an applicant is trying to avoid the outcome.

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 • 0 (Zero), represents an applicant is trying to be indifferent to the outcome
• +1 (Plus one), represents an applicant is welcoming the outcome.
For the valence to be positive, the person must prefer attaining the outcome to not attaining
it.

2.2 Motivational Force

Now, as per Victor Vroom, the motivational force is defined as follows –
Motivational Force (MF) = Expectancy x Instrumentality x Valence
I. When deciding among behavioral options, individuals select the option with the
greatest amount of motivational force (MF). Expectancy and instrumentality are
attitudes (cognitions), whereas valence is rooted in an individual's value system.
II. Examples of valued outcomes in the workplace include, pay increases and bonuses,
promotions, time off, new assignments, recognition, etc.
III. Sometimes this formula is also written as Force = Valence * Expectancy which states
that motivation is a product of anticipated worth of an outcome to a person and
perceived probability that person would be able to achieve the outcome
As per Vroom, it is the perception and the value the individual place on certain goals. This
model explains how individuals’ goals influence his efforts.

2.2.1 Implications of Vroom Expectancy Theory

1. To Increase the Expectancy level, the managers should make sure that the work assigned to
the employees is as per their skill set or they should be trained properly before being assigned
task which requires completely new skill set.
2. To enhance the performance-outcome tie (Instrumentality), managers should use systems
that tie rewards very closely to performance.

2.2.2 Criticism of Expectancy Theory

Following is the Criticism of Expectancy Theory -

1. The model underlying the expectancy theory states that Motivation is equal to
Expectancy multiplied by Instrumentality multiplied by Valance. Under the theory, if any
of the factors are zero, the employee will be unmotivated. However, in the real world,
employees work hard at times even if they're not sure they'll get the reward they hope
for. "Oxford Handbook of Motivation" implies that the equation should be additive:
Motivation equals Expectancy plus Instrumentality plus Valance.
2. The theory won't work in practice without active participation from managers.

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 2.3 Adam’s Equity Theory

According to John Stacy Adams, author of the theory, people judge the fairness of their work
situation in 2 ways:

1. By comparing the inputs that they contribute to the outputs that they receive from their
job. This concept is also known as Equity Norm.
2. Employees determine what their equitable return should be after comparing their inputs
and outcomes with those of their co-workers. This concept is referred to as "social
comparison".

Inputs: This term encompasses the quality and quantity of the employee’s contributions to
his or her work. Typical inputs include time, effort, loyalty, challenging work, commitment,
ability, adaptability, flexibility, tolerance, determination, enthusiasm, personal sacrifice, trust
in superiors, support from co-workers and colleagues, skill.

Outputs: Outputs are defined as the positive and negative consequences that an individual
perceives a participant has incurred because of his/her relationship with another. Outputs
can be both tangible and intangible. Typical outcomes are job security, esteem, salary,
employee benefits, expenses, recognition, reputation, responsibility, sense of achievement,
praise.

Note: This Theory is also based on Cognition or the Cognitive Process

The following picture is very important to understand the core theme of this theory of
motivation.

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 A person will feel angry and demotivated when: -

1. When people feel that their inputs far outweigh the outputs they receive in return,
motivation, and productivity slumps. The greater the perceived disparity between the
inputs and the outputs, the greater the demotivation.

2. Another important aspect is that people tend to compare their output/input with the
output/Input of others (references in the market).

2.3.1 Three Types of Inequity

When one compares his Input/output ratio with his colleagues then he/she may realize 3
types of Inequity

1. Overpaid Inequity: When one feels his outcomes are more as compared to his inputs in
relation to others. Person experiences guilt
2. Underpaid Inequity: When one feels his outcomes are less as compared to his inputs in
relation to others. Person Experiences anger or dissonance
3. Equity: When one feels his outcomes as compared to his inputs are equal in relation to
others

2.3.2 Re-establishing Equity

Now, in this section we will learn what will an employee do if the inequality exists, then how
the employee will try to establish the much-needed fair balance. Based on equity theory,
employees who perceive inequity will make one of six choices:

1. Change inputs: A person can change his inputs depending upon whether the perceived
inequity is positive or negative.
2. Change outcomes: A person may attempt to change his outcomes by requesting a salary
increase or asking for a bigger office.
3. Distort perceptions of self: Rather than changing the inputs and outcomes, people may
change their perceptions of their inputs or out-comer. If they feel overpaid, they may
begin to ‘See’ more responsibility and duty in their job.
4. Distort perceptions of other: People may change their perceptions of the inputs and
outcomes of the comparison other.
5. Choose a different referent: If comparing oneself with a specific person creates feelings
of inequity, choosing someone else for comparison purposes may result in less
uncomfortable feelings.
6. Leave the field: A person may withdraw from the situation that produced the feeling of
inequity.

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 2.3.3 Referents in Equity Theory
The people or situations with which person will compare his/her present situation are as
follows-

1. Self-inside: An employee’s experience in a different position inside his present

organization. Example would be employee comparing his inputs/outputs in earlier junior
position or his post in a different department.
2. Self-outside: An employee’s experience in a situation outside the present organization.
Example would be employee comparing his inputs/outputs with his earlier job in earlier
company.
3. Other-inside: Another employee or group of employees inside the employee’s present
organization. Example would be employee comparing his inputs/outputs with other
people in the same organization.
4. Other-outside: Another employee or employees outside the employee’s present
organization. Example would be employee comparing his inputs/outputs with other
people in his earlier organization.

2.3.4 Implications in Workplace

Following are the implications of the Adam’s equity theory.

1. People always try to maximize their outcomes, so managers should try to take maximum
work from their subordinates and should pay them according to their output. Individuals
in an inequitable relationship feel 'distressed'.
2. Equity Theory in business introduces the concept of social comparison.
3. It’s based on the perception of the employees. We form perceptions of what constitutes
a fair ratio (a balance or trade) of inputs and outputs by comparing our own situation
with other 'referents' and People measure the totals of their inputs and outcomes..

2.3.5 New Perspective on Equity Theory

One important theoretical revision proposes three types of individuals based on preference
for Equity:

1) Benevolent, those who prefer their own output/input ratios to be less than those of
their relational partner. In other words, the benevolent prefers to be under-
benefitted.
2) Equity Sensitives, those who prefer their own output/input ratios to be equal to those
of their relational partner.
3) Entitles, those who prefer their own output/input ratios to exceed those of their
relational partner. In other words, the entitled prefers to be over-benefitted.

Although equity theory’s propositions have not all held up, the hypothesis serves as an
important precursor to the study of Organizational Justice.
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 2.3.6 Organizational Justice

Organizational justice refers to employee perceptions of fairness in the workplace. These

perceptions can be classified into three categories: distributive, procedural, and
interactional.

1) Distributive Justice: Distributive justice is conceptualized as the fairness associated with

decision outcomes and distribution of resources. The outcomes or resources distributed
may be tangible (e.g., pay) or intangible (e.g., praise). Distributive justice is composed of
three main components: Equity, Equality and need.
• Equity focuses more on rewarding employees based on their contribution.
• Equality on the other hand provide each employee with the same compensation.
• Need is providing a benefit based on one's personal requirement.

2) Procedural justice is defined as the fairness of the processes that lead to outcomes.
Procedural justice is the appropriateness of the allocation process.

3) Interactional justice is the standard applied to how employees relate to each other at
work. This is not just determining how managers treat their team members; it can also
relate to how co-workers and colleagues interact with each other.
Interactional justice should be broken into two components:
• Interpersonal justice refers to perceptions of respect and propriety in one's
treatment i.e., if an employee is treated with dignity and respect in an organization.
• Informational justice relates to the adequacy of the explanations given in terms of
their timeliness, specificity, and truthfulness i.e., whether manager provide
employee with information for key decisions and important organization matters.

2.3.7 Criticism of Adams Equity

Adams Equity theory has been criticized for both the assumptions and practical
application of equity theory.

• Researchers have questioned the simplicity of the model.

• Critics questioned its Environmental validity as the research backups the basic
propositions of equity theory has been conducted in laboratory settings, and thus has
questionable applicability to real-world situations.

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 • Critics argued that people might perceive equity/inequity not only in terms of the
specific inputs and outcomes of a relationship, but also in terms of the overall system.
• Since every organization has some structure, so it is not easy for the managers to
have equity in the whole organization.

Concept Check

Question – Identify the theory of motivation where a person compares his inputs and output (rewards) with co-
worker.
A. Equity Theory
B. Comparison Theory
C. Productivity Theory
D. Efficiency Theory

Answer – Option A

Question - Ram is earning 5000 per month in a company whereas Sham is earning 50,000 per month in the same
company. As per equity theory which one among them would be happier?
A. Ram would be happier than Sham as with money comes lot of tension.
B. Sham would be happier as he is earning more than Ram and as per equity theory when you earn more than your
peers then you are happy.
C. It cannot be determined since we do not know who Ram and Sham compare themselves with as per equity theory.
D. Both would be happy because it is not the money but the work culture and challenge in the work which matters
as per equity theory.

Answer – Option C:
Explanation - You might be confused in the choices B and C. But since its nowhere given that Ram and Sham compare
themselves with each other, so we cannot determine whether they believe they are getting compared to others.

Now, let’s cover some other related concepts of motivation.

3 Concept of Morale
Morale (also known as esprit de corps) is the capacity of a group's members to maintain belief
in an institution or goal, particularly in the face of opposition or hardship. Morale is usually
assessed at a collective, rather than an individual level.

In nutshell morale is the degree of enthusiasm and willingness with which the members of
a group work to perform their assignments.

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 3.1 Nature of Morale
1. Degree of Morale: Morale in itself is not a positive or negative word. It is an ‘overall
climate prevailing in the organization’ It is the degree of Moral which matters. Morale
can be high or low.
2. Morale represents collective attitude of workers: High morale represents attitude of
satisfaction with desire to continue in the group and willingness to strive for the goals of
the group
3. Morale is multi-dimensional in nature: Morale is a complex phenomenon in nature.

Now, let’s cover the factors affecting morale of the organisation.

3.2 Factors Affecting Morale

The employee morale is an overly complex phenomenon and is influenced by many factors.
The key factors in the determination of levels of morale are as describe below:

1. The Organization: The first factor affecting the employee morale is the organization itself.
The organization influences the worker’s attitudes to their jobs.

2. The Nature of Work: The nature of the work, the worker is expected to perform also
affects his attitude towards the job as well as his morale.

3. The Level of Supervision: The level of supervision received by an employer has

tremendous Influence on his morale. High rate of employee turnover indicates that the
leadership is ineffective.

4. Worker’s Perception of Rewards System: The worker’s perception of past rewards and
future opportunities for rewards affect their morale to a substantial extent. If the workers
regard the rewards as fair and satisfactory, their morale will tend to be higher than if
the perception is in the opposite direction.

5. The Off the Job Activities of the Employee: The relationship of an employee with his
family and work group influences his behavior and attitude while he is on the job.

3.3 Significance of Morale

Morale is an important part of organizational climate. Morale is the total satisfaction one
derives from his job, his workgroup, his organization, and his environment. Morale must
be high to achieve the organizational objectives and

Morale deals with the work environment and is primary factor driving the organization.

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 High morale - High morale implies determination at work- an essential in achievement of
management objectives. High morale results in:

• A keen teamwork on part of the employees.

• Organizational Commitment and a sense of belongingness in the employee’s mind.
• Immediate conflict identification and resolution.
• Healthy and safe work environment.
• Effective communication in the organization.
• Increase in productivity.
• Greater motivation.

Low morale - Low morale indicates mental unrest. It has following features:

• Greater grievances and conflicts in organization.

• High rate of employee absenteeism and turnover.
• Dissatisfaction with the superiors and employers.
• Poor working conditions.
• Employee’s frustration.
• Decrease in productivity.
• Lack of motivation.

3.4 Relation between Morale and Productivity

It is generally assumed that Morale and Productivity have a direct relationship with each
other. But this assumption is wrong. Generally, there is some positive correlation between
morale and productivity, but they are not absolutely related i.e. an increase of 10% in
morale will not always lead to 10% increase in productivity.

There are four possible combinations of morale and productivity

A. High Morale and high Productivity - High Productivity goes with high morale when
workers are highly motivated and trained.
B. Low morale and low productivity - Low Morale and Low Productivity may happen
when workers are highly de-motivated, under-trained or remain untrained.
C. High Morale and Low Productivity - High Morale is associated with low productivity
when employees are merely happy, but they are not motivated to work. Other
reasons of low productivity may be inefficient supervision, faulty materials, low skills
of employees, old technologies etc.
D. Low morale and high productivity - Low Morale is associated with high productivity
when management used strict supervision, better technology, severe punishments for
low productivity. But low morale and high productivity cannot be sustained for longer
time.
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 3.5 Difference Between Motivation and Morale
Though motivation and morale are closely related concepts, they are different in following
ways:

Motivation Morale
Motivation is concerned with needs of an Morale is concerned with overall attitude of the
individual. Thus, motivation takes into group towards the Organization and management
consideration the individual differences among
the employees,
High Motivation is driving force which induces High Moral might not always lead to higher
higher productivity productivity
Higher motivation often leads to higher morale High morale does not essentially result in greatly
of employees motivated employees.

Motivation acquires primary concern in every High morale is a secondary phenomenon because
organization because high motivation essentially high morale may not necessarily lead to higher
leads to higher productivity, productivity

4 Financial and Non-financial Incentives

The term incentives mean inducement towards an action. The incentives can be categorized
as financial or non-financial incentive.

1. Financial Incentives include all those payments in monetary terms that provided to
employees to motivate them for better performance. Financial incentives are used to
satisfy needs like food, shelter, clothing etc. They are tangible incentives and mostly
useful for low level employees. Some of the Financial incentives would be, Salary
increases, Bonus, Profit sharing, Co-partnership with the employees and Fringe benefits
such as club membership, sponsored vacations etc.

2. Non-financial incentives are the one those which do not impact employees in monetary
terms, but they are still important as they help in providing motivation to employees. As
per two-factor theory money is just a satisfier whereas non-monetary factors such as
challenging job acts as a motivator. They are intangible incentives and mostly useful for
higher level employees.

Some of the Non- Financial incentives would be, Interesting and Challenging Job, Social
Importance of the Job, Status, Opportunity for Personal Growth, Opportunity for
Promotion, Praise, Participation in decision making, Job Security, Job Enrichment

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 Concept Check

Question - Which of the following is the indicator of ‘Low Morale’ in team?

A. High Output
B. High Productivity of the employees
C. High labor turnover
D. High level of motivation

Answer – Option C

Question - Indian cricket team has been losing matches one after one for the last two months. The new members
though want to perform well by stretching themselves, but they are feeling helpless as their seniors are not at all
concerned by this. The seniors have earned enough fame and money and they do not think it worthwhile to play for
the country anymore. They do not get the kick while playing. What do you think is missing in the team?

A. Lack of Motivation for Seniors and Juniors

B. Lack of Morale for Seniors and Juniors
C. Lack of Motivation for seniors and Lack of Morale for Juniors
D. Lack of morale for seniors and lack of motivation for Junior

Answer – Option C
Explanation - Seniors do not think it’s worthwhile to play for the country since they already have achieved
everything. They do not feel motivated. Juniors on the other hand are down because group is losing. Hence their
Morale is low, but their motivation is still high as they want to achieve more. But if morale keeps low for a longer
period, then they will lose motivation also.

5 Application of Motivation
The motivation of an employee can be increased through various ways depending up on what
is the motivational pattern of employee. The ways are -

1. Work Design Options - Work design theories basically talk about the different design
options considering two aspects of Job – Number of tasks and complexity of task.
2. Work Schedule Options - A number of work schedule can be given to employees to
help them adjust time between work and personal time. If they are able to balance
their work-life, then they will be satisfied.
3. Designing Reward System - The reward system should be designed considering the
needs of the person.
4. Employee Involvement - Employee involvement is a participative process that used
the input of the employees to increase their commitment towards organization.
5. Empowerment - Empowerment is any process that provides greater autonomy
through the sharing of relevant information.
6. Quality of Life - Quality of work-life refers to creating a good environment for the
people working.
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 Important Points
1. This Summary Sheet shall only be used for Quick Revision after you have
read the Complete Notes.
2. For Building Concepts along with examples/concept checks you should rely
only on Complete Notes
3. It would be useful to go through this Summary sheet just before the exam or
before any Mock Test.
4. Questions in the exam are concept based and reading only summary sheets
shall not be sufficient to answer all the questions.

1 Summary Points
 Communication includes both the transfer and understanding of the meaning of the message
which the sender wants to convey to the receiver.
 In perfect communication, a thought would be transmitted so the receiver understood the
same mental picture the sender intended.
 Communication is an effective tool to achieve Organizational goals. It is interrelated with
concepts such as motivation, coordination, leadership, structure; and decision making in
organizations.

 Communication Process: It refers to steps through which communication takes place between
the sender and the receiver.

Communication process consists of the following eight steps:

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 1. Developing idea by the sender: Conceptualization of the idea to be sent (also called Planning
stage)
2. Encoding: Translation of the idea into a perceivable form understandable to the receiver
3. Developing the message: The message can be written, oral, symbolic or non-verbal such as
body gestures, silence, signs, sounds, etc. or any other signal that triggers the response of a
receiver
4. Selecting the medium: Medium is the way of transmitting the message to the receiver. Air,
sight, sound are 3 important communication channels
5. Transmission of message: Sending of the message from the chosen medium
6. Receiving the message by receiver: Reception of message by the receiver
7. Decoding: Message is decoded by the receiver to understand its meaning
8. Feedback: Receiver’s response to the sender. But it must be noted that feedback is optional,
sometimes there is no feedback in communication.

 Claude Shannon & Warren Weaver Model of Communication

Consists of eight components which are most like the general steps of communication except
Noise:

1. Source: Initiator of conversation

2. Encoder: Transmitter of message into signals (ex. Thought in brain Mouth  Voice)
1. Message: Actual physical product which source wants to convey (ex. In speaking, speech is the
message; when written, writing the message; when we gesture the movement of our arms
and the expressions on our faces are the message
3. Channel: Medium of message transmission
4. Decoder: Reception of message. Converts signal into message
5. Receiver: To whom message is sent
6. Feedback: Receiver’s response to the sender in the form of understanding of the message
7. Noise: Present in each of the above stages of communication. Reduces accuracy of the
message.

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  Study of Communication

It is classified into three main streams:

1. Information Theory: Related to storage and communication of signal processing or data

compression
2. Communication Studies: Related to human communication
3. Bio semiotics: Related to communication between living organisms including plants and
animals

 Importance of Feedback in Communication

Two-way communication takes place when receiver provides feedback to the sender. The
communication without feedback is called one-way communication. Two-way communication
is superior because

1. Refinement and Accuracy: Two-way communication through feedback helps sender to refine
his communication so that it becomes more precise and accurate
2. Confidence in Receiver: Receivers confidence in case of two-way communication as they are
permitted to ask questions and seek clarification from the senders

The problem with 2-way communication is

1. Polarization: Two persons may strongly disagree about some items but may not realize it until
they establish 2-way communication. When they discuss, they will become even more
polarized, taking even more extreme position
2. Cognitive Dissonance: Cognitive dissonance is about internal conflict and anxiety that occurs
when people receive information incompatible with their value system. In 2 -way
communication this gets heightened
 Functions of Communication

1. Management: Communication helps in dealing with lots of management activities efficiently in

many ways, like:
 Information Function

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  Command or Instructive Function
 Influence or Persuasive Function
 Integrative Function
 Better Planning and Decision making
 Facilitation of change
 Control and Coordination
 Connecting various departments of the organization
 Communicating the vision and goals to the employees
 Resolving conflicts between the employees
 Directing employees to do tasks
 Building efficient relationships with customers as well as employees
2. Feedback: Communication helps in giving feedback to the employees regarding their
performance, expectations, guidance etc to motivate them.
3. Emotional Sharing: Employee satisfaction, dissatisfaction or other employee related problems
can be shared through communication

 Communication Networks
When 2 people are involved in the Communication, we call it circuit Communication

There are 6 types of formal small group communication networks:

1. Chain Network: Rigidly follows formal chain of command. Chain is best where accuracy is
required.
2. Wheel Network: Relies on a central figure to act as the conduit for all group communication.
Found in teams having a strong leader. It is the most centralized type of formal communication
network. Useful for task-oriented approach to leadership
3. Circle Network: The information is transmitted laterally among all group members. Each
person can communicate with two neighbors only. A disadvantage of Circular network is that
communication is terribly slow. This network is similar to chain network except that
information flows in a circular direction rather than vertical direction
4. All Channel Network: Permits group members to actively communicate with each other.
Characterizes self-managed teams, where no person takes a leadership. It is the most
decentralized type of formal communication

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 5. Inverted V Network: Subordinate communicates with his immediate superior as well as a
second superior.
6. Y Network: Under the Y network, two subordinates through the hierarchical chain
communicate with a superior. This is similar to chain network, the only difference being that
here 2 subordinates will report to a superior instead of one subordinate reporting to superior
in chain network. This network is less centralized than the wheel network but more flexible
than chain network.

 Channels of Communication: It is a type of media that is used to transfer a message from one
person to another. It affects the flow of information in the company. There are 2 types:

 Formal Communication Channel:

1. Messages in this type of channel follows a chain of command
2. It follows hierarchical structure present in the organization
3. Information like Organization goals, policies, procedures, reports, notes etc. communicate
through this channel
4. Ex. A boss communicating project requirements to his subordinate

 Informal Communication Channel:

1. This type of channel does not follow any hierarchy present in the organization
2. It is informal by that it means it does not carry proof of transcripts or communication between
individuals like formal communication gives

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 3. Ex. Colleagues meeting at cafeteria; Colleagues chatting with each other, etc.
4. It is a type of Grapevine communication
5. It could play a role of distortion as well as constructive role in an organization

 Choice Channels of Communication

Channels differ in terms of Richness. By Richness we mean (i) Rapid feedback and (ii) Sense of
Belongingness and (iii) Number of multiple cues

Video conferencing and Face to Face Conversation will provide rapid feedback and give
personal touch the listener. Hence, they would be rich medium of communication. Reports
and letters are kind of one-way communication providing slow or no feedback and no personal
touch at all

 Directions in Communication Channels

Depending up on levels of sender and receive in the organization, the communication may be
grouped into 2 types

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 1. Inter-Scalar Communication: This happens between two parties who are at the different
level in the hierarchy. The communication between them would be upward or downward
2. Intra-Scalar Communication: This happens between two parties who are at the same level in
the hierarchy. . The communication between them would be lateral

 Downward Communication
1. Follows hierarchical structure of the organization where manager instructs subordinates
2. Helps in assigning goals, providing job instructions, briefing about policies and procedures,
feedback to subordinates

Disadvantages:
1. Distortion/Dilution: Quite often the communication originating at the highest level
gets distorted or diluted on the way to the lower levels. Sometimes the messages
may get lost.
2. Delay: The more the levels the greater the chances of delay. That is why sometimes
managers choose to send their massages directly to the person concerned.
3. Filtering: Sometimes managers may withhold some valuable information from the
employees.
4. One way: It at times does not ask for advice or opinion of the employees. Lack of
feedback from people on the ground is not good for the organization
5. Deterioration of relationship: Heavy reliance on downward communication also
deteriorates the labor-management relationships. Because it does not provide any
scope of direct communication between them.
6. Creation of frustration: Downward communication is directive in nature and many a
times creates frustration in the mind of the employees.

Advantages:

1. Getting Things Done: Downward Communication helps in delegation of tasks.

Delegation means entrusting the subordinates with some responsibilities along with
due authority.
2. To let the people, feel the pride of being well informed: In an Downward
communication plays a significant role in communicating the plans, policies,
strategies and procedures to the lower levels of the organization. Lower-level
workers feel pride in them being informed about everything
3. Facilitate Changes: Change is part of every organization. But change is resisted.
Though downward communication, people can be explained about importance of
change and how it will benefit them
4. Discourage Misinformation: Timely and accurate downward communication will
help people dispel any rumours and will discourage any information being
misrepresented

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 5. Increasing efficiency: Downward communication provides necessary guidance, orders,
instructions and explanations of various complex issues to the subordinates that
ultimately increase the efficiency of the employees.
6. Explaining the complex issues: Managers rely on downward communication to
provide necessary explanations and analysis.
7. Avoiding by-passing of hierarchy: Downward communication takes place by following
the established chain of command of the organization.

 Upward Communication
1. The direction of communication followed is upward i.e., when lower-level ‘employees
communicate to their managers
2. Things communicated by lower-level employees can be feedback to higher-ups, progress
towards goals, pass on information regarding any problems faced

Disadvantage:
1. Psychological: Certain problems, primarily of psychological nature, may come up in
upward communication. For example, managers might not accept workers giving
suggestions
2. Hierarchical: Many managers do not accept suggestions by their juniors. They may not
be patient enough to listen to them or may even suppress the message sent to them
from below. In such a situation the employees may feel let down.
3. Unwillingness: Sometimes subordinates don’t send the information to their superior
willingly. So, the communication system may be disrupted.
4. Bypassing: In the process of upward communication, sometimes workers directly
approach the topmost authority with their suggestions or bypassing their immediate
boss. This is harmful to any organization.
5. Flattery: In order to convince the superior bosses, subordinates can take the help of
flattery and for this reason, subordinates may conceal the true and provide incomplete
information to top level.
6. Risk of distortion of messages:
7. Delay

Advantage:
 Development of plan: The information received from subordinate plays important role to
help development of planning of the organization.
 Providing suggestions and opinions: By upward communication system, subordinate gives
necessary suggestions and opinions to the superiors about the work-related issues of the
organization.

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  Good labor-management relationship: Upward communication I participative in nature.
Here, information is invited from lower-level executives and employees and on the basis of
this information top executive makes a decision. So, good relation between subordinates
and bosses should create for the betterment of the organization.
 Providing feedback:
 Decision making: Top level executives or superiors needed much information before taking
a decision on a particular issue. Subordinates supply this information through the help of
upward communication.
 Developing creative and innovative ideas: Upward communication facilitates easy excess of
the employees or subordinate to the superiors in providing necessary constructive
suggestions and opinions about the work-related issues of the organization.

 Lateral Communication
1. Communication occurs between members of the same workgroup, members at the same level
in separate workgroups, or any other horizontally equivalent workers
2. Ex. Managers of two different departments interacting with each other
3. It saves time and facilitates coordination

Advantages:
 Coordination: Horizontal communication facilities coordination of various
departmental activities
 Reducing Misunderstanding helps to reduce possible misunderstanding and conflict
though meeting, discussion, face to face conversation etc.
 Strengthening group efforts
 Performing interdepartmental communication
 Distortion-free communication
 Bringing dynamism in workplace: It creates an environment of cooperation, teamwork,
and team spirit. This brings dynamism in performing organizational activities.
Disadvantages
 Rivalling attitude: Horizontal communication occurs between the people at the same
rank and position. If there exists any hostility or rivalry between them, they will not
exchange information spontaneously. Moreover, they will conceal their information
intentionally to deprive someone from the real news.
 Interdepartmental conflict: The success of horizontal communication depends on good
relationship between sender and receiver. If there is any conflict, distrust or suspicion
between them, horizontal communication will be ineffective.
 Discouraging attitude of top management: In some cases, top managers discourage
horizontal communication thinking that workers may become friendly with one another
and may create threat for the management.
 Ignoring vertical communication:

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  Diagonal/Crosswise Communication
1. Communication that takes place between a manager and employees of other workgroups
2. It generally does not appear on organizational chart.
3. Ex. To design a training module a training manager interacts with Operations personnel to
enquire about the way they perform their task.

Advantages:
More Practicable way of communication, Boosts Morale, increases coordination and speed of
Communication.

Disadvantages:
Superior might feel infringement of hierarchy, may lead to internal anarchy or animosity and
Superior might show resistance to comply with the suggestions on which he is not consulted
(Ego issues)

 Grapevine Communication
1. It is an informal or unofficial channel of communication
2. It has no direction and can take place between people of any level
3. Deals with casual conversation between workers including personal and business matters
4. Leads to generation of rumor
5. Serves to fill gaps in formal communication
6. Satisfies social needs of workers
7. It is classified into four types:
 Single Strand: Involves the passing of information through a line of persons to the ultimate
recipient

 Gossip: One person seeks and tells the information to everyone

 Probability: Random process in which someone transmits the information to others in
accordance with the laws of probability and then these others tell still others in a similar way

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  Cluster: A person tells the information to the selected persons who may in turn relay (pass)
the information to other selected persons

Grapevine happens mostly in Oral form but sometimes it may happen in written form also.
Informal communication can happen on mobile, emails in a closed group which is called
electronic grapevine

8. Factors causing Grapevine:

 Uncertainty in the organization
 Bias/Favoritism from the management for few employees
 Lack of self-confidence among employees

9. Advantages:
 Information is passed speedily
 Feedback is quick
 Acts as parallel function where formal communication fails
 Acts as a support system for employees or acts as a means for psychological satisfaction
 Increases group cohesiveness among employees

10. Disadvantages:
 Less Credible Information
 Selective information passed
 Creates trouble and hostile environment
 Leakage of sensitive information
 Reduces employee productivity
 Modes of Communication

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  Verbal Communication: Takes place through face-to-face conversations, group discussions,
counseling, interview, radio, television, calls, reports, newsletters, etc. It is classified into oral
and written communication.
 Oral Communication: Process of communication in which messages or information is exchanged or
Communicated within sender and receiver through the word of mouth.

1. Advantages
 Constitutes elevated level of understanding and transparency
 Flexibility in decisions made
 Quick Feedback
 Time and other costs saving
 Efficient conflict resolution
 Helps in team work
 Encourages morale
 Helps in transferring confidential information
 Facilitates Informal Communication

2. Disadvantages
 Not reliable in business work
 Less authentic
 Long speeches are time consuming
 Lead to misunderstanding sometimes
 Attention is required
 Not much legally valid
 No records are maintained

 Written Communication: Messages shared between sender and receiver in written form.
Internal form of written communication can be letter, memo, notices, reports, etc. and
external form of written communication can be advertisements, telegram, fax, posts, etc.

1. Advantages:
 Helps in laying principles of organization
 Record Maintenance
 Accountability of roles and responsibilities
 Precise and explicit
 Helps in legal defense
 Formal in nature
 Record are maintained properly for reference in future

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 2. Disadvantages:
 Costly and uses lots of resources
 Not effective in long distance communication as feedback is not spontaneous
 Time-consuming
 Requires skills and competencies for efficient communication
 Lack of secrecy
 Overemphasis on Formalization

Difference between Written and Oral Communication

Non-Verbal Communication: It refers to the sending and receiving of wordless messages. It

includes gestures, body language, eye contact, posture, tone or facial expressions. Non-Verbal
Communication can take place both in Verbal and Written Communication. Hand gestures,
Body language are part of non-verbal communication in Oral Communication. Even in Written
Communication symbols like smileys exhibit nonverbal communication

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  Types of Non-Verbal Communication:
1. Facial Expressions
2. Gestures: includes waving, pointing, showing fingers, differs from culture to culture
3. Paralinguistic /Vocalic/Prosodics: tone of voice, loudness, inflection, pitch
4. Body language & Posture(Kinesics): way of standing, sitting, moving
5. Proxemics: personal space, depends on type of relationship and culture
6. Eye Gaze/ Oculesics: looking, staring, blinking
7. Haptics: communication through touch, shows affection, familiarity, sympathy
8. Appearance: way of dressing, color, clothing, hairstyle
9. Artifacts: accessories put on, web image
10. Chronemics: role of time in communication, refers to punctuality, willingness to wait, status
indicator, varies from culture to culture, differs in situation or relationship wise
11. Written text: handwriting style, presentation, use of smileys
12. Genetics: eye color, hair color, height

Difference between Verbal and Non-Verbal communication

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 o Barriers to Communication:

o Semantic Barriers
1. Symbols with Different Meanings (Bypassing): Communicators (sender and the receiver)
do not attach the same symbolic meanings to their words. For example- Rest room is used
for toilets, but somebody might perceive it as a place to rest.
2. Technical Jargons: Technical jargon is a word which is used commonly in a particular field
but not in other fields. For example, KT is jargon used in BPO and IT industry which
basically means Knowledge Transfer which other person might not be able to understand
3. Faulty Translations: Sometimes a message for wide circulation is translated from one
language to another. Fault in Translation will make the communication ineffective
4. Use of Gestures having different meanings: Gestures are interpreted differently by
different people. For example, flashing a victory sign with 2 fingers might be interpreted
as number 2
5. Unclarified Assumptions: Sometimes unclarified assumptions lead to communication gap.
6. Ambiguity of words/phrases- Words sounding the same but having different meaning can
convey a different meaning altogether. For example, the words hear and here sound the
same, but they have different meanings?

o Psychological Barriers

Psychological barriers also known as emotional barriers emerge because of psychological

state of message receiver. They are as follows

1. Distrust in the person communicating the message

2. Inattention:
3. Loss of Transmission and Poor Retention:
4. Premature Evaluation: It means interpreting the message even before its transmission
is complete. This happens due to prejudice against the message.

o Organizational Barriers

Organizational Barriers arise because of the working culture of the organization. These are

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 1. Organizational Policy/Rules and Regulations: Suppose policy is that all communication
must be strictly in written form then such policies will restrict smooth communication
flow
2. Status Relationships: The hierarchical relationships also stem the flow of communication.
Subordinates feel hesitant to talk to seniors if they are not supportive
3. Organizational Facilities : Organizational can provide facilities for smooth, adequate,
clear, and timely flow of information. These may be in form of Complaint box, suggestion
box, open door policy, social and cultural gatherings
4. Complexity in Organizational Structure:

o Personal Barriers

Personal Barriers can be categorized as barriers related to subordinates or superiors

Superior Related Barriers

1. Negative Attitude of Superiors towards Communication

2. Fear of Challenge to Authority:
3. Insistence on Proper channel: Sometimes superiors insist on formal channels and do
not like any bypassing in communication. Superiors may thwart any attempt at bypassing
4. Lack of Confidence in subordinates: Superiors feel subordinates are not capable and
may not take their advice seriously
5. Lack of time: Superior feels he is busy and its ok for him to ignore the communication by
subordinates

Subordinate Related Barriers

1. Unwillingness to Communicate: For example, a woman who is getting married might

not share this information as this might impact her promotion opportunities
2. Lack of Incentive: Suppose in spite of giving numerous ideas, the employee got nothing
in return. He would not be motivated to share any such information in future

o Other Barriers
1. Physical Barriers: refers to the nature of the environment, ex. Long distance, different
building, sites, non-up gradation of communication technologies
2. Attitudinal: results through problems with staff, poor management, personal attitude of
employee, insufficient training
3. Fear of being criticized
4. Gender Barriers

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 5. Physiological Barriers: individuals' personal discomfort, caused—for example—by ill health,
poor eyesight or hearing difficulties
6. Rigidity or Dogmatism: People with stubborn views and low listening ability. Attitudes,
opinions, and beliefs possessed by a person prevents him from accepting accurate and
additional information
7. Ideological Barriers: Members of the organization do not share the same ideological
perspectives and orientation. Differences in background education and expectation result in
different social and political views
8. Filtering: Refers to sender's purposeful and deliberate manipulation of information to be
passed on to the receiver
9. Generalization: Few people try to stereotype things based on their experiences and stick to it
10. Halo effect: results from two valued thinking, in this people see things only as dichotomous i.e.
good and bad, right, and wrong, etc. but sometimes this acts as a barrier for effective
communication
o Horn Effect: The horn effect, a type of cognitive bias, happens when you make a snap
judgment about someone on the basis of one negative trait.
11. Stereotyping: In social psychology, a stereotype is any thought widely adopted about specific
types of individuals or certain ways of behaving intended to represent the entire group of
those individuals or behaviors as a whole.
12. Linguistic Barrier: difficulties in communication experienced by people or groups originally
speaking different languages, or even dialects.
13. Emotional Barriers – Although emotional barriers are sometimes also called as psychological
barriers of communication, however in the larger context, Physiological barriers of
communication are related with the limitations of the human body and the human mind
(memory, attention, and perception).

Whereas Emotional barriers to effective communication represent the emotions that may
hold you back from communicating effectively. These emotions may also hold you back from
listening to others attentively and accepting their point of view on matters discussed. Key
emotional barriers include anger, pride, frustration, humour and anxiety.

For example, Because of excessive anger, Ramesh is less likely to be logical in discussions.
Moreover, Ramesh is less likely to contribute productively to solving problems and he is more
likely to oppose other people’s ideas. Thus, Ramesh is dealing with the emotional barrier of
Anger.

o Principles Effective Communication:

1. Clarity- Communication should be clearly and precisely stated

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 2. Objective: The objective of the communication must be clear before we transmit the
message
3. Consistency- Information in the communication should be consistent with the plans, policies
of the enterprise. This will increase the credibility of the Communication
4. Adequacy or Completeness- Information in the communication should be sufficient, neither
too little nor over burdening
5. Timeliness- communication should be timely, neither early nor too late
6. Uniformity- Communication should not be discriminatory
7. Flexibility- Communication should not be rigid, either in form or character
8. Acceptability- Communication should stimulate acceptance and positive response in the
receiver
9. Feedback: Feedback is must and it must be addressed properly
10. Integrity: Various means in communications should complement each other. Verbal
Communication and Non-verbal gestures should be in line with each other
11. Good Listening: Listen Patiently
12. Communication Audits: In communication audits the information known to managers and
employees is compared with actual information to know the degree of distortion of
information

o Cultural aspects of communication

1. Cultural differences exist within countries (tribal/regional differences, dialects etc.), between
religious groups and in organizations or at an organizational level
2. For example: words, colors and symbols have different meanings in diverse cultures
3. All countries have different languages and to have a better understanding of different culture
it is required to have knowledge of languages of different countries
4. About non-verbal communication, paralinguistic, proxemics, artifacts, chronemics, kinesics,
differ from culture to culture and create problems while communicating
5. Ethnocentrism where one person feels his culture is superior to others also creates problem in
communication

Additional Information: High Context Culture Vs Low Context Culture

 High-context cultures: Cultures that rely heavily on nonverbal and subtle situational cues in
communication. For Example: Japanese, Chinese culture
 Low-context cultures: Cultures that rely heavily on words to convey meaning in
communication. For example: Scandinavian, Swiss, German culture

o Role of IT in communication
1. Advantages:
 Money and time can be saved as it is cheap as well as fast to move information around
 Video conferencing saves time on flights/accommodation
 It removes isolation and provides support systems to people who need it
 It is available 24x7

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  It helps reduce red tapism/delays and corruption in the work processes

2. Disadvantages:
 Loss of face-to-face communication often results in loss of personal touch
 There is always an element of uncertainty regarding the authenticity of information
 Virus, fraud, identity theft are other concerns

o Some Fringe Topics

 Reflective Listening
 Reflective listening is a communication strategy involving two key steps: seeking to
understand a speaker's idea, then offering the idea back to the speaker, to confirm the
idea has been understood correctly. It can be characterized as personal, feeling oriented
and responsive.
 Reflective Listening encourages two-way communication.
Two-way Communication: One way Communication:
Two-way communication is a form of One-way communication flows from a
transmission in which both parties involved sender to a receiver, but nothing goes back
transmit information. in return.
E.g., Chat room, Instant messaging etc. E.g., Radio, Television etc.

 Five Keys to Effective Supervisory Communication

1) Expressive Speakers
2) Empathetic Listeners
3) Persuasive Leaders
4) Sensitive to feelings
5) Informative Managers

 Defensive and Non-Defensive communication

Defensive communication Non-Defensive Communication

is a communicative behavior that occurs We are using non-defensive communication
within relationships, work environments, and when we ask questions, make statements and
social groups when an individual reacts in predict consequences in an open, sincere way
a defensive manner in response to a self- without trying to control how other people
perceived flaw or a threat from outsiders. respond.

 Persuasive Communication

Persuasive communication means, persuading others to understand what one is trying

to communicate.

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 In order to understand Persuasive communication, we need to understand the two
categories of cognitive processing: Automatic and controlled Processing.
 Controlled processes Controlled processing requires us to pay attention and
deliberately put in effort.
 Automatic attention Automatic processing does not require us to pay attention, nor
do we have to deliberately put in effort to control automatic processes.

Factors determining whether people will use an automatic or controlled process for
reacting to a persuasive message are as following. When we use controlled processing, we
will be harder to persuade as compared to Automatic processing because in controlled
processing we are applying our mind in analysing all the aspects

1) Interest Level: When people are extremely interested in the outcome of a decision,
they’re more likely to process information carefully. That’s probably why people look for
so much more information when deciding about something important (like where to
live) than something relatively unimportant (like which soda to drink).

2) Prior Knowledge: People who are very well informed about a subject area are also
more likely to use controlled processing strategies. In other words, a better-informed
audience is likely to be much harder to persuade.

3) Personality: People who are probably high in need for cognition, a personality trait of
individuals who are most likely to be persuaded by evidence and facts. Those who are
lower in need for cognition are more likely to use automatic processing strategies,
relying on intuition and emotion to guide their evaluation of persuasive messages.

4) Message Characteristics: Messages provided through relatively lean communication

channels, with little opportunity for users to interact with the content of the message,
tend to encourage automatic processing. For example, most television advertisements
go by too fast for deliberative thought; we automatically process these. Conversely,
messages provided through richer communication channels, like a long magazine article,
tend to encourage more deliberative processing

o Implications for Managers

“The less is uncertainty, the greater is the satisfaction.” Distortions, ambiguities, and
incongruities between verbal and nonverbal messages all increase uncertainty and reduce
satisfaction.

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  Reduce ambiguities and clarify the group’s task.
 Extensive use of vertical, lateral, and informal channels also increases communication
flow, reduces uncertainty, and improves group performance and satisfaction.
 Perfect communication is unattainable. Yet a positive relationship exists between
effective communication and worker productivity.
 The potential for misunderstanding in electronic communication is great despite its
advantages.
 Make sure you use communication strategies appropriate to your audience and the type
of message you’re sending.
 Finally, by keeping in mind communication barriers such as gender and culture, we can
overcome them and increase our communication effectiveness.

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 Important Points
1. This Summary Sheet shall only be used for Quick Revision after you
have read the Complete Notes.
2. For Building Concepts along with examples/concept checks you
should rely only on Complete Notes
3. It would be useful to go through this Summary sheet just before the
exam or before any Mock Test.
4. Questions in the exam are concept based and reading only summary
sheets shall not be sufficient to answer all the questions.

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 1 Summary Points

➢ Leadership is a process by which an executive can direct, guide, and influence the behavior
and work of others towards accomplishment of specific goals in a given situation. Leadership
is the ability of a manager to induce the subordinates to work with confidence and zeal. It is
the human factor which binds a group together and motivates them towards goals.

➢ Characteristics of effective leadership includes influencing ability of the leader, adaptability in

different situations, direction ability to achieve organizational objectives, readiness to accept
responsibility, personality, intelligence & maturity to handle group decisions and existence of
followers in the group.

➢ Importance of leadership in an Organization

• Influencing the behaviour of people

• Helps employees in fulfilling their needs.
• Introducing required changes
• Solving conflicts effectively
• Training and Development of Subordinates
• Setting a clear vision
• Motivating, guiding employees, and building morale of employees

➢ Leadership Tasks:

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 ➢ Different between Leadership and Management: A person can be effective manager, an
effective leader, both or neither. Leadership is part of management, but not all of it. All works
performed by leader may not be management work. Outstanding leaders might be poor
managers. Leadership is different from management in following ways

Leadership Management
Derives power from personal characteristics Derives power from authority delegated
Leadership focuses on transformation aspect Management
- focuses on transactional part -
Creating vision and purpose of the organizationDeals with establishing structures and systems
in getting intended results to get those results. Management is about
efficiency, cost-benefit analysis, logistics,
methods, procedures, and policies
Focuses on top line (organizational growth) Focusses on bottom line (profitability)
Leadership is about Motivating, Mentoring, andManagement is about monitoring results
Inspiring against plans and solving problems i.e.
Controlling and Problem Solving
Leader Coaches and advises Manager drives and orders

➢ Formal and Informal Leader: Leadership is exercised in group situation. Since groups may be
either formal or informal. There may be formal leader or informal leader.
Formal leader: Formal leader is the one who is officially appointed to manage a group. He has
authority to exercise the control over the group

Informal Leader: An informal leader has no formal organizational authority to influence others
but possesses special kills and talent to influence and lead other members of organization. He
drives power to influence from his skills such as strong self-motivation, positive attitude,
motivating others. He can satisfy those needs of people which organization is not able to

➢ Leadership Styles: A leadership style is a leader's style of providing direction, implementing

plans, and motivating people. Kurt Lewin recognized that one of the factors that determine a
leader's choice of leadership style is the need to make decisions. Accordingly, he identified 3
different styles:

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 Authoritarian Leadership: Under this, all decision-making powers are centralized in the
leader, as with dictators. These leaders determine the actions of the group with little (if
any) discussion. They tend to exercise total control of the team and the decision-making
process. The leader gives the directions and the team follows them and reports back.
While, this style of leadership may save time in the short term, few new ideas are
generated and generally morale is low. Further there are 3 types of autocratic leaders
1. Strict Autocrat: Those who have negative influence on the team because group
members are uniformed and afraid of leader
2. Benevolent Autocrat: Those who may have positive influence on the team by using his
power to disperse rewards to the group. They can get high productivity from the people
3. Manipulative Autocrat: Those who make people believe they are participating in the
process but in reality, the decision has already been taken

Participative/Democratic Leadership/Consultative Style: These leaders encourage their team

to be actively involved in decision making. They delegate authority to suitably skilled team
members and provide opportunities for others to develop their skills. Because there is an
ongoing exchange of information, the team tends to be productive and efficient. This style of
leader uses a variety of approaches to meet the specific skill levels and motivational needs of
the team members.

Laissez Faire/ Delegative Leadership/Free Reign Style/Permissive Style: Decision-making is

passed on to the sub-ordinates. The sub-ordinates are given complete right and power to
make decisions to establish goals and work out the problems or hurdles. This type of leader
tends to adopt a policy of not 'interfering' with the group by letting them run themselves. This
method is generally only effective in highly specialized fields.

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 ➢ Transactional Leadership(also known as Managerial Leadership):

1. Managers are mostly concerned with supervision, organization, and performance

2. Based on rewards (Carrot) and punishments (Stick) approach

3. Managers believe that employees have only extrinsic needs to be satisfied

4. It is a kind of autocratic style or telling style and Theory X style of management

5. This type of leadership focuses on Maslow’s lower level of needs(Physiological, Safety and
Social) to increase the productivity and execution of objectives

6. Focuses on Management by Exception which means managers do not interfere or pay

attention to subordinate’s work until there is some problem

7. Not suitable in case of highly emotional people in the group

8. These are mostly passive managers who do not believe in innovative or creative work but
rather following established routines and procedures

9. Effective in crisis and emergency situations as well as for projects that need to be carried out
in a specific way.

➢ Transformational Leadership

1. It is a more of selling style or democratic style of management

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 2. Leader works with subordinates to make the needed change and creates a vision to guide the
change through inspiration

3. Believes in innovating and creative work and does not believe in following standard operating
procedures

4. Believes that workers have extrinsic as well as intrinsic needs

5. Believes in inspiring the workforce by setting an example, serves to enhance the motivation
and morale of the workforce

6. Helps to connect self-identity and project’s identity in turn achieving the collective identity of
the organization

7. Transformational Leadership Style was given by James Burns and then extended by Bernard
M. Bass.

8. According to Burns, transformational leadership can be seen when “leaders and followers
make each other advance to a higher level of morality and motivation”. Through the strength
of their vision and personality, transformational leaders are able to inspire followers to change
expectations, perceptions, and motivations to work towards common goals

9. Bernard M. Bass (1985) extended the work of Burns (1978) by explaining

the psychological mechanisms that underlie transforming and transactional leadership.

10. According to Bass, there are four characteristics in the Transformational Leader

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 ✓ Idealized Influence (II) - the leader serves as an ideal role model for followers; the leader
"walks the talk," and is admired for this.
✓ Inspirational Motivation (IM) - Transformational leaders have the ability to inspire and
motivate followers. Combined these first two I's are what constitute the transformational
leader's charisma.
✓ Individualized Consideration (IC) - Transformational leaders demonstrate genuine concern for
the needs and feelings of followers. This personal attention to each follower is a key element
in bringing out their very best efforts.

✓ Intellectual Stimulation (IS) - the leader challenges followers to be innovative and creative. A
common misunderstanding is that transformational leaders are "soft," but the truth is that
they constantly challenge followers to higher levels of performance.

➢ Difference between Transactional and Transformational Leadership

Area Transactional Leadership Transformational

Based on Behavioral Pattern
Basic Based on exchange relation Based on leader’s values, beliefs
between Leader and and needs of followers
followers
Motivation Linked to immediate Inspirational Motivation which
performance through makes them act beyond their scope
rewards and Punishment
Decision Making Use of Structured Process Based on Intellectual Stimulation
Follower Development Through Training and Individualized Mentoring and
Development programs coaching
Influence Process Traditional process of using Influence through idealized
authority Influence by being a role model
Approach Passive and Stable Active and Dynamic
Orientation Leader follows Task Leader follows Goal Orientation
Orientation
Organizational Growth Bottom Line Growth Top Line Growth
Perspective
Tackling Issues Responsive Proactive and Individualized
Consideration
Main Functions of Leaders Determination of Objectives, Providing vision and mission,
clarifying tasks and helping instilling pride, gaining respect and
subordinates in achieving trust, inspiring people
objectives
Time Frame Based on Short term thinking Long term thinking and relations

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 Based on Outcomes
Organizational Processes Low to moderate High to highly effective
Creativity and innovation Low to moderate High to highly effective
Follower Satisfaction Low to moderate High to highly effective
Performance Level Low to moderate High to highly effective

11. Five major personality traits have been identified as factors contributing to the likelihood of an
individual displaying the characteristics of a transformational leader are as follows:

➢ Servant Leadership (Coined by Robert K. Greenleaf)

1. Believes in sharing power and less control on the group
2. Leader exercising such leadership puts others needs first and help people to develop and
perform in their highest possible ways
3. Power pyramid is upside down for this type of leadership that to say leaders exists to serve
the people
4. This leadership style is mostly associated with Participative style of leadership
5. Mostly seen in NGO’s or Politics

➢ Bureaucratic Leadership (Given by Max Weber)

1. Bureaucratic leaders rely on rules and regulations and clearly defined positions within
organizations.
2. Bureaucratic leadership is based on strict hierarchies and often depends on written job
descriptions and organization charts to explain the hierarchy and their relationships.

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 3. Weber, a German sociologist, described six tenets that define bureaucratic leadership:

✓ A strict hierarchy that is formalized by the leadership and strictly adhered to

✓ The organization is controlled by immutable rules, regulations, or laws
✓ The organization is structured along the lines of specialties. People with like talents are
grouped together
✓ The organization has one of two missions:
• “Up-focus,” meaning it focuses on the board of directors or stockholders
• “In-focus,” which means the organization serves a product-oriented goal such as increasing
profits market share
✓ Bureaucratic leadership is impersonal. It is about performance, not the worker
✓ Employment is based on the most technically proficient

➢ Paternalistic Leadership
1. A type of fatherly managerial style typically employed by dominant males where they exert
organizational power and treat employees and partners as part of members of the large
extended family.
2. Used to control and protect subordinate staff that are expected to be loyal & obedient

➢ Narcissistic Leadership
1. These types of leaders are found to have high in self-love
2. They are only interested in their own interests and prioritize their agendas at the expense of
group
3. This is characterized to be mostly unhealthy and destructive kind of leadership found mainly in
individuals with high arrogance, self-absorption, ego, and love for power

➢ Collaborative Leadership
1. This is a type of leadership style that is focused across functional and organizational
boundaries
2. Mostly seen in groups where people are working from different departments, organizations ,
team who have shared goals and values and believing in sharing success
3. General examples where this leadership is applied can be public private partnerships, global
supply chains, on-line collaborations, etc.

➢ Shared Leadership
1. This type of leadership distributes leadership responsibility
2. Commonly thought of as the "serial emergence" of multiple leaders over the life of a team
3. Measurement of Shared Leadership:
✓ Ratings of team’s collective leadership behavior: Measures team member’s perceptions of
leader behavior exhibited by respective team leaders and team members which is done by
distributing leader behavior questionnaires

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 ✓ Social network analysis: Analysis of the relationships that occurs when one team member
perceives another as exerting leadership influence on the team
✓ BARS(Behaviorally anchored rating scales): Used to assess and rate performances
4. Factors affecting Shared leadership:
✓ Internal Environment: This is focused on three dimensions, namely Shared purpose, Voice,
and Social support
✓ External Environment: This is affected through external coaching provide to the team. This
can be done in two ways: Supportive Coaching(through active encouragement and positive
reinforcement of team members by external team managers) and Functional
Coaching(external coaches intervenes only when team lacks shared purpose)

➢ Authentic Leadership Authentic leaders know who they are and what they believe in, and they
act on those values and beliefs openly and candidly.
Characteristics of Authentic Leaders:
• Authentic leaders are self-aware and genuine.
• Authentic leaders are mission driven and focused on results.
• Authentic leaders lead with their heart.
• Authentic leaders focus on the long-term
• They share information and encourage open communication.
• Their followers consider them ethical people and trust them as a result.

➢ Ethical Leadership Ethical leadership is a form of leadership in which individuals demonstrate

conduct for the common good that is acceptable and appropriate in every area of their life. It
is composed of the following three major elements:
• A noble quality of a leader is leading by example.
• Champion the Importance of Ethics
• Successful ethical leaders tend to be good communicators.

➢ Affiliative Leadership: Affiliative leadership is a type of leadership that promotes positivity, a

harmonious workplace and team building. This leadership style focuses on using conflict
resolution and creating personal connections between employees and their managers to
build a sense of community and trust. Some of the main characteristics are
1. Harmony: Creating Harmony between Teams and members
2. Flexibility: Giving employees flexible work conditions
3. Positivity: Affiliative leadership encourages positive interactions, advocating for
productive feedback and empathetic communication

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 ➢ Leadership Theories:

We will cover Trait, Functional Approach theory and Behavioral Style Theories in this
document.

Trait Approach Theories

1. Believes that people are born with certain qualities that makes them effective leaders
2. Qualities like intelligence, personality, stability etc. which are stable over time and differs
across individuals
3. What does trait theory say -> Leaders are born, or leaders are made? There is some confusion
whether as per trait theory leaders are born with these traits or these traits can be learned
over time. Different authors have expressed different opinion about this. The opinion
expressed by most authors is that as per trait theory traits can be inborn or they can be
learned over a period of time. Some others are of the opinion that leaders must be born with
these traits and these traits cannot be learned over a period of time. Actually, former view is
more correct but latter view is also not completely wrong. In exam, remember both these
views and answer based on this
4. The major trait theory is given by Gordon Allport

➢ Gordon Allport Trait Theory

1. Traits influenced through childhood experiences, current environment, and their interaction
2. Personality made up of 3 traits: Cardinal, Central and Secondary
✓ Cardinal Traits symbolizes a person’s personality. He is majorly known for such traits
✓ Central Traits are the basic qualities in a person that shape up the whole personality
✓ Secondary Traits of an individual are only visible in certain specific situations

➢ Functional Approach Theories

1. Focuses on how leadership occurs i.e. process of leadership rather who serves as a leader
2. Believes that leadership is a distributed function
3. Not necessary to have a formal leader and organization as a whole can lead

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 4. Example could be such job positions where an individual has to take leadership responsibility
without any delegated authority
5. John Adair’s Action Centered Theory is a popular theory in Functional Approach theories

➢ John Adair’s Action Centered Theory

1. Divides leadership into 3 areas namely, Tasks, Team and Individual
2. Emphasizes that each of the three elements play significant role for effective leadership

➢ Behavioral Theories
1.Believes that leaders are made and not born(Opposite of Trait Approach Theory)
2.Asserts that people can be taught to become a good leader
3.Divides leaders into 2 categories:
✓ Task Oriented: Mainly concerned with accomplishment of the task as per the standard
operating procedures
✓ People Oriented or Group Maintenance Oriented: Mainly concerned with inner needs of the
people getting satisfied whilst achieving results

One of the drawbacks of behavior theory is that it believes one leader would be effective in all
the situations but there is no appropriate behavior which can be effective in all the situations

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 ➢ Michigan and Ohio University Leadership Studies:
In the studies at University of Michigan, two types of practices influencing employees have
been identified: Employee-Orientation and Production orientation.

a. Employee orientation stresses the relationship and emphasizes that every individual is
important, one must accept their individuality and personal needs
b. Production or Task orientation emphasizes production and technical aspects of the job
and employees are taken as tools for accomplishing the jobs

At the same time when studies were going on Michigan University, a separate study was
going on at Ohio state university. These studies have identified two dimensions: Initiating
structure and Consideration

1. Initiating structure (Task Orientation) refers to leader’s behavior in delineating the

relationship between him and members of work group to establish well defined

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 patterns of organization., channels of communication, method, and procedures. The
leader who his high on initiating structures specifies the task to be performed by each
member of his group, sets down deadlines, gives directions and put pressure on them
for its fulfillment

2. Consideration (People Orientation): Consideration refers to the extent to which a

leader is likely to have job relationships which are characterized by mutual trust, respect
for subordinates’ ideas and regard for their feelings. He shows concern for his followers’
comfort, well-being, status, and satisfaction.

The 4 quadrants show various combinations of initiating structure and consideration.

Manager can adopt style in any one of the quadrants

➢ Blake and Mouton Managerial Grid

1. System used to group leaders into different categories based on the techniques they use
2. Helpful in knowing an individual’s existing leadership style and guiding to achieve ideal
leadership style required
3. Considers 2 dimensions of the grid namely, Task oriented managers and Relationship
oriented managers

In essence, Managerial grid is very much similar to Ohio state leadership model. However,
there is one basic difference between the two. In managerial grid the ‘concern for’
dimension on X-axis is more about the attitude of managers whereas in Ohio state

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 leadership model its more about how leader actions are perceived by others. In other
words, managerial grid is attitudinal model whereas Ohio state leadership model is
behavioral model. Both these frameworks can be combined as below

➢ Updated Blake and Mouton Managerial Grid

1. Includes two new style namely, Opportunistic and Paternalistic Styles
2. Opportunistic Style leaders adopt any style that has highest likelihood of achieving their
objectives. It does not have any fixed position on the grid.
3. Paternalistic Style leaders guide and define objectives for their employees and discourage any
initiative contrary to their views

➢ W.J. Reddin 3-Dimensional Grid

Tridimensional Leadership or 3D leadership theory was given by Reddin. It is based on the
Managerial grid theory by Blake and Mouton. Some people say that it is based on Ohio state

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 leadership theory as Reddin’s model is based on the two basic dimensions (Task and
Relationship) of leadership identified by the Ohio State studies

Reddin identified 4 leadership styles as given below

Reddin also says that apart from task and relationship being two dimensions of leadership,
the third dimension is effectiveness as shown below

Reddin believed that the way leader behaves in a certain situation may not be appropriate
in some other situations and hence leader can become effective only if he changes his style
as per the demand of the situation. One style may be effective in one situation and
ineffective in other situation. Thus, the difference between effective and ineffective styles is
often not the behavior itself but the appropriateness of the behavior to the environment in

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 which it is used. 3-Dimensional grid integrates the concepts of leadership style with
situational demands of a specific environment
Since each style can be less appropriate or more appropriate for the situation, Reddin also
gave less effective and more effective equivalent of each of these 4 styles that we discussed
above

Basic Style Less Effective Style More Effective Style

Integrated Compromiser Executive

Dedicated Autocrat Benevolent Autocrat

Related Missionary Developer

Separated Deserter Bureaucrat

➢ Lewin’s Leadership Theory is one of the Behavioral Approach theories consisting of

Authoritative, Democratic and Laissez Faire Styles of Leadership as discussed above.

➢ Tannenbaum and Schmidt leadership style continuum

1. Believes that leadership style is a continuum that can be adopted in a real-life scenario
rather than categorizing leadership into different segregates like other theories

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 2. Extremes marking each end of the continuum:
✓ Manager-oriented leadership: Leader acts more like dictator and asserts autocratic style of
leadership with minimal amount of freedom. This extreme is also called manager power
influence
✓ Team-oriented leadership: Leader gives plenty of flexibility and freedom to the employees
to encourage sharing of collaborative ideas. This extreme is also called non-manager power
influence
3. According to Tannebaum Schmidt, there are 7 points in the continuum:
✓ Tells: Close to the left end of the extreme with least amount of freedom provided to the
subordinates
✓ Sells: Amount of freedom given here is little bit up the scale in the continuum where
subordinates get a chance to give their inputs but ultimate action taken by the leader
✓ Suggests: In this subordinate feel little bit more amount of freedom by suggesting ideas to
the leaders where they feel that their voice is heard
✓ Consults: In this leader consults with the team knowing that the team is experienced
enough
✓ Join: In this leader acts more like a member of the team even if in the end the power to
take action resides with him
✓ Delegates: In this leader delegates activities to the team members and trusts that they will
do their job
✓ Abdicates: In this leader relinquishes any kind of involvement in the task to be done and
trusts that the members of the team will do it. This is present at the extreme end of the
spectrum with maximal freedom given to the subordinates
The left side shows styles where control is maintained by the superior and the right side
shows release of control and more freedom to employees. The question arises at which
point in the continuum should a manager as a superior adopt the leadership style. There is
no answer to this question. The answer depends on 3 factors
1. Forces in the superior: His value system, confidence in his subordinates, feeling of
security
2. Force in subordinates: their need for independence, readiness to assume
responsibility, understanding of organizational goals, ability to participate in decision
making
3. Forces in the situation: type of organization, group effectiveness and nature of
problems
The more superior is confident about subordinates, the more subordinates are mature and
responsible and the more is the team spirit in the group, the higher will be the freedom
given to the employees.

➢ Likert’s Leadership Theory

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 ➢ Comparison of Likert’s and Levin’s theories
1. Likert’s divides Authoritative Style of Levin’s into Exploitative and Benevolent Authoritative
Styles
2. Democratic Style of Levin is similar to Consultative and Democratic(Participative) approach of
Likert
➢ Huneryager and Heckman Four Styles of Management

1. In Dictatorial, 100% centralization in decision making by the managers is present

2. In Autocratic, managers orders subordinates to accept decisions with little consultation
3. In Democratic, managers consult their subordinates in making decisions
4. In Laissez Faire, 100% decentralization of decision making by the managers is there
➢ Comparison of different theories

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 ➢ Emerging Issues in Leadership
Along with the recent developments in theory, some exciting issues have emerged of which
leaders must be aware. These include:

1) Emotional Intelligence (EI)

It has been suggested that effective leaders must possess emotional intelligence, which is
the ability to recognize and manage emotion in oneself and in others.

2) Trust
Effective leaders understand both who to trust and how to trust. At one extreme, leaders
often trust a close circle of advisors and gradually cutting themselves off from dissenting
opinions. At opposite extreme, lone-wolf leaders may trust nobody, leading to preventable
mistakes. Wise leaders carefully evaluate both the competence ad the position of those
they trust, seeking out a variety of opinions and input.

3) Gender and Leadership

Gender is important because of the common perception that male gender roles are more
congruent with the leadership role than are female gender roles. This perception may
contribute to prejudice against women leaders.

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 4) Abusive Supervision
Abusive supervision refers to sustained displays of nonphysical forms of hostility
perpetrated by supervisors against their direct reports. Examples of behavior that fall within
the abusive supervision content domain include public derogation, undermining, and
explosive outbursts.

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hello@edutap.co.in 1|Page http://www.edutap.co.in
 Important Points
1. This Summary Sheet shall only be used for Quick Revision after you have
read the Complete Notes
2. For Building Concepts along with examples/concept checks you should
rely only on Complete Notes
3. It would be useful to go through this Summary sheet just before the
exam or before any Mock Test
4. Questions in the exam are concept based and reading only summary
sheets shall not be sufficient to answer all the questions

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 1 Summary Points

➢ Leadership Theories

Trait Approach theory, Functional Approach theory and Behavioral Approach Theory have
already been discussed earlier in the course. Here, remaining theories have been
summarized.

➢ Situational/Contingency Theories : Asserts that there is no single effective style of

leadership suitable for every situation. It suggests that leadership effectiveness
depends on leader’s behaviors and situation in which leadership is exercised up on.
Let us discuss these two factors

1. Leader’s behavior: Leader’s behavior is affected by two variables

a. Leaders characteristics: Leaders behavior is influenced by his characteristics
like his ability, personality, attitude, interest, motivation etc. All this factor is
internal to the leader
b. Leaders Hierarchical Position: Leaders hierarchical position in organization is
important because persons at different levels different kind of participation is
involved. Managers at higher level are more concerned with long-run complex
problems which require more participation in decision making. Managers at
lower levels are more concerned with short-run problems involving routine
operations which may not require high level of participation. The degree of
participation affects the leader’s behavior

2. Situational Factors: Besides leader’s characteristics it is the situation that

determines whether the leader will be effective or not. Some leaders may be
successful in certain situations whereas they may not be successful in other
situations. For example, A leader who is a tough task master might be successful in
managing workers in factory whereas he might not be successful in managing white

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 collar workers in IT industry. The situational factors can be grouped into 4
categories: Subordinate’s characteristics, Leader’s Situation, Group Factors and
Organizational Factors
a. Subordinate Characteristics: The characteristics of subordinates like their
ability, personality, attitude, interest etc. affect their behavior

b. Leaders Situations: Leaders situation in respect to his subordinates depends on

two factors – Leaders position power and leader-subordinate relationship.
i. Leader’s position power helps or hinders in influencing others: high
position power simplifies the leader’s task of influencing others while
low-position power makes the leaders task more difficult.
ii. Leader-subordinate relationship indicates the extent to which leader
will satisfy the subordinates’ needs and the extent to which
subordinates will contribute to leader’s success. If leader subordinate
relationship is good, leader is likely to be effective. In alternative case,
the leader will be ineffective

c. Group Factors: Various group factors like task design, group composition,
group norms, group cohesiveness and peer group relationship affect leadership
effectiveness and performance. If these factors are favorable, the leader will be
effective

d. Organizational Factors: Organizational factors like climate and culture in the

organization affect leadership effectiveness. If these are conducive the leader
will be effective

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 ➢ Fiedler’s Contingency Theory
1. Leadership style is dependent on situation and varies accordingly
2. Individual’s leadership style is fixed, hence for every situation a suitable leader needs to be
chosen based on his style
3. Considers 2 types of leadership styles broadly: Task Oriented (focused on the productivity of
the tasks) and Relationship Oriented Styles (focused on building relationships with people
by addressing their needs and opinions)

4. Measurement for judging leadership style of an individual according to the theory: Least-
Preferred Co-worker Scale (LPC)
5. LPC asks an individual to rate the 16 characteristics on a series of bipolar scales of 1-8, of a
least preferred co-worker they have come across.
6. Low LPC score → Task Oriented Style and High LPC score → Relationship Oriented Style
7. Situation variable types:
✓ Leader’s Position Power: Based on managerial powers, an individual is classified into a
strong or weak leader
✓ Task Structure: Based on proper instructions and defined layout of the task, it is
categorized into structured and unstructured task
✓ Leader Member Relation: Based on relationship or rapport shard by the leader with
his subordinates, it is classified into good or poor
8. With the use of situation variables, Fiedler designed a matrix to recommend the suitable
leadership style for a particular situation.

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 9. As per the matrix,
✓ Favorable situation: Good member relations, Highly structured task, and Strong leader
position power
✓ Unfavorable Situation: Poor member relations, Highly unstructured task, and weak
leader position power
10. Low LPC based leader suitable for extremely favorable situation and High LPC based
leader suitable for intermediate favorable situation
11. In stressful situations, experience is more useful than intelligence and vice-versa
12. Selecting the leader based on his style for which the situation is most suitable is termed as
Job Engineering/Restructuring in the organization

➢ Hersey and Blanchard Situational Leadership Theory

This theory is also called life-cycle theory of leadership

1. Based on 4 leadership styles and 4 maturity styles of the subordinates

2. Leadership style is dependent on the maturity level of the person
3. Asserts there is no single “best” style of leadership
4. Effective leadership is dependent on nature of tasks and performance readiness of the
subordinates
5. Four leadership styles:
✓ Telling: Leader directs instructions to the subordinates. More like autocratic style of
leadership
✓ Selling: Leader explains decisions and tries to convince his ideas to the subordinates
✓ Participating: Leader tries to build team relationship by working together and sharing
ideas

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 ✓ Delegating: More independent style of leadership where leader delegates tasks to the
team members. Generally, observed in highly experienced team groups
6. Four Maturity levels:
✓ M-1: Lack of ability and unwillingness in doing the task
✓ M-2: Lack of ability but willing to do so
✓ M-3: Ability to do the task but Unwilling to do task
✓ M-4: Ability to do task and willing also
7. Maturity level is dependent on the task
8. A good leader develops competence (Maturity in task) and commitment (Performance
readiness) in his subordinates to feel self-motivated to do the job. This leads to traversal of an
individual though different developmental levels

➢ Robert House’s Path Goal Theory

1. Leader's behavior is contingent to the satisfaction, motivation and performance of her or his
subordinates
2. Leadership Style is determined through Environmental and Employee factors which all when
combined determines the output of tasks

3. 4 Different leadership Styles according to the theory:

✓ Directive: Leaders directs, guides, and carves out the work schedule for the employees
and concentrate on building task-oriented relationship
✓ Achievement-oriented: Leaders set high expectations and challenging goals from
their employees and generally seen in high end jobs
✓ Participative: Leaders work with their subordinates and involve them in the decision-
making process by taking their views and opinions

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 ✓ Supportive: Leaders are supportive enough to satisfy the needs of their subordinates
and concentrate majorly on relationship-oriented type of relationship

➢ Vroom-Yetton-Jago Decision Making Model (Leader Participation Model)

1. Model suggests decision of leadership style for group decision-making which is
contingent on the situation
2. 3 Factors that influence leadership style:
✓ Decision Quality: This tells how rigorous and thoroughly checked decision is needed to
be made which could be dependent on various factors like sufficient research done,
people involved, etc.
✓ Team Commitment: This is related to those decisions that have considerable impact
on the team members and might affect their morale while accomplishing the task
✓ Time Constraints: This is related to the amount of time that is available with any
leader to decide

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 3. Vroom and Yetton formulated 7 questions on decision quality, commitment, problem
information and decision acceptance, with which leaders can determine level of
follower’s involvement in decision and type of leadership (A1, A2, C1, C2, or G2) needs
to be employed. Answer to the questions must be either ‘Yes’ or ‘No’ with the current
scenario.
4. Decision Tree is followed until you arrive at a specific leadership code style

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 ➢ Cognitive Resource Theory (by Fred Fiedler and Joe Garcia)
1. Asserts that Intelligence and Experience play a significant role in a person’s reaction to a
stressful situation
2. For Low-stress situation → Intelligence is important and High-stress situation →
Experience is important
3. Takes stress as the situational factor and suggests whether intelligence or experience is
more suitable to the task depending on the stress factor
4. For Directive oriented approach, intelligence is required
5. Intelligence or experience is irrelevant for simple tasks

➢ Leader Member Exchange Theory (LMX or Vertical Dyad Linkage Theory)

1. It is a type of Transactional leadership
2. Focuses on relationship between manager and members of the team

3. Claims that leaders do not treat each subordinate the same which leads to the formation
of In-group and Out-group members
4. Relationship between managers and members of the group is developed through 3
stages:

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 ✓ Role-taking: This happens initially when members join newly, and managers take time
to assess their qualities
✓ Role-making: At this stage managers categorizes his team members into In-group or
Out-group depending on the trust, loyalty and commitment shown by them
✓ Routinization: Routines between team members and mangers are established

➢ Transformational Theories: This has been already discussed in the previous document
of Leadership part 1. Basic essence of this leadership is forming a new vision to
accomplish the task by motivating and selling the vision formed by the leader

Categorization of Leadership theories

Transformational
Traits Approach
Approach
Theory
Theory

Burns Bass Transformational James Kouze and Barry

Transformational Theory Posner - Leadership
Theory Participation Inventory

We have already discussed about views of Burns and Bernard Bass on

Transformational leadership in Leadership Part 1. We are not going to discuss them
again. Now we shall discuss about third theory – leadership participation Inventory

➢ James Kouze and Barry Posner Model (Leadership Participation Inventory)

1. James and Posner conducted a survey that asked people to rate top
characteristics in a leader to which they would follow based on which they
recommended 5 characteristics that make a good leader. They are:

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 ➢ Inspirational Approach to Leadership : There are 3 approaches to Inspirational Leadership:
Charismatic Leadership, Visionary Leadership and Transformational Leadership. These
three are closely related but there is some basic difference among these

We have already discussed about Transformational Leadership. We shall study about the
remaining two: Visionary and Charismatic Leadership

Charismatic Leadership:
1. These types of leaders have particularly good personality and fan following. Narendra
Modi is an example
2. They are dominant, self-confident individuals who hold strong conviction for their beliefs
3. They lead by example and that’s why people like them. This concept of leading by
example where one uses its loyalty, affection, admiration etc. is called usage of
referent power to gain followers
4. The subordinates want to be like leaders in every aspect
5. Key characteristics of Charismatic Leaders are
a. Vision and Articulation: He has a vision for longer term that proposes a better future.
He is able to clarify the importance of vision so that it becomes acceptable to others
b. Personal Risk: He is willing to take high risk, incurs high costs and engages in self-
sacrifice to achieve the vision
c. Sensitivity to Followers needs: He is perceptive of abilities and needs of the
subordinates
d. Unconventional Behavior: He might behave against the established practices and
norms
Robert house was the one who basically emphasized that charismatic leaders have inborn
qualities which makes them great leaders. This view is now being challenged as charismatic
leaders can also be developed. As per Richardson and Thayor view that a person can become
charismatic leader by following these 3 steps
1. First, he needs to develop an aura by maintaining an optimistic view, using passion as
a catalyst for generating enthusiasm and communicating with whole body (non-
verbal) and not just words
2. Second, he draws others in by creating a bond that inspires the to follow
3. Third, he brings out the potential in followers by tapping into their emotions

Types of Charismatic Leaders

Charismatic leaders have been categorized into five types:

a) Socialized charismatic Leaders: Socialized charismatic Leaders use power to benefit others.

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 b) Personalized charismatic: Personalized charismatic leaders use power to serve primarily
their own interests.
c) Office-holder charismatic: The office-holder charismatic leaders attain their charisma
chiefly from the position they hold rather than of their personal characteristics.
d) Personal (not personalized) charismatic's: Personal (not personalized) charismatic leaders
gain very high esteem through the faith; others have in them.
e) Divine charismatic: A divine charismatic was someone endowed with a gift of divine grace.
For example, Godmen.

Difference between Charismatic Leadership Versus Transformational Leadership

You might be thinking that charismatic leadership is same as Transformational Leadership. In
many ways they are same but there are some differences between the two
1. Charisma is part of Transformational leadership, charisma by itself is not sufficient to
account for transformational process. Transformational leadership is broader than
charismatic leadership
2. Charismatic leader might not encourage followers to challenge his views whereas
transformational leader will encourage their followers to question not only long-
established views but his own views also.
3. Under Charismatic Leadership, People believe charismatic leaders are born and not
made whereas in Transformational Leadership, leaders are adaptive leaders and
mostly are trained to become leaders.
4. Under Charismatic Leadership, leaders may not want to change anything in the
organization whereas in Transformational Leadership, Leaders have a basic focus of
transforming the organization and their followers.
5. Under Charismatic Leadership, leaders tend to work more towards their personal
benefit and image building whereas in Transformational Leadership, leaders
tend to work more for the betterment of the organization and their followers.
6. Under Charismatic Leadership, leaders are hard to replace whereas in
Transformational Leadership, leaders will be replaced by the next in line
commandment officer in the organization if they are trained well.
7. The purely charismatic leadership may want followers to adopt the leader’s world
view and go no further. However, transformational leadership attempts to encourage
followers to question not only established views but those established by the leader.

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 Visionary Leadership
Visionary leadership is about credible and inspiring vision for the future of the organization
which is shared commonly by all the organizational members and hence becoming a shared
vision.

Characteristic of Visionary Leader

1. He has some charismatic characteristics but those are acquired and not in-born
2. He is willing to take risk to put the organization on right path
3. He is strategic planner and plans ahead to make the best business moves
4. He constantly searches for additional information that might yield an insight and helps
solve a problem
5. He is a persuasive communicator and communicates in way that influences others to
act willingly to convert the vision into reality

Visionary and Charismatic leadership might be sounding like they are same. But there is
important difference between the two

1. The charismatic leaders tend to rely more on in-born qualities whereas visionary
leaders tend to rely on acquired qualities to influence others
2. The source of loyalty for charismatic leaders is loyalty (referent power) of his followers
towards him while source of influence of the visionary leader is follower’s
commitment to shared vision

➢ Systems Approach Theory

Systems theory of leadership suggests that there are two subsystems of an organization –
Technical and Social
1. Technical system is about rules, policies, tasks, organization structure etc.
2. Social subsystem is about the human element, interaction between leaders and
followers

Both these systems interact closely and shape employee behavior. Due to changes in the
environment organization changes its technical system which impacts the social system i.e.
when organization changes its rules and policies then the way leaders and followers interact
also get changed
As per this theory, 4 types of leadership pattern emerge in the organization in stages

1. Formal: Influence in Formal leadership is based on authority of the position held by

the individual

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 2. Emergent: Influence in Emergent leadership is based on skills and knowledge of an
individual and his acceptance in the group
3. Shared: Influence of shared leadership is based on individual accountability and self-
control
4. Integrative: Influence of Integrative leadership is based on interdependence of group
members and control is through self-regulation
➢ Great Man theory of Leadership:
This is one of the first theory of Leadership. As per this theory ‘leaders are born, not made’.
This theory emphasizes that a person is born with or without necessary traits of leadership.
For example, it was believed that Napoleon was a born leader due to his natural ability to rise
out of any situation. This theory actually emphasizes ‘charismatic’ leadership. As per this
theory, great leaders have inborn characteristics such as commanding personality, charm,
courage, intelligence etc. These qualities cannot be learned but are ingrained
As per this theory
1. Good leaders have in born qualities which are bestowed upon them by God
2. Ordinary people cannot become good leaders
3. Leadership qualities cannot be acquired through formal education
4. The situational factors have little influence on leaders’ qualities. A good leader will be
a good leader in all the situations
Criticism of Great Man Theory
1. Leadership qualities are not just in-born, they can be acquired also. Hitler who was
just a house painter in youth became a dynamic leader later. This shows that
leadership qualities are not just inherited.
2. Another criticism is that this theory ignores the situational variables. A leader with
certain leadership qualities may be effective in one situation and non-effective in
another situation.
3. “A Natural Born Leader “: Does this mean that introverts, persons of average social
intelligence, or those of us who are not particularly empathic will not make good
leaders? Certainly not. A great leader in recent history - the Mayor of New York – has
Leadership thrust on him in the aftermath of the September 11 attacks for which he
was subsequently honored. Remember, most of leadership is made, not born. So, if
you aspire to positions of leadership, then the best course is to embark on a
leadership self-development plan.
4. Doing the Right Thing: To be successful, all leaders – whatever their leadership style,
type and so on - must choose the right action at the right time and “keep a steady eye

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 on the ball”. They must be courageous, self-aware – and ensure the consistent support
of their team of followers. This is a skill which needs to be practiced.
5. Never Stop Learning: The well-known business coach, Hugo Heij says, “True leaders
ensure they continue to develop their leadership skills throughout their careers,
through learning and development materials and activities.” Fortunately, there is
tremendous interest in leadership and in leader development. Self-motivated Leaders
may consider embarking on their own leadership development programme.
➢ Zenger’s Folkman’s 10 Fatal Leadership Flaws: These defines 10 set of flaws that are
employed by the leaders which result in ineffective leadership

➢ Attribution Theory of Leadership

1. It says that a leader’s judgment about his employee is based on the attribution causes made
by him for his employee’s performance

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 2. Internal factors attribution is called Dispositional attribution and external
factors attribution is called Situational attribution
3. To conclude whether attribution factor is internal or external, Kelly designed a
model based on 3 factors namely, consistent, distinctive and consensus

➢ French and Raven’s 5 forms of Power

1. This theory describes 5 forms of power available to a leader
2. Reward – This results from one person's ability to compensate another for
compliance
3. Expert – This is based on a person's high levels of skill and knowledge
4. Legitimate/Title – This comes from the belief that a person has the formal right to
make demands, and to expect others to be compliant and obedient
5. Coercive – This comes from the belief that a person can punish others for
noncompliance
6. Referent – This is the result of a person's perceived attractiveness, worthiness and
right to others' respect
7. Later on, Raven added an extra power base called Informational. This results from a
person's ability to control the information that others need to accomplish something

➢ Leadership Style in Indian Organizations

Indian organizations can be classified into following
1. Family Based Organizations: Mostly autocratic in a way, centralized decision making
2. Professionally Managed Organizations: Participative Leadership is prevalent
3. Public sector organizations: Mostly bureaucratic style is prevalent
Additional Information: Nurturant Task Leader
The Nurturant-Task leadership approach is developed by Jai B. P. Sinha.
It is a blend between nurturance (people orientation) and task (task orientation) that was
found to be effective.

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 A nurturant leader "cares for his subordinates, shows affection, takes a personal interest in
their well-being, and above all is committed to their growth”. In order to be effective,
however, he makes his nurturance contingent on the subordinate's task accomplishment.

➢ Comparison between theories

➢ Successful and Effective leader

A leader who is effective can also be a successful leader but vice-versa is not necessarily true
always.

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 ➢ Contemporary Leadership Roles
A) Providing Team Leadership
• Leadership is increasingly taking place within a team context. The role of team leader is
different from the traditional leadership role performed by first-line supervisors.
• The challenge for most managers is to learn how to become an effective team leader.
• They have to learn skills such as the patience to share information, to trust others, to give
up authority, and understanding when to intervene.
• The team leader’s job is to focus on two priorities: managing the team’s external
boundary and facilitating the team process.
B) Mentoring
A mentor is a senior employee who sponsors and supports a less experienced employee (A
protégés’). The mentoring role includes coaching, counseling, and sponsorship.

C) Self-leadership
Proponents of self-leadership say that there are a set of processes through which individuals
control their own behavior.
How do leaders create self-leaders?
• The following ideas have been suggested:
• Model self-leadership.
• Encourage employees to create self-set goals.
• Encourage the use of self-rewards to strengthen and increase desirable behaviors.
• Create positive thought patterns.
• Create a climate of self-leadership.
• Encourage self-criticism.

D) On-Line Leadership
Leadership research has been directed almost exclusively to face-to-face and verbal
situations. The reality is that today’s managers and their employees are increasingly being
linked by networks rather than geographical proximity.
Obvious examples include managers who regularly use e-mail to communicate with their
staff, managers overseeing virtual projects or teams, and managers whose telecommuting
employees are linked to the office by a computer and modem.

➢ Implication for Managers

• Organizations want managers who can exhibit transformational leadership qualities and
who have vision and the charisma to carry it out.
• Effective managers must develop trusting relationships with followers.
• Managers should also consider investing in leadership training such as formal courses,
workshops, rotating job responsibilities, coaching, and mentoring.

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 • Effective Managers should hire candidates whom they believe are ethical and
trustworthy.
• For maximum leadership effectiveness, ensure that manager’s preferences on the
initiating structure and consideration dimensions are a match for their work dynamics and
culture.
• Organization should appreciate the unique attributes, predispositions, and talents of each
leader. No two leaders are the same and there is value in diversity.

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Email – hello@edutap.co.in P age |1 M - 8146207241
 Important Points

1. This Summary Sheet shall only be used for Quick Revision after you have
read the Complete Notes
2. For Building Concepts along with examples/concept checks you should
rely only on Complete Notes
3. It would be useful to go through this Summary sheet just before the
exam or before any Mock Test
4. Questions in the exam are concept based and reading only summary
sheets shall not be sufficient to answer all the questions

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 1. Introduction
The task of getting results through others by coordinating their efforts is known as
management. Just as the mind coordinates and regulates all the activities of a person,
management coordinates and regulates the activities of various members of an organization

2. Functions of Management
Thus, according to Henry Fayol, management consist of 5 functions namely planning,
organizing, commanding, coordinating, and controlling.

However, modern authors do not view coordination as a separate function of management.

As per modern view, management consist of 5 functions -> Planning, Organizing, Staffing,
Directing and Controlling. Koontz and O’Donnell have adopted the same classification.

1. Planning: It means determining the objectives of the organization. It also involves as in

what needs to be done, how and when.
2. Organizing: Organizing: 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 involves manpower planning, recruitment, Training, performance appraisal,

appraisal, remuneration and Promotions etc.

4. Directing: It is concerned with interpersonal relationships. Direction has following

elements: Supervision, Motivation, Leadership and Communication

5. Controlling: It implies measurement of accomplishment against the standards and correction

of deviation if any to ensure achievement of organizational goals.

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 Nature of Management Functions
1. Interrelated and no sequence of performing functions: Management is an integrated
process consisting of 5 functions. There is no rigid sequence of performance of these
functions. A manager must perform these activities simultaneously
2. Universal: These functions are universal in the sense that a manager must perform all
these functions in the organization irrespective of his level.
3. Iterative Quality: These functions have iterative quality in the sense that they are
contained with in each other. For example, planning, organizing, directing, and controlling
may occur within the staffing function.
4. Equal Importance: Almost all management functions are equally important though the
mix of functions may vary from level to level of management.

3. Concepts of Management
Management has been defined in different ways and different views. Let us discuss some of
them

Management as a Process: Management is considered a process because it involves a series

of interrelated functions to obtain the objectives of the organization. It is a continuous
process consisting of planning, organizing, staffing, directing, and controlling functions.

Management as an Economic Resource: Like land, labor and capital, management is an

important factor of production. Management occupies the central place among productive
factors as it combines and coordinates all other resources.

Management as a Team or Group of Managers: As a group of persons, management consists

of all those who have the responsibility of guiding and coordinating the efforts of other
persons. These persons are called as managers who operate at different levels of authority
(top, middle, operating). As a group manager have become an elite class in society occupying
positions with enormous power and prestige

Management as Discipline : Management has emerged as field of study or specialized branch

of knowledge which is taught in various business schools and universities.
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 4. Features of Management
1. Management is goal-oriented: Management is not an end in itself. It is a means to achieve
certain goals.
2. Management is universal: Management is an essential element of every organized activity
irrespective of the size or type of activity.
3. Management is an Integrative Force: The essence of management lies in the coordination
of human and other resources to achieve desired objectives. As unifying force,
management creates a whole that is more than the sum of individual parts.
4. System of Authority: Managers at different level process varying degrees of authority. As
we move down in managerial level, the degree of authority decreases gradually
5. Results from others: Managers cannot do everything on their own. They must have
necessary skills and ability to get work accomplished through effort of others.
6. Dynamic process: Managers will have to make changes in their plans as per environmental
changes
7. Group Activity: Management is group activity because it comes into existence only when
there are 2 types of people - managers and workers (operatives)
8. Management is Intangible: It cannot be seen but its presence can be felt everywhere in the
form of results.

5. Objectives of Management
The objectives of Management can be categorized into 3 categories

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 6. Administration and Management
There has been constant debate whether administration and management are different or
same. Earlier they use to be same but then Oliver Sheldon made the distinction between
management and administration in 1923. As a result, three views have emerged regarding
the same

1. Administration is a higher-level Function and Management is lower level function:

According to this view Administration involves policy formulation and is concerned with
top level management whereas management involves execution and is concerned with
lower levels of management. Thus, administration is above management

Administration Management
It is concerned with formulation of policies, It means getting work done through others
plans and objectives
It relates to decision making. It is a It relates to executions of decisions. It is a doing
determinative or thinking function function
It has extremely broad scope. Administrators It is mainly narrow as they are just concerned
are mainly concerned with planning and control about implementation and execution
It is not directly concerned with directing human It is actively concerned with leading, motivating
resources or just directing middle level of operational workforce at lower level for
managers execution of plans
Concerned with what is to be done and when is Concerned with who shall implement decisions
to be done made by administration
It is a top-level function It is a middle and low-level function
Administration has direct interaction with the Management is mainly concerned with internal
external environment and their decisions are forces i.e. objectives, policies of the
influenced by the external environmental forces organization
This term is usually used in government offices Mainly used in business organizations

2. Administration as part of Management: Some management thinkers believe that

management is broader concept and administration is its part. Administration is that part
of management which is concerned with the carrying out of procedures related to
execution of the plans.

3. Administration and Management are same: According to this view, both management
and administration are same. The difference lies in usage of terms in different countries
and different type of organizations. For example, the term administration is used in
government organizations whereas management is used in business organizations.

Practically, there is no difference between management and administration. Every manager is

concerned with both – administrative management function and operative management
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 function as shown in the figure. However, the managers who are higher up in the hierarchy
denote more time on administrative function and the lower level denote more time on
directing and controlling worker ‘s performance i.e. operative management.

7. Levels of Management

Top Level Management

The top-level management is generally occupied by board of directors, CEO’s and General
managers etc.
The area of scope is
1. To make a corporate plan and long-term strategies for the entire organisation covering all
areas of operations
2. To decide upon the matters which are vital for the survival, profitability, and growth of
the organisation such as introduction of new product, shifting to new technology and
opening new plant
3. To liaison with outside parties having a stake in business such as government, trade union,
shareholders, and trade associations etc.
4. Provide guidance and direction to Departmental heads, Coordinating the operations of
different departments, Review and Control of organizational Performance through reports
etc.
5. Appointment of key middle level managers in the organization

Middle Level Management

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 Middle level management consists of departmental managers, divisional managers, deputy
managers, foreman and administrative officers etc. These executives are mainly concerned
with the overall functioning of their respective departments.

1. To establish departmental goals and plans for their respective department

2. Allocating resources to different activities and coordinating them within the
department
3. Recruiting supervisory personnel, providing guidance and direction to supervisory
personnel and Reviewing and Controlling Departmental Functioning

Lower Level Management or Supervisory Management

Lower-level management consists of factory supervisors, superintendents, foremen, sales
supervisors, accounts officers etc. They directly guide and control the performance of rank
and file workers. They issue orders and instructions and guide day to-day activities

Comparison of three Management Levels

Characteristic Top Management Middle Management Supervisory
Management
Number of Person Very few Moderate Many
Role Strategic Tactical Operational
Nature of Functions Broad and Creative Somewhat broad and Routine and detailed
creative
Level of complexity Extremely high Moderate Very Low
Job Measurement Exceedingly difficult Less Difficult Easy
Time dimension Long term Medium Term Day to Day

8. Effective Management (Efficiency Vs. Effectiveness).

Efficiency refers to relationship between input and output. This efficiency denotes how
much inputs have been used to produce a given level of outputs or with a given level of
inputs how much outputs have been produced.

Effectiveness on other hand refers to the extent to which an organization achieves its
objectives. This effectiveness is externally focused because the achievement of organizational
objectives depends on environment in which the organization operates

Basis of Difference Efficiency Effectiveness

Orientation Input-Output Goal achievement orientation
Focus Means Ends
Emphasis Doing things right Doing right things
Determining factors Internal External

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 McKinney 7-S framework for effective management
The model was developed in the late 1970s by Tom Peters and Robert Waterman, former
consultants at McKinsey & Company. They identified seven internal elements of an
organization that need to align for it to be effective.

The model categorizes the seven elements as either "hard" or "soft":

Hard Elements: The three "hard" elements are strategy, structures (such as organization
charts and reporting lines), and systems (such as formal processes and IT systems.) These are
relatively easy to identify, and management can influence them directly.

Soft Elements: The four "soft" elements – Skills, Staff, Style, and Shared Values, on the other
hand, can be harder to describe, less tangible, and more influenced by your company culture.
But they are just as important as the hard elements if the organization is going to be
successful.

9. Nature of Management

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 There are conflicting views about whether management is a science or an art. Let us evaluate
these statements through the below discussion

Management as Science
Science is a body of systemized knowledge generated through logic and experiments. Science
has following features
1. Systematic body of knowledge: Science is systemized body of knowledge. Principles of
science are based on cause-effect relationship. In management there is lack of such cause-
effect relationship. If an employee is not feeling motivated, we cannot explain a single
sure shot reason for the same. So, Management is not true science
2. Universal principles: Scientific principles represent basic facts about a particular field
enquiry. These principles may always be applied in all situations. A management principle
which works well in one country may not work in other country because of the situational
and cultural differences between two countries. This management is not true science
3. Scientific enquiry and experiments: Scientific principles are tested rigorously before
being approved. This is not the case in management principles. In management the
principles are not tested like science. Thus, management is not true science.

In line with above discussion management is not a perfect science. It is called pseudo-
science or inexact science. It is also called soft science

Management as Art
Art implies the application of knowledge and skills to bring about the desired results.
Management is Art because it fulfills the following criteria
1. Practical knowledge: Every art signifies practical knowledge. An artist not only learns the
theory but also its application in practice. Similarly, a person cannot become a successful
manager simply by reading the theory, he must also learn to apply his knowledge in
solving managerial problems in practical life. Thus, management is an art
2. Personal skill or Personalized Application of Knowledge: The success of different artists
differs even when all of them possess the same technical knowledge or qualifications. This
is due to the level of their personal skills. Similarly, the success of a manager depends on
his personality in addition to his technical knowledge. Thus, management is an art
3. Improvement through Continuous Practice: In art, improvement is made through
continuous practice. In this way person engaged in art move towards perfection. This is
also done in management. Thus, management is an art.
4. Creativity: Art is basically creative, and an artist aims at producing something that had not
existed before. A manager effectively combines and coordinates the factors of production
to create goods and services.

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 5. Situational Approach. Art has situational application. This is true for management too; a
particular management practice may be effective in one organization but may not be
effective in other.

Management is Combination of Art and Science

If we combine the above discussion, we find that management has some features of science
through though not exactly in the same was as science and it has all features of an art. Thus,
management is both science and an art.

Management as Profession
There is controversy whether management is a profession or not. Let us discuss the following
points related to profession and evaluate whether management is a profession or not.
1. Specialized body of knowledge: All professions have well-defined knowledge that can be
acquired by the person who wishes to enter a profession. In management, we have a
systematic body of knowledge that can be used for development for managers.
Management is taught across universities as a discipline
2. Restricted entry (Formal Education): Only those people are eligible to enter a profession
those who have eligible degrees. For example, a doctor must have degree as prescribed
by Medical Council of India. In managements, MBAs are preferred but MBA degree is not
necessary to enter this profession. This there are no standard qualification for managers
3. Professional Body: For regulation of any profession, the existence of professional
representative body is must. For example, ICAI lays down rules and regulations with
respect to chartered accountants. In area of management also, there are professional
bodies such as All India Management association (AIMA), but these are not having
authority to frame rules and regulations or professional qualifications to take up
managerial posts
4. Service motive: A profession is a source of livelihood, but professionals are primarily
motivated by the desire to serve the community. Service motive is also emphasized in
management. A manager of a factory is responsible not only to its owners, but he is also
expected to produce quality goods at a reasonable cost and to contribute to the well-
being of the community
5. Code of conduct: Every profession must have a code of conduct for its members.
Members of one profession must abide by a code of conduct which contains rules and
regulations providing the norms of honesty, integrity and professional. Though All India
Management Association has framed code of conduct for managers, but it has no right to
act against any manager who does not follow this code

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 From the above discussion, it seems that on some points management fulfills the condition of
profession and on some points it does not. So, the professionalism of management has
started but it is far from complete. However, since it is moving towards professionalism, we
can say management in India is an emerging profession.

10.Skills Required by Managers

To perform management functions and assume multiple roles, managers must be skilled.
Robert Katz identified three managerial skills essential to successful management: technical,
human, and conceptual

11.Competencies of Quality Manager

1. Education: Well educated with special education in business management
2. Training: Management skills are not in-born. They are to be acquired through training.
Manager must undergo proper training
3. Good analytical skills and Intelligence: High level of Intelligence is required
4. High on creativity and Leadership qualities
5. Maturity
6. Foresightedness
7. Self-confidence, Human Relations Attitude and Decisive
8. Excellent communication skills, Leading from the front
9. High on integrity and Team based approach

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 12.Scope of Management
The operational areas of business management may be classified into the following branches
– Production Management, Financial Management, Marketing Management and Human
Resource Management.

1. Production Management:
Production means creation of utilities. This creation of utilities takes place when raw
materials are converted into finished products. Plant location and layout, production
policy, type of production, plant facilities, material handling, production planning and
control, repair and maintenance, research and development, simplification and
standardization, quality control and value analysis, etc., are the main problems involved in
production management

2. Marketing Management:
Some of the area under marketing management are
I. Product decisions: what to produce and how the product should look like?
II. Pricing Decisions: What should be the price of the product in the market
III. Promotion decisions: Brand name, Advertising etc.
IV. Place or Physical Distribution decisions: What all channels such a kirana stores, malls
etc. where the product should be available
V. Others such as after sales service, market research, etc. are the problems of marketing
management.

3. Financial Management:
Financial management is concerned with the managerial activities pertaining to the
procurement and utilization of funds or finance for business purposes. The main functions
of financial management include:
1. Estimation of capital requirements.
2. Ensuring a fair return to investors.
3. Determining the suitable sources of funds.
4. Laying down the optimum and suitable capital
5. Preparation, analysis, and interpretation of financial statements.
6. Laying down a proper dividend policy
7. Negotiating for outside financing.

4. Personnel Management:

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 Personnel Management is that phase of management which deals with the effective control
and use of manpower. Managerial functions of personnel management include:
a. Personnel planning.
b. Organizing by setting up the structure of relationship among jobs, personnel, and physical
factors to contribute towards organization goals.
c. Procurement of right kind and number of persons.
d. Training and development of employees.
e. Determination of adequate and equitable compensation of employees.
f. Integration of the interests of the personnel with that of the enterprise; and
g. Providing good working conditions and welfare services to the employees.

Apart from Production Management, Human Resource Management, Marketing

Management, and financial management, there are some other areas under Management
1. Materials Management which is mainly concerned with purchase of materials at right
price and in right quantity and at right time
2. Legal Function: Legal function may aid the organization in compliance with the rules and
regulations laid down by the government
3. Public Relations Function: This department organizes publicity campaigns to increase the
image and goodwill of the business in the society

13.Ethics and Management

In this era of globalization and multinational competition, ethical decision taking assumes
importance in today's corporate world

We will discuss three models of Ethics in Management.

1. Joseph son institute Ethical decision-making model: This model is widely used in
taking ethical decisions. It consists of 3 Steps:

I. All decisions must consider and reflect a concern for the interest and wellbeing of
all stakeholders.
II. Ethical values and principles always take precedence over non ethical ones.
III. It is proper to violate an ethical principle only when it is clearly necessary to
advance another true ethical principle, which according to the decision maker's
conscience will produce the greatest balance of good in the long run

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 2. The Plus Decision –Making Model: To make it easy to understand and apply these
ethics filters, let us adapt to mnemonic word "PLUS"

I. P = Policies (It is consistent with my organizations Policies, Procedures and

Guidelines?)
II. L = Legal (Is it Acceptable under the applicable laws and Regulations?)
III. U = Universal (Does it conform to the universal principles values my
organizations has adopted?)
IV. S = Self (Does it satisfy my personal definition of Right, Good and Fair?)

3. Taylor Four Way test: Herbert J. Taylor was a business executive, civic leader and
sponsor of Christian organizations who belonged to the United States of America. His
Ethical Model was based on these 4 questions

I. Is it the truth?
II. Is it fair to all concerned?
III. Will it build goodwill and better friendships?
IV. Will it be beneficial to all concerned?

In 1940s, when Taylor was an international director of Rotary, he offered the Four
Way Test to the organization, and it was adopted by Rotary for its internal and
promotional use.

14.Schools of Management
Different Schools of Management Thought are as follows

Different schools of management have evolved over a period. Harold Koontz, called this
development as the management theory Jungle because of so many management thoughts .
Below is the list of Management Thoughts which we shall discuss one by one

Management Thoughts or Schools of Management

Classical Theory
1) Scientific Management
2) Management Process or Administrative Management Approach
3) Bureaucratic Organization Approach

Human Relations approach

Social System Approach

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 System Approach

15.1 Classical Theory

Classical theory is one of the oldest schools of management. It is also called as traditional
theory and can be traced to military organizations. Several authors contributed to this theory.

Features of Classical Theory

1. Emphasis on division of labor and specialization

2. Emphasized on organization hierarchical structure for coordination. They ignored role
human element. For this reason classical theory is also called Structural theory
3. It ignored the impact of external environment on the organization
4. Integration of organization is achieved through authority and control. Thus, it is based on
centralization of authority
5. It assumes no conflict between individual and organization. In case of conflict the interest
of organization shall prevail
6. People at work are rational and they should be motivated by economic rewards

They can be studied under 3 streams

1. Scientific Management (Taylor)

2. Administrative Management (Fayol)
3. Bureaucracy (Weber)

Criticism of Classical Theory

1. Assumption of Closed System. Classical theorists viewed organisation as a closed system

to having no interaction with environment. This assumption is totally unrealistic
2. Assumption about Human Behaviour. The human beings were treated like any other
factor of production. They were supposed to obey their superiors.
3. Economic Rewards as Main Motivators. The assumption that people at work can be
motivated solely through economic rewards is also wrong. Non-monetary factors like
better status and job enrichment can also motivate the workers

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 15.2Scientific Management Approach

15.2.1 Principles of Scientific Management

1. Science, Not Rule of Thumb: Replace working by "rule of thumb," or simple habit and
common sense, and instead use the scientific method to study work and determine the
most efficient way to perform specific tasks.

2. Harmony, Not Discord (Max Output): The principles involves maintaining harmony
between management and workers in place of conflict.

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 3. Cooperation, not individualism: Management should encourage constructive suggestion
form workers and management should take workers into confidence before taking
important decisions which affect the worker. There needs to be change of mental
attitude. This is called mental revolution

4. Development of each person (Scientific selection and Training of workers): There should
be scientific selection of workers and work should be assigned to them should suit their
physical, mental, and intellectual capabilities. Workers should be trained as per the needs
of work and they will perform that work only. This is basically called Division of labor and
Specialization

5. Equal division of work and reponsbility: There should also be equal division of work
between workers and management and both should work side by side. Managers should
be responsible for planning and organizing whereas workers should be responsible for
execution

15.2.2 Techniques of Scientific Management

Taylor has devised the following techniques for implementing the principles of scientific
management

1. Functional Foremanship (Specialization): Taylor has proposed functional foremanship

technique for supervising workers. In this technique there is supervision of each worker
by 8 supervisors, four supervisors supervising planning aspect and other 4 supervisors
supervising production work. In other words, there should be specialized person for
supervising each task

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 2. Standardization and Simplification of work: Taylor advocated standardization of tools and
equipment’s, material to be used in production, methods used in production to increase
the output

3. Work Study: Work study refers to systematic and critical evaluation of a work with the aim
of identifying how the work can be performed in the most desirable way by standardizing
and simplifying it. In a work study, 4 types of studies are undertaken
I. Method study: It refers to identify the most suitable way to do a particular activity
II. Motion study: It refers to conduct the study of motions being performed by
workers and machines while doing the job. The moving camera is used to conduct
this study. The main objective of this study is to eliminate the unnecessary
motions.
III. Time study or measurement: It refers to determine the standard time required to
complete a particular activity. The standard time is determined based on average
time taken by the several experiences of the same work
IV. Fatigue study: It refers to determine the duration and frequency of rest intervals
to complete a particular job. The rest refreshes the workers. They work again with
their full capacity

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 4. Differential Piece Wage Plan: It is a system of wage payment in which a worker who
achieves or exceeds production target get wage at a higher price while a worker who does
not achieve the target will get wage at lower price.

5. Mental Revolution: The basic idea behind concept of mental revolution is that there
should be change in mindset of managers, owners and workers resulting in understanding
needs of each other. According to Taylor, instead of fighting over division of profits, both
the parties should make efforts for increasing the profits.

15.2.3 Pros and Cons of Taylor’s way of thinking

Pros Cons
Establishment of harmonious relationship Scientific Management was applicable only to
between managers and workers production management but not much applicable in
finance or marketing management

Proper selection and training of workers The principle of Functional foremanship violated
and equal division of work between principle of unity of command as one person must take
managers and workers order from various people
Incentive for higher production to workersScientific management made the work monotonous
and workers tried to overspeed due to differential
wage rate system
Standardization of tools, equipment’s, Scientific management just thought people as
materials etc. and elimination of wastage resources and their other needs such as social needs
and higher order needs were ignored. This led to lower
morale

15.2.4 Other Thinkers in Scientific Management

1. Henry L Grant
Henry Gantt's legacy to project management is the following:

• The Gantt chart: Still accepted as an important management tool today, it provides a
graphic schedule for the planning and controlling of work and recording progress
towards stages of a project.

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 2. Frank and Lillian Gilbert
Frank and Lillian Gilbert made following contributions
I. The motion study and fatigue study that we discussed under techniques of
scientific management was developed by these 2 people
II. Humanistic approach: Taylor aimed at standardizing the work timing using a
stopwatch whereas Frank and Lillian aimed at studying motions required for work
and removing unnecessary motions thereby standardizing the work through
innovation. Their fatigue study was also aimed at giving proper rest to workers. So,
they worked for betterment of workers as they believed in human relations

15.2.5 Productivity
It can be defined as ratio of output to input. High productivity means efficient use of
resources.

As per International office – the ratio of output and one of the factors of input is generally
known as productivity of the factor considered. Thus, for different factors of production
productivity can be measured as follows:

Productivity in general Terms Output/Input

Productivity of Labor Output/Number of Man hours
Productivity of Machine Output/Number of machine hours worked
Productivity of Capital Output/Net capital employed
Productivity of Material Output/Weight and Volume of material used
Productivity of Land Output/area of land

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 Productivity is often misconstrued with production, but there exists a difference, in the sense
that production indicates the volume of output, whereas productivity is the output generated
from the resources employed by the company.

Factors influencing productivity

1. Technological advancement: Use of right technology can help increase productivity

2. Quality of workforce: Able and willing workers can help increase productivity as
compared to lazy and incompetent workers
3. Managerial Talent: The way managers handle their employees also impacts productivity
4. Government Policy: Government policies can also impact productivity. For example,
government should follow taxation policy which encourages the growth and expansion of
business

15.3 Fayol Administrative Management

Fayol is also called the father of modern operational management or administrative
management. Fayol looked at problems of managing an organization form top management
point of view. He was the first one to show concern for efficiency at higher level. This school
is also called Management process school of thought or Universalist school of thought.

15.3.1 Principles of Management as per Fayol

Henri Fayol, a French mining engineer, developed 14 principles of management based on his
management experiences.

1. Division of work: Division of work involves dividing work into relevant number of tasks
and assigning task or unit to single person
2. Authority and responsibility: Authority is the right to give orders and the power to exact
obedience. Responsibility is the duty of the person to complete the work. Authority
creates responsibility.
3. Discipline: Workers must work in discipline. Adoption of this principle leads to systematic
working in the organization and violation leads to chaos
4. Unity of command: An employee should receive orders from only one superior, otherwise
it will lead to conflict as subordinate will never know whom to obey. This principle is
against the Taylor’s functional foremanship where multiple superiors oversee the
subordinate.
5. Unity of direction: Unity of direction means one plan, one boss. Organizational activities
must have one central authority and one plan of action.

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 Difference between Unity of Command and Unity of Direction

Unity of Command Unity of Direction

It implies that subordinate should receive It means one unit, one plan for the group of
order from one boss only activities having the same objective
This principle is related to functioning of This principle is related to functioning of a
personnel department or organization as a whole
Unity of command is necessary to fix Unity of direction is necessary for sound
responsibility of each subordinate organization
Unity of Command avoids conflicts in the Unity of Direction avoids duplication of
undertaking efforts and wastage of resources

6. Subordination of individual interest to general interest: The interests of one employee or

group of employees are subordinate to the interests and goals of the organization.
7. Remuneration of personnel: Salaries to employees should be fair and provide satisfaction
both to the employee and employer.
8. Centralization and Decentralization: Fayol believed there should be balance between the
two with a little leaning towards decentralization.
9. Scalar chain: A chain of authority exists from the highest organizational authority to the
lowest ranks. Any communication going up or coming down must follow this chain.
However, this system results in delays. Therefore, Fayol suggested gang plank which is
system of direct communication between two employees not in the same chain but
related horizontally

10. Order: The right materials and the right employees are necessary for each organizational
function and activity. The right employees should be there at right place. It basically
indicates orderliness
11. Equity: Equity is a combination of kindliness and justice. Both should be considered when
dealing with employees.

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 12. Stability of tenure of personnel: Employees need job security. They should be kept at
their positions at least for a minimum fixed period and no employee should be removed
within a short period of time.
13. Initiative: Employees should be encouraged to come forward and give suggestions
regarding new efficient methods of doing work.
14. Esprit de corps: Esprit de corps means ‘union is strength’ or ‘group spirit’. As per this
principle management should promote teamwork and group spirit among employees.

Importance or Advantages of Administrative Management

1. Healthy Financial Situation: Administrative management is a management strategy that

focuses on maintaining all expenses within the decided budget. It supervises all finances
of company and ensures that there is no wastage of money.
2. Higher Productivity: It aims at attaining the better coordination of all resources for
deriving maximum output.
3. Facilitates in Acquiring Goals: This efficient strategy of management assist in
accomplishing the primary goals of company.
4. Data-based Decisions: Administrative management theory avoids the basis of any
assumption or whim in decision-making process of organization. All decisions are taken on
the basis of information.
5. Improve Employees and Customer Satisfaction: It helps in enhancing the satisfaction
level of employees by properly allocating them work as per their skills.

Limitation or Disadvantages of Administrative management

1. Management Oriented- This theory does not give any attention to the issues of workers.
Ignoring the human behaviour will have adverse effects over the performance of
company.
2. Concepts Borrowed from Military Science- This strategy of management has borrowed
concepts from military science such as commanding.
3. Ignores Environmental Changes- Another major limitation of administrative management
strategy is that it does not consider the environment changes which have major impact
over the organization.
4. Mechanical Approach- This theory of management is mechanistic in nature. It cannot be
applied with key aspects of management. Administrative management theory has a
limited utility in a modern management concept such as communication, leadership and
motivation.
5. Deals with Formal Structure- Another major limitation with administrative management
theory is that it completely ignores the informal structure of organization. It does not give
any attention to non-formal groups and organizations.

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 15.3.2 Comparison between work of Taylor and Fayol
The work of Taylor and Fayol was to an extent but there were some dissimilarities also.

Taylor Fayol
He worked from bottom to top. His study was He worked from top to bottom His study was
related to Shop floor level related to Higher management level laying stress
on unity of command, unity of direction etc.
Narrow perspective. Advocated Efficiency Wider perspective. Advocated Efficiency through
through simplification and standardization observing certain management principles
Production and Engineering Managerial functions
Scientific observation and measurement Personal experiences translated into universal
truth
Basis for accomplishment on the production line Systematic theory of management
He gave stress on increasing productivity than on He showed regard for human element by
human resources advocating principles such as initiative, stability
of service and esprit de corps

15.4 Bureaucracy - Max Weber Contribution

Max weber was the one who contributed to this Bureaucracy school of thought.

Weber believed that All bureaucracies would have following characteristics

• A well‐defined hierarchy. All positions within a bureaucracy are structured in a way

that permits the higher positions to supervise and control the lower positions. This
clear chain of command facilitates control and order throughout the organization.

• Division of work and specialization. All responsibilities in an organization are

specialized so that each employee has the necessary expertise to do a particular task.

• Rules and regulations. Standard operating procedures govern all organizational

activities to provide certainty and facilitate coordination.

• Impersonal relationships between managers and employees. Managers should

maintain an impersonal relationship with employees so that favoritism and personal
prejudice do not influence decisions. Managers and employees must not be emotional
and sentimental towards each other

• Competence. Competence, not “who you know,” should be the basis for all decisions
made in hiring, job assignments, and promotions in order to foster ability and merit as
the primary characteristics of a bureaucratic organization.

• Official Records. A bureaucracy needs to maintain complete files regarding all its
activities. All the decisions and activities are recorded and preserved for future
reference
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 When a bureaucracy is implemented, it can provide accountability, responsibility, control,
and consistency. The hiring of employees will be an impersonal and equal system.

Reason for Efficiency in bureaucracy

The following factors are reasons for higher efficiency in bureaucratic organizations

1. Extensive rules and regulations give clarity regarding what is expected of employees
2. Decision making is rational and not by personal factors or personal bias
3. There is proper maintenance of official records, so employees refrain from doing anything
wrong

15.4.1 Merits and Demerits of Bureaucracy

Cons of Bureaucracy Pros of Bureaucracy
Rigidity in Operations: The rules which act source of Competence: Competence is given
efficiency can sometimes lead to rigidity killing innovation importance while doing appraisals and
and creativity personal bias not there
Lack of Human Touch: Bureaucratic organizations are Rules and Regulations lead to
inhuman which works like a machine in which there is np efficiency
importance of human beings because of too much
emphasis on rules
Delay and Red Tapism: Rules become source of delays and Rational behaviour: All decisions are
inefficiency as we see in government organizations logic based rather than on emotions
and personal bias
Gola Displacement: The bureaucrats may forget about Predictability: The behaviour of
primary goal and may just focus on rules and regulations employees is predictable; it is known
how they must react
Ineffective Communication No partiality happens as everything is
driven by rules and regulations
Compartmentalization of activities: Jobs are divided into
watertight categories and people are prevented from
performing jobs they are capable of

15.5 Human Relations Approach (Neo-classical Theory)

Elton Mayo is generally considered father of Human Relations school.

The classical writers such as weber and Taylor neglected the human relations aspect. The
neoclassicists focused on the human aspect of industry. They modified the classical theory by
emphasizing the fact that organization is a social system and the human factor is the most
important element within it.

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 15.5.1 Factors affecting Human Relations.
Four Factors Influencing Human Relations in an Organisations are:

(I) work environment: In general, when employee needs are satisfied, the work environment
is termed positive and when employee needs are not satisfied, the work environment is
termed negative.

(II) workgroup: The Hawthorne studies showed that the informal groups exert tremendous
influence over the Behaviour patterns of workers.

(III) individual: The human being is an important segment of the organization. Behaviour of
an individual is affected by his feeling’s sentiments and attitudes.

(Iv) leader: The leader must ensure full and effective utilization of all organizational resources
to achieve organizational goals.

15.5.2 Hawthorne Studies

A group of researchers led by John Elton Mayo and Fritz J. Roethlisberger were invited to
conducted studies at Hawthrone works of western electric company in USA.

Findings of Hawthorne Experiments:

1. Social Factors in Output (Social System): Organization is a social system where informal
relations exist. Therefore, while motivating workers, social factors shall be considered.
2. Social Environment: The social environment on the job affects the workers and is also
affected by them. Management is not the only variable.
3. Group Influence: Workers create informal social groups, and they behave more by the
norms of informal group to which they are adhered to.
4. Informal Organization: Informal organization does also exist within the framework of
formal organization and it affects and is affected by the formal organization.
5. Leadership: There is an emergence of informal leader and sometimes he becomes
important in directing the behavior of the group. He helps the group function as a social
group and achieve its objectives.
6. Supervision: Supervisors must be friendly to the workers, genuinely concerned about
their needs and such an attitude from supervisor impacts the productivity favorably.
7. Two-way Communication: Two-way communication is necessary as it is not only the
supervisors who need to order but workers must also be given opportunity to express
their feelings to the supervisors.
8. Non-Economic Reward: Money is only one of the motivators, but not the sole motivator
of human behaviour.

Criticism of Human Relation Approach

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 The human relations approach has been criticized on the following grounds:

1. Lack of Scientific Validity: The human relation drew conclusions from Hawthorne studies.
These conclusions are based on clinical insight rather than on scientific evidence.

2. Over-Emphasis on Group: The human relations approach over-emphasizes the group and
group decision-making. But, in practice, groups may create problems for the management
and collective decision-making may not be possible.

3. Over-Stretching of Human Relations: It is assumed that all organizational problems are

amenable to solutions through human relations. This assumption does not hold good in
practice.

4. Limited Focus on Work: It puts all the emphasis on interpersonal relations and on the
informal group. It tends to overemphasize the psychological aspects at the cost of the
structural and technical aspects.

5. Over-Stress on Socio-Psychological Factors: The human relations approach undermines

the role of economic incentives in motivation and gives excessive stress on social and
psychological factors.

6. Negative View of Conflict between Organizational and Individual Goals: It views conflict
between the goals of the organization and those of individuals as destructive. The positive
aspects of conflicts such as overcoming weaknesses and generation of innovative ideas are
ignored.

Difference between Human Relations Approach and Scientific Management:

Scientific Management Human Relations

Founded by F.W. Taylor Founded by Elton Mayo
It suggested engineering and scientific It suggested human relations as an approach
approach to doing things to achieve higher productivity
It focused on problem of productivity It focused on study of individual, his needs
and behavior
The main concepts are scientific selection and The main concepts are job satisfaction,
training of people, specialization of work motivation, and morale
It originated form experience of Taylor and Originated from Hawthorne studies
others in dealing with problem in factories
Part of classical theory school of thought Part of Human relations school of thought

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 15.6 Social System Approach
Social System approach has extended the implications of human relations approach further.
There is not much difference between the two. This approach was introduced by Vilfredo
Pareto and his ideas were later developed by Chester Barnard. Chester Barnard is seen as
founding father of this approach. Main Features of this approach are

1. An organization is social system consisting of people and their culture

2. Relationships exist among external as well as internal environment of the organization
3. Cooperation among group members is necessary for the achievement of Organizational
Objectives
4. Efforts should be made to establish harmony between the goals of the organization and
goals of various groups in the organizations.

15.7 Systems Approach

In the 1960, an approach to management appeared which try to unify the prior schools of
thought. This approach is commonly known as ‘Systems Approach’.

Features of Systems Approach

1. Interdependent subsystem: System is composed of interacting and interdependent

parts, called subsystems. These subsystems are related and dependent which when in
interaction make a unitary whole. There are 4 types of subsystems
a. Technical Subsystem: it refers to knowledge required to complete the work.
b. Social Subsystem: It refers to Individuals and groups in the organization.
c. Power Subsystem: Power is one’s ability to influence other into action in an
organization.
d. Managerial Subsystem: It refers to managing organizational activities. It consists of
operation and control.
2. Hierarchy of subsystems: System is composed of hierarchy of sub-systems. For example,
the world can be considered-to be a system in which various national economies are sub-
systems.
3. Synergy: The arrangement of subsystems in a system is more important. The whole
becomes greater than the total of individual parts.
4. Multidisciplinary: This theory of management is enriched by the contributions from
various disciplines like psychology, sociology, economics, anthropology, mathematics,
operations research and so on.
5. Multivariable: It considers so many variables which makes the process complex
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 6. Dynamic: Management as a system is dynamic. Even after reaching equilibrium there
would changes that would again make in unstable. So, it is a very dynamic system.
7. Organization as an Open Adaptive System: organizations cannot work like closed systems
as they have to constantly monitor the changes in external environment and adapt . This
theory views organization as an open system

Open System View of an Organization

Systems approach consider organization as open system in contract to classical theories

which saw organization as closed concept. Some characteristics of Open system are given
below:

1. Feedback mechanism: Feedback is given by the environment for improvement.

2. Equifinality: Equifinality means system can reach a final state from different initial
conditions. It implies not all organizations may not choose the same course of actions to
attain success.

The system approach has the following merits:

1. System approach provides a holistic view of the organisations and emphasises on their
adaptive nature. It increases organisation’s adaptability to environmental changes.

2. It analyses the system at different levels and inter-relates and integrates it into a unified
set of direction. Starting from individual goals, it focuses on overall organisational goals,
synthesizes the two and converges them into global economy.

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 3. System approach provides a framework for effective interaction of parts of the
organisation in a specific arrangement for attainment of its goals. It does not focus on one
part of the organisation.

4. It considers the impact of environment on the organisation and vice versa. Interaction of
external environment with the internal environment is the most significant contribution of
systems theory.

5. System approach synthesizes the classical and behavioural theories into a broader
framework to solve managerial problems.

Limitations of System Approach:

1. Abstract Analysis: Critics of this theory claim this as a theoretical approach to

management.

2. Limited View of Organization-Environment Interface: Relationship amongst parts of the

organization is emphasized upon but the exact nature of inter-dependence is not defined.

3. Lack of Unification: Management practices change with changes in environmental

variables. No standard set of principles apply to all types of organizations.

4. Limited Application: It fails to provide concepts that apply to all types of organizations.

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 MANAGEMENT
SUPPLEMENTARY CONCEPTS

Supplementary Notes
General Management Part 1

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 Read This Before Continuing Further
The purpose of the supplementary notes is that it helps us cover more breadth for the exam. We have put certain
things in supplementary notes and not in the Concept notes because if we put all the content in concept notes
then it will make the concept course very lengthy.

Concept Notes – Information that must be read for the exam (Must have)

Supplementary Notes – Information that is nice to read for the exam (Nice to have)

Though we have mentioned above that supplementary notes are “nice to have” and not “must have” but in this
time of competition when there is cut-throat competition, “nice to have” also becomes kind of mandatory. Every
single mark counts. Questions can be asked from Supplementary notes

To summarize, do not leave this part unless and until you are short of time.

Note: The content given in supplementary notes is not covered in videos since it would be too much time
consuming for an aspirant to watch video for supplementary part. Hence, please study these notes without fail
in case you want to cover the supplementary part.

While explaining some concepts, we have re-written some information which was already available in concept
notes just to give a full picture here in this document. So, if you find some information which you have already
read in the concept Notes then you can skip that

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Contents
1 Schools of Management.............................................................................................................................. 4
Decision Theory Approach ................................................................................................................... 4
Empirical Approach .............................................................................................................................. 6
Management Science or Quantitative Approach ................................................................................ 6
Behavioral Science Approach ............................................................................................................... 7
Contingency Approach ......................................................................................................................... 8
Practical Utility of Contingency Approach .................................................................................... 9
Relationship between System approach and Contingency approach .......................................... 9
Problems with Contingency Approach........................................................................................ 10
Operational Approach ........................................................................................................................ 10
Summary of Evolution of Management Thought .............................................................................. 10
2 Kautilyas Contribution to Management.................................................................................................... 11
3 Universality of Management ..................................................................................................................... 12

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1 Schools of Management
Management Thoughts or Schools of Management
Classical Theory
1) Scientific Management
2) Management Process or Administrative Management Approach
3) Bureaucratic Organization Approach

Human Relations approach

Social System Approach
System Approach
Decision Theory Approach
Management Science or Quantitative Approach
Behavioral Science Approach
Contingency Approach
Operational Approach

We have already studied schools of Management – Classical Theory, Human Relations Approach and Social
System Approach and System Approach. Now we shall study about some more schools of Management

1. Decision Theory Approach

2. Management Science or Quantitative Approach
3. Behavioral Science Approach
4. Contingency Approach
5. Operational Approach

Modern Theories of Management

The three theories: System Approach, Quantitative Approach and Contingency Approach together make
up for Modern theories of Management. The classical theories ignored the human element and believed
that human is motivated by money whereas modern theories lay emphasis on social interaction and
communication in humans and satisfaction of human needs other than money

Decision Theory Approach

Decision Theory Approach see management as decision making. Major contributions in this field has come
from Herbert Simon. As per this approach decision making is the job of every manager. Therefore, the basic
problem in managing is to make rational decisions. The features of this theory are

1. Management is essentially decision making

2. Managers are decision makers and Problem solvers
3. Organization is a combination of various decision centers. The importance of organizational members is
determined based on importance of decisions they make
4. Quality of decisions affect organizational effectiveness

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As per this theory, the factors affecting decision making are not only the process and techniques involved in
decision making rather it involves social and psychological aspects of decision makers

Contributions form Herbert Simon

1. Concept of Organization: Simon has described an organization as a complex network of decisional

processes. Thus, the best way to analyze an organization is to find out where and by whom decisions are
made

2. Decision making: Perhaps the greatest contribution of Simon is in the field of decision-making. According
to him, the decision process can be broken into a series of three sequential steps
a. Intelligent activity the initial phase of searching the environment for conditions calling for decisions
b. Design activity the phase of inventing, developing, and analyzing possible course of action to take
place
c. Choice activity the final phase of actual choice selecting a particular course of action from those
available

3. Bounded Rationality: Simon is of view that man is not completely rational. He has criticized the theories
which are based on the assumptions of complete rationality. He has advocated the principle of bounded
rationality. Accordingly, managers do not go for maximum satisfaction of a decision but are satisfied with
good enough satisfaction (satisficing) from a decision.

4. Administrative Man Model: Simon has given the concept of administrative man as the model of decision-
making in which an administrative man adopts satisficing approach i.e., he goes for simply good enough
satisfaction and not the maximum output. He perceives the world as a simplified model of real world.
Thus, he remains content with simplification, can make his choice without determining all possible
alternatives, and is able to make decisions with simple rule of thumb or tricks of trade

5. Organizational Communication: Simon has emphasized the role of communication in organization.

According to him, there are three stage in the communication process: initiation, transmittal, and receipt
of information. There may be blockade of communication and any of these three stages. In order to
overcome the problem of communication, he has emphasized the role of informal communication and
has attached less importance to the formal network of authority

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 Empirical Approach
Major Features of Empirical Approach are

1. According to this approach, management is the study of the experiences of managers.

2. The knowledge based on experiences of successful managers can be applied by other managers in
solving problems in future and in making decisions.
3. Thus, the empirical school is based on analysis of experience which believes management theories
can be developed by studying large number of experiences because of some sort of generalizations

The major contributions in the Empirical Approach came from Mooney and Riley, Urwick and Earnest Dale.
Peter Drucker also belongs to this approach who had vast experience in field of management. Major
Contributions of Peter Drucker are as follows

1. Nature of Management: He defined management as creative and innovative process. Basic objective of
management tis to lead organization towards innovation. He believed management is not a science
rather management is distinct disciple and profession

2. Organizational Structure: Drucker has decried bureaucratic structure because of its too many
dysfunctional effects. Therefore, it should be replaced. He has emphasized three basic characteristics of
an effective organization structure
a. Enterprise should be organized for performance
b. it should contain the least possible number of managerial levels
c. it must make possible the training and testing of tomorrow’s top managers—responsibility to a
manager while still he is young

3. Federalism: Drucker has advocated the concept of federalism. Federalism refers to centralized control in
decentralized structure just as it happens in the case of Central and State Governments

4. Management by Objectives: Management by objectives is the process of defining specific objectives

within an organization that management can convey to organization members. The goals of employees
are set in mutual discussion between managers and employees and those goals are in line with
organizational objectives

5. Organizational changes: Drucker has visualized rapid changes in the society because of rapid
technological development. Organizations need to tackle this by developing dynamic organizations which
can absorb changes much faster than static ones

Management Science or Quantitative Approach

This approach is also called ‘Mathematical’ approach or ‘Operations Research Approach’ or Quantitative
Approach

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This approach believes in scientific tools for providing base for managerial decisions. The major features of
this approach are

1. Management problems can be described in terms of mathematical symbols and data

2. Management is about problem solving using mathematical tools and techniques such as linear
programming, break even analysis
3. Decision making may require skills of various disciplines such as engineering, mathematics, statistics,
economics, finance etc.

The quantitative approach to management has its root in the scientific management movement. Since Taylor
advocated a logical sequence of problem formulation, fact finding, modeling, a tentative solution, testing
etc., his scientific approach could be classified as an early form of quantitative approach to management

It is developing as a widely adopted approach. But this approach is not able to handle many problems like
motivation and other psychological needs which are related to human. This approach does not consider
human element in the organization. This approach assumes that all the variables are quantifiable and
measurable which may not be fully true in all the cases

Difference between Scientific Management and Quantitative Approach

Scientific Management Quantitative Approach

Advocated use of scientific methods in doing Advocates use of mathematical models for
work solving management problems
Focus on improving efficiency of workers and Focus on finding answers to management
machines problems
Stress in experiment and research for improving Stress of mathematical models for making
efficiency managerial decisions
Given by F.W. Taylor Popularized by W.C. Churchman
Concerned with analysis of operational Concerned with finding solutions to all problems
problems at shop floor level at all levels of the organization
Closed Approach perspective of organization Open system view of organization and presents
an integrated approach to its problems

Behavioral Science Approach

Since management aims at getting work done from the people, the study of management must revolve
around human behavior. This approach is also known as Leadership approach or human resource approach.
In contract to human relations approach which believes that happy workers are productive workers, the
behavioral science approach considers that better work performance itself is a source of happiness of
workers

All the leadership theories and Motivational theories such as Maslow, Herzberg, Theory X, Theory Y etc. are
in line with this approach. If you remember most of these theories say how recognition, achievement,

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participation etc. are important for satisfaction of employee which means work performance will need to
happiness

Major Propositions of Behavioral Science Approach are

1. People do not dislike work. If they are clear what is to be achieved, they will want to achieve it. Job
itself is a source of motivation and satisfaction to employees
2. The basic job of manager is to tap the untapped potential by showing them direction and motivating
them
3. Subordinates should be encouraged to participate and develop self-direction and self-control
4. It is goal oriented. It recognizes the goal conflicts in the organization and suggest reconciliation of
goals of the individual and organization
5. It focused not only on individuals but also on group relationships in a company
6. The central core of this approach is about following aspects of human behavior – motivation,
leadership, communication, participative management etc.
7. It is drawn from behavioral sciences namely psychology, Sociology and Anthropology

The behavioral science approach seems like Human Relations approach. But here are some key differences

Criticism of Behavioral Science Approach

1. Behavioral sciences have enriched management theory through their contribution in areas like
motivation, communication etc. but it failed in developing an integrated theory of management. There
are other variables such as technology and environment which have important bearing on the
effectiveness of the organization
2. Behavioral science still has not achieved the precision of physical science. Human behavior is complex
and most of the research done in this area is tentative and require further investigation

Contingency Approach
Contingency approach in a way is an extension of Systems approach. Contingency approach, also known as
situational approach, is a concept in management stating that there is no one universally applicable set of
management principles (rules) by which to manage organizations. Organizations are individually different,
face different situations (contingency variables), and require diverse ways of managing

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Pigors and Myers started working on this approach in 1950 but it was Joan Woodward who in 1950s marked
the beginning of this approach

An example of this is the never-ending problem of increasing productivity. The different experts would offer
different solutions as given below

1. Behavioral scientist: create a climate which is psychologically motivating.

2. Classical management approach: create a new incentive scheme.
3. Contingency approach: both ideas are viable, and it depends on the possible fit of each solution with
the goals, structure, and resources of the organization

There are 3 major parts of the framework for contingency framework

1. Environment
2. Management concepts and principles
3. Contingent relationship between first two
The environment will act as ‘if’ variable and Management concepts will act as ‘then’ variable. There is
contingent relationship between the two i.e., Management concepts and principles need to be applied
depending on the changes in the environment

Practical Utility of Contingency Approach

1. Contingency approach advocates that there is no single best solution to manage all the situations.
Therefore, management should deal with different situations in different ways. In other words, the
effectiveness of any technique is contingent on the given situation
2. Contingency approach is action-oriented since it is directed towards application of systems approach
and the knowledge gained from other approaches. However, the choice of particular approach or
managerial style would depend on the type of situation faced

Relationship between System approach and Contingency approach

Systems approach just lays down that simply that organization interacts with the environment. On the other
hand, Contingency approach not only talks about interaction between environment and Organization but
also about how managerial style needs to be changed as per changes in environment.
They are very much similar also. If you remember we discussed the principle of equifinality which means
system can reach a final state from different initial conditions. It implies not all organizations may not choose
the same course of actions to attain success. So, in a way it suggests different strategies can be adopted by
different systems which is exactly like contingency approach

Systems Approach Contingency Approach

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 It lays emphasis on the interdependencies and It identifies the nature of interdependencies and the
interactions among the systems and subsystems impact of environment an organizational design and
managerial style

It treats all organizations alike. Size of organization Each organization is to be studied as a unique entity
and its socio-cultural setting are not considered

It studies organizations at philosophical level It follows action-oriented approach and is so

pragmatic. It is based on empirical studies

It simply lays down that the organization interacts The impact of environment on the organizational
with the environment structure and managerial style is the major concern
of contingency approach

It does not comment on validity of classical It rejects the blind application of the classical
principles of management principles of management

Problems with Contingency Approach

1. Complex in practice: It makes a quite simple suggestion that managers should so as per the needs of
the situation. But this is easier said than done

2. Reactive not Proactive: It is basically reactive in nature. It suggests what managers to do in a given
situation. In fact, the reactive way would be to impact the environment through management
strategies. For example, Zomato and swiggy have made people felt the need of eating at home rather
than dining outside, they have impacted the environment by creating the need

Operational Approach
This approach views management as an activity based on certain unique management functions.
Management is regarded as a process for getting things done through the functions of planning, organizing,
staffing, leading, and controlling. It involves coordination of human and material resources. As per this
approach management is body of knowledge applicable at all levels of management and in all the enterprises.
Managers must consider the environmental factors while designing solutions to the problems

Summary of Evolution of Management Thought

Traditional (1900 to 1930) Modifications (1930-1960) Modern Approach (1960
onwards)

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 Scientific Management: Huma Relations Approach Systems Approach:
Application of scientific methods
Hawthorne experiments, informal Open and adaptive system,
such as efficient task
groups, leader, and interface with external
performance, time and motion communication, Making workers environment, interdependence,
study, functional foremanship, happy through better human and inter-related subsystems
differential wage plan etc. relations
Administrative Management: Behavior Science Approach Contingency Approach
Management Theory: Functions Psychological, cultural, and Based on systems approach.
and Principles, Universal
sociological issues, motivation, Relevancy of contingency or
Application of Management leadership, communication, situation. Management style
Principles, management
participative management, based in situation. Action-
education conflict etc. Satisfaction through orientation, multi-disciplinary,
job performance organic structure
Bureaucracy: Quantitative or Management Operational Approach
Rational-Legal Authority, rules Science Approach Management is operational
and regulations, impersonal Rational decisions, economic- process. Central core of
conduct, efficiency etc. technical rationality. Use of management knowledge of
mathematical models drawn from various approaches.
Application of knowledge should
be based on problem faced

2 Kautilyas Contribution to Management

Kautilya was one of the early contributors to management

Kautilya has identified seven pillars for effective state administration. Let us take a closer look at each of
these

1. The King (The Leader). A great organization has great leader, like a great king. The leader is the visionary,
the captain the man who guides the organization. In today's corporate world, we call him the chief
executive. Without visionary chief executive, an organization will lose direction

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2. The Minister (The Manager). The manager the second-in-command is the person runs the show and in
always in action. He is the person on whom one can depend in absence of leader
3. The Country (The Market). No business can exist without its market. It is the area basically from where
the organization get a revenue. The organization needs a dominate its territory
4. The Fortified city (Head office): The organization needs a control tower – a place from where all the plans
can be executed.
5. The treasury (Finance): Finance is extremely important resource. It is the backbone of any business. A
strong and managed treasury is the heart of any organization
6. The Army (Your Team): When you go to war, you need a well-equipped arm. In ease of an organization,
the army consist of team members who ae ready to swat out for the organization

3 Universality of Management
We have discussed that management is universal i.e. it is present everywhere. There is controversy about
this. Some people feel management is universal whereas others feel management is not universal.
Settlement of this controversy can be done by determining the extent to which management knowledge
developed in one country can be transmitted to other countries. If it is universal then it must be possible to
transmit the same, otherwise there can be serious questions on the universal use of management

We shall study arguments in favor of universality of management and against it

Arguments in favor

1. Management as a process is universal. Functions of management such as planning, organizing,

staffing, directing sand controlling are present in all the organizations
2. Management fundamentals are same though the techniques may change. For example, motivation
of workers is management fundamental, but the techniques of management can be different

Arguments Against
1. Management is culture bound. The management practices which might work in India might not work
in US
2. The organizational objectives determine what type of management is required. If objective is profit
motive, then different type of management is required than what would be required in non-profit
organizations
3. The management philosophy is different in different organizations. For example, take an example of
Infosys which is professionally managed and is totally different from Hero Honda which is family-
managed

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Important Points

1. This Summary Sheet shall only be used for Quick Revision after you have
read the Complete Notes
2. For Building Concepts along with examples/concept checks you should
rely only on Complete Notes
3. It would be useful to go through this Summary sheet just before the
exam or before any Mock Test
4. Questions in the exam are concept based and reading only summary
sheets shall not be sufficient to answer all the questions

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1. Management Processes
Functions of management given by KOONTZ and O’DONNEL are Planning,
Organizing, Staffing, Directing and Controlling

In this part we will only discuss on Planning. Organizing, Staffing, Directing and Controlling will be
discussed in later chapters

2. Planning
Planning involves deciding in advance what needs to be done and how to do it

The concept of planning is different from plan. Planning is process of consisting of various
steps whereas plan is a commitment to a particular course of action believed necessary to
achieve the specific results. For example, the five-year plans made by government are plans
but the process used to make those plans is called planning

1.1 Characteristics of Planning

1. Planning is Primary Function:
2. Rational Approach:
3. Open system approach: This approach of planning indicates that the future course of action is
influenced by the environment in which system operates. So, while planning, managers must
consider various features of environment
4. Planning is Result Oriented:
5. Planning is Looking Ahead in future:
6. Planning is a continuous activity:
7. Planning is Pervasive: It is required for all the business activities and by all the managers at all
the levels.
4. Planning is Interdependent activity: One departmental plan is dependent on other
departmental plans.
5. Planning Involves Decision making: While planning one must evaluate various alternatives. A
manager must choose one alternative and hence planning involves decision making

6. Planning is flexible: Planning is done for future and since future is not predictable, planning
must be able to cope with changes in customer preference, competition, and govt. policies etc.

1.2 Steps in Planning

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1.3 Types of Planning
Planning can be categorized as per below given criteria

Dimension Types of Planning

Coverage of Activities Corporate Planning and Functional Planning
Importance of content Strategic Planning and Operational Planning
Time Period Involved Long Term Planning and Short-Term Planning
Specificity Directional or specific

1.3.1 Corporate Planning Vs. Functional Planning

Corporate planning is undertaken at top level also known as corporate level. It covers the
entire organizational activities and is done to determine long-term objectives of the
organization. Functional Planning is of segmental nature and is undertaken for each major
function of the organization. Functional planning is derived out of corporate planning and
therefore it should contribute to the latter.

1.3.2 Strategic or Tactical Plans

Strategic planning deals with strategic issues like diversification of business, new products to
be launched. It is done to establish long term objectives and how the resources should be
used to meet these objectives.

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Tactical planning also known as operational planning relates to actions taken day-to-day
basis. In tactical planning we will make effective use of resources allocated through strategic
planning and to develop a control mechanism to ensure effective implementation.

Basic differences between strategic planning and tactical planning:

1. Upper management generally develops the strategic plans whereas lower level
managers develop the tactical plans.
2. Strategic planning considers external environment whereas operational planning mainly
focuses on internal environment of the organization
3. Strategic planning is done before tactical planning and tactical planning is based on
strategic planning
4. Facts on which to base strategic plans are usually more difficult to gather than are facts
on which to base tactical plans.
5. Strategic plans are generally less detailed than tactical plans.
6. Strategic plans cover a relatively long period of time whereas tactical plans cover a
relatively short period of time.

1.3.3 Long Term of Short-Term Plans

Short Term Plans are made to execute and produce results within one year whereas longer
term plans to planning and execution which goes beyond 1-year duration, usually from 3 to 5
years

1.3.4 Directional or Specific Plans

Specific plans mean plans that have clearly defined objectives and leave no room for
misinterpretation. Directional plans mean flexible plans that set out general guidelines

1.4 Approaches to Planning

Proactive Planning Approach involve designing suitable courses of action in anticipation of
likely changes whereas Reactive Planning Approach means organizations respond after the
change happens in the environment.

1.5 Types of Planning Premises:

1.5.1 Internal and external:

Internal premises are those which exist within the business enterprise. They are related to
organizational factors. The factors considered in internal premise may be strength or
weakness of the organization. Analysing strength and weakness are also called
organizational analysis

External premises centre round the markets and derived from the external environment
surrounding the business. The factors considered in external premise offers threats and
Opportunities Analysing the threats and Opportunities is also called environmental analysis
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Usually the environmental and organizational environmental is combined to have SWOT.
SWOT is acronym for strength, weakness, opportunity, and threat)

1.5.2 Tangible and Intangible Premises:

Tangible premises are those which can be measured quantitatively. They may be quantified
in terms of money, time, and units of production. Intangible premises are those which cannot
be measured quantitatively.

1.5.3 Controllable, Semi-Controllable and Uncontrollable Premises:

1. Controllable Premises: There are certain factors which are well within the control of the
management to a great extent. Controllable premises are mostly internal premises
2. Semi-controllable premises: These are those assumptions about future which are under
the partial control of a business.
3. Non-controllable premises: These are entirety beyond the scope of business-like
government policy, international trade agreements, wars, natural calamities new
discoveries and inventions etc.

1.6 Barrier to Effective Planning

1. Difficult of accurate premising or predicting the future
2. Difficulty of Rapidly changing environment
3. Time Consuming
4. Costly
5. Generates Rigidity: While carrying on actual performance, managers always focus only
on planned targets. It may be possible that, sometimes higher performance may be
possible. But managers tend to achieve only what has been planned

1.7 Features of Sound Plan

1. Plan must be linked to Long Term Objectives
2. Plan must be consistent with the external and internal factors
3. Plan must be feasible
4. Plan must be flexible so that future unseen circumstances can be incorporated in the
plan. There are 2 principles in this context
a. Principle of flexibility: The flexibility should be incorporated in both short term
and long-term plan
b. Principal of Navigational Change: This is based on the principle of navigator
checking constantly where his slip is going in vast ocean. Similarly, manager
should check his plans and evaluate whether these are proceeding in the right
way

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2 Types of Organizational Plans
Based on usage plans are classified as single use plan and standing plans.

Standing Plans: These plans are prepared for repeat use. For example, plan to extinguish fire
Single Use Plans: These plans are prepared to achieve specific objectives. For example, plan to
finance the deficit in 2010-2011 is a plan valid for only one year, it cannot be used again and again

2.1 Hierarchy of Plans

2.1.1 Mission
Mission is the statement which reflects purpose, philosophy, and vision of the organization. For
example, Mission could be to be leading motorcycle manufacturer in the world

2.1.2 Objectives
The end results which organizations seeks to achieve are known as goals or objectives.
Though the term goals and objectives are used interchangeably but they do differ

Factor How Goals and Objective are different

Time Frame Goals are timeless whereas objectives are time bound.
Specificity Goals are generally broad in line with the aspirations whereas objectives are
generally more specific.
Focus Goals are usually stated in terms of external environment whereas objectives
are more internally focused
Measurement Goals are set in qualitative terms whereas objectives are set in quantitative
terms.

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Role of Objectives

1. Direction for Action:

2. Performance Standards
3. Basis for Decentralization

Multiplicity of Objectives

Peter Drucker believed that an organization must have multiple objectives. He suggested that
objectives must be set in following 8 key areas

2.1.3 Strategy
Strategy is course of action which an organization tries to relate itself with its environment
to develop competitive advantage which helps in achieving its objectives. For example: to
launch a motorcycle for a rural area which is sturdy and comfortable

2.1.4 Policies
The term “Policy” is defined by koontz and O ‘Donnel as “policies are general statements or
understandings which guide mangers thinking in decision making”. Policies define how an
organization should deal with its stakeholders such as employees, suppliers, customers etc.

For example: Policy could be not to sell motorcycles in credit

Policies may be divided into different types of policies from different approaches.

A. Based on Source:

1. Formulated or Originated Policy: By originated policy they refer to policy which originates
from the top management itself.

2. Appealed Policy: When the current policy is not able to handle any situation, then an
appeal by any subordinate to the manager results appeal being forwarded to higher
authorities

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3. Implied Policy: Implied policy is meant policies which emanate from conduct. They are not
clearly stated but actions of managers at higher level provide guidelines to juniors.

4. Externally Imposed Policy: Policies may be imposed externally that is from outside the
organisation on such as by Government control or regulation, trade associations and trade
union etc.

B. Based on different Levels:

Policies are divided into the following types based on levels:

1. General Policies: General Policies are those which are followed in all the departments and
unit of the organization. For example, policy of sick leave will be uniform across all the
departments

2. Specific Policies: Specific Policies are those which are followed by departments of
organization differently. For example, HR department may have different incentive policy and
Marketing department may have different incentive policy

2.1.4.1 Difference between Policy and Strategy

Basics of Strategy Policy
difference
Nature Determine what and what type of How Aspect of actions
actions
Prescription Direction for actions Guidelines for actions
Indication Indicates destination Indicates route to reach destination
Context Mostly environmental factors Mostly organizational factors
Derivation Mission and Vision of Organization Objective of Organization
Number Few Many in number

2.1.5 Procedure
A procedure is chronological sequence in which an activity should be performed to achieve the
objective of the activity.
Difference between Policy and Procedure
Basis of Difference Policy Procedure
Nature It is a general statement It is a specific statement
Role It provides guideline for thinking Itforprovides chronological steps for
a specific direction completing a task
Flexibility It is flexible to some extent It is not flexible
Relevance Its s relevant for higher Management
It is relevant for lower management

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2.1.6 Method
Methods are standardized way or manner of performing a routine activity. For example, there are
different methods of valuation of closing stock in an organization, but organization may choose
one method which is adopted throughout the organization

2.1.7 Rule
Rule is a specific statement that prescribes what is to be done or not done in the organization.
Policy may leave some areas for discretion, but rules are to be strictly followed. Rules does not
allow any deviation from the stated course of action

2.1.8 Programme, Budget, and Schedules

Programme: Programmes are the combination of goals, policies, procedures, and rules. All these
plans together form a program. The programmes create relation between policies, procedures,
and Rules. For example, launching of new product.
Budget: Budget is the statement of expected result expressed in numerical terms. In budgets the
results are always measurable and most of the time these are financial in nature,
Schedules: A schedule is a timetable for activities. It defines start time and completion time of
each activity. It ensures completion of work on time

3 Strategy in Organization
We discussed about strategy in brief in the previous section. Now we shall discuss in detail
about strategy here

3.1 Role of Strategy in Organization:

In an Organization, the strategy plays an especially important role. It helps in following ways

1. Clarity in Direction of Activities:

2. Framework for Operational Planning:
3. Personnel Satisfaction:

3.2 Types of Strategy in Organization: Based on Levels

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3.2.1 Corporate Strategy:
The first level of strategy in the business world is corporate strategy, which sits at the ‘top of
the heap’.

Corporate Strategy can be of the following types

1. Stability: Achieving stability in current business

2. Growth: Expansion of same business or Diversification into new business
3. Retrenchment: Closing a business or selling a share business to other company

3.2.2 Business Strategy:

Every large company has certain business units such as Reliance has business units of
Reliance Petroleum, Reliance Energy and Reliance Telecom etc. These business units are SBUs
– Strategic Business Units. Each SBU has its own product, own market, own customers and
therefore its own business strategy. In other words, the strategies that you outline at this
level are slightly more specific and they usually relate to the smaller businesses within the
larger organization.

3.2.3 Functional Strategy:

Functional Strategy basically relates to single business function such as Finance, Marketing,
HR Strategy.

The decisions at this level are called tactical or Operational decisions.

Sometimes below the Functional Strategy, we have operational strategy as each function can
be divided into sub-functions. For example, the marketing department can be divided into
sales, distribution, promotion, pricing etc. So, the Sub-Functional strategy would be made at
Operational Level Strategy

3.3 Types of Strategies – Based on Growth

The strategies based on whether organization wants to grow can be of following 4 types

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1. Stability Strategy: Under this strategy, the business will concentrate on utilizing its present
resources to develop its competitive strength within a restricted product-market
configuration
2. Growth Strategy: Growth strategy means company is wants to grow instead of just being
stable. Growth strategy can be of 2 types – Intensive and Diversification
a. Intensive Growth: It is a strategy of aggregation or expansion under which growth is
achieved by expanding the scale of operations. Intensive growth can further be of 3
types
i. Market Penetration: Aim is to increase sale of present products in present
markets though more aggressive promotion and distribution
ii. Market Development: Aim is to increase the sales by selling present products
into new markets. For example, venturing into foreign markets
iii. Product Development: Aim is to grow by developing new variety in current
products or improving current products for the present market.

b. Diversification Strategy: Aim is to increase sales by developing new products for the
new markets.
3. Retrenchment Strategy: A strategy used by corporations to reduce the diversity or the
overall size of the operations of the company. Retrenchment strategy can be of 3 types
a. Turnaround Strategy: It refers to the management measures which turn a sick
company back to a healthy one
b. Divestment Strategy: In Divestment strategy company may decide to close/sell the
business unit or division if it seems it cannot be turned around.
c. Liquidation Strategy: The strategy is used as a last resort where the whole company
is sold to avoid bankruptcy. The main difference between Divestment and Liquidation
is that the Divestment is selling off a division or a unit whereas Liquidation is a
winding-up of the whole company
4. Combination Strategy: A company into many products may use different strategies for
different products

3.4 Types of Global Business Strategies

The companies which operate in many countries must face may challenges. They basically
face two type of pressures

1. Pressure for Cost Minimization: The cost of products must be minimized

2. Pressure for Local Responsiveness: The company must adjust to local customer
preferences and taste

Based on these two factors there are 4 types of global business strategies as shown below

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Let us discuss them one by one

3.4.1 Global (Low Cost and Standard Products)

Global Business Strategy assumes that customer needs are similar worldwide. Therefore,
organizations can sell standard products in same way in any country. Organizations compete
based on price. They leverage economy of scale as much as possible to boost their reach and
revenue.

3.4.2 Multi-domestic (High Cost and Customized Products)

In this strategy, the organizations try to achieve high level of local responsiveness though the
cost may be high. Companies modify their offerings and reposition their marketing strategies
to engage with foreign customs, cultural traits, and traditions. The products may require high
amount of customization and therefore the costs are increased which are passed on to the
customers

3.4.3 International (Moderate cost and Little Customized Products)

Initially when company is new in business and want to expand, it may not be able to either
reduce costs or make the products highly responsive to local market. So, they might not be
able to opt for global or multidomestic strategy. As a result, they follow a balanced path
where neither they reduce the costs too much nor make the products highly responsive to
local market. They sell somewhat customized products at a medium cost. Later once they
gain momentum, they can either shift to Global Strategy or Multidomestic Strategy
depending on what kind of product they are selling

3.4.4 Transnational (Low Cost but Customized Products)

In Transnational Strategy, the products are low cost but still they are customized products for
the customers. This might seem contradictory, but this is possible with innovative techniques
of doing business.

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3.5 Portfolio Analysis – BCG Matrix
BCG matrix tries to analyze the business units in a company

The rate of market growth rate is plotted against the relative market share of the business
unit. The business units are classified into 4 types

1. Dogs: Low market share in slow growing market. It is kind of stagnant business
2. Cash Cows: High Marker share in slow growing market. This is seen as profitable business
giving quick cash revenues without much investment
3. Stars: High Market share in high growing market. Company needs to invest here to keep
the market share in rapidly growing market. These can be future stars for the company
4. Question Marks: Low market share in high growth market. It is a question mark for the
company because company needs to invest to keep with the market growth, but its low
market share may be against investing more

4 Management by Objectives
We have earlier studied about objectives under the hierarchy of plans. In line with that we
are going to study about Management by Objectives

Management by objectives (MBO), also known as management by results (MBR), was first
popularized by Peter Drucker in his 1954 book The Practice of Management

The essence of MBO is participative goal setting. The principle behind Management by
Objectives (MBO) is to make sure that everybody within the organization has a clear
understanding of the aims, or objectives, of that organization, as well as awareness of their
own roles and responsibilities in achieving those aims. The goals are agreed by employees
and are not merely imposed on them

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4.1 Process of MBO

1. Setting Organizational Objectives: The first step is setting organizational objectives

These objectives are set form long-term view of the organization
2. Identification of Key Result Areas: Organizational objectives and planning premises
together provide the basis for identification of key result areas (KRAs). The key result
areas can be product quality, cost, sales volume, distribution network, cash flows etc.
3. Setting Superior and Subordinate Objectives: The process of objective setting begins
with superior recommending the subordinate’s objectives. Subordinate will also state
his own objectives. Thereafter, the final objectives for the subordinate are set by the
mutual negotiation between superior and subordinate
4. Appraisal: Appraisal is done to gauge whether the subordinate is achieving the
objectives or not. If there is a deviation, then corrective steps may be taken
5. Process continuity: Appraisal is last process but feedback from appraisal goes into
setting next set of objectives. So objective setting leads to action plans and action
plans provide basis for appraisal and feedback from appraisal is used to set the next
set of objectives
Benefits of MBO
1. Clarity of Goals to Employees
2. Focus on key Result Areas
3. Basis for Organizational Change: MBO stimulates the organizational change and
provides a framework and guidelines for planned change. In MBO, Organizational
members accept the change readily because they are actively involved in objective
setting
4. Better communication and coordination – Frequent reviews and interactions
between superiors and subordinates help to maintain harmonious relationships
within the organization and to solve problems

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 Drawbacks of MBO
1. At times it can be time consuming
2. In some cases, companies introduce MBO, but individual managers are unwilling to
delegate fully to their subordinates
3. Sometime objectives are set from short-term perspective and emphasis on short term
objectives may lead to opposite results as envisioned by long term planning
4. Inflexibility: MBO represents danger of inflexibility in organization when objectives
need to be changed. In dynamic environment, a particular objective may not be valid
for ever.

5 Decision Making in Planning

Decision-making is the process of identifying and choosing alternatives based on
the values, preferences, and beliefs of the decision-maker.

Difference between Decision making and Problem Solving

Decision making is a process of selection of an alternative which may or may not be new
while problem solving is the invention of an alternative that is different from the earlier
decision that has created the problem.

5.1 Decision Making Types

1. Programmed and Non-Programmed Decision Making: Programmed decisions are those
that are based on criteria that are well understood. There are routine and repetitive in
nature. On the other hand, non-programmed decisions are the one which do not have
established rules and problems.

2. Strategic and Tactical Decisions:

Strategic Decisions Tactical Decisions

Strategic Decision affects the whole Tactical Decisions relate t day to day
organization and determine the direction operations of the organization. They are
of Organization mostly repetitive in nature like purchase
of new raw material
They are mostly non-programmed They are mostly programmed
Their outcome is long-term in nature Short term in nature
The authority lies with higher lever in the The authority can be delegated to lower
organization levels in the organization

3. Policy and Operating Decisions: Policy decisions are taken by top management. They
affect the entire enterprise. But operating decisions are taken by lower management to
put the policy into action.
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4. Individual and Group Decision Making: In an organization decision can be made
individually or in a group. Group decision making can lead to quality decision but is time
consuming. Let us discuss the Pros and Cons of group decision making in detail

Pros of Group Decision Making Cons of Group Decision Making

Pooling of Knowledge and Information from Time Consuming activity

various sources leading to better quality
decisions

People participate in decision making and hence Domination: Certain people due to their position
they get satisfaction from it or age may dominate in group decision making
and thereby defeating the purpose

People learn from others in group decision Lack of Responsibility in group decision making
making leading to Personnel development

Risk taking of individual is less but in group we Groupthink is a type of thinking when reaching
tend to take more risk agreement is more important rather than
arriving at sound decision. People conform to the
pressure of the group. Groupthink can happen in
group decision making

Satisficing: A combination of the words "satisfy"

and "suffice". Members accept a low-risk, easy
solution instead of searching for the best
solution.

5.2 Steps in Decision making Process

The above decision-making process is based on Simon’s decision-making process who has
proposed phases of decision making: Intelligence (Problem Identification), Design (Alternative
generation) and Choice (Choosing an alternative). As per him the decision-making process is a
rational decision-making process

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5.3 Models in Decision Making – Economic Man Model and Administrative Man
Model
There are two models of decision making which differ according to the emphasis they put on
rationality. These two models are

1. Economic man model (Maximization)

a. Economic Model believes that person searches for all the possible alternatives and
selects the best alternative among them
b. For this he might have to collect lot of data and information
c. This believes in perfect rationality
d. The objective is to maximize the return

2. Administrative Man model (Rationalization)

a. Administrative Man model believes that person selects the alternative which is
satisfactory or good enough though it might not be the best alternative.
b. For this he might have to use rules of thumb, intuition etc.
c. This believes decisions cannot be fully rational and these partial rational decisions
are based on ‘bounded rationality’ where rationality has certain limits
d. The objective is to optimize the return

5.4 Decision Making Conditions

Decision Making faces 3 conditions they are.

(1) uncertainty,
(2) certainty
(3) risk.

5.4.1 Certainty
Under conditions of certainty, the manager has enough information to know the outcome of
the decision before it is made.

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 5.4.2 Risk
Risks exist when the individual has some information regarding the outcome of the decision
but does not know everything when making decisions under conditions of risk, the manager
may find it helpful to use probabilities. To the degree that the probability assignment is
accurate; he or she can make a good decision.

Let us consider the case of a company that has four contract proposals it is interested in
bidding on. If the firm obtains any one of these contracts, it will make a profit on the
undertaking. However, because only a limited number of personnel can devote their time to
putting bids together, the firm has decided to bid on one proposal only—one that offers the
best combination of profit and probability that the bid will be successful. This combination is
known as the expected value.

The profit associated with each of these four contract proposals, as presented in below table,
varies from $100,000 to $400,000. The probability of getting the contract is also given. On
which of the proposals should the firm bid?

As the table shows, the answer is number three. It offers the greatest expected value.

Computation of Expected Values

Contract Profit ($) The probability of Getting the Expected Value ($)
Proposal Contract
(Profit * Probability)

1 100,000 .2 20000

2 200,000 .3 60000

3 300,000 .4 120,000

4 400,000 .1 40000

5.4.3 Uncertainty
Uncertainty exists when the probabilities of the various results are not known. The manager
feels unable to assign estimates to any of the alternatives.

Under such a condition, several different decision criteria have been proposed as possible
bases for decision making.

These are as follows:

1. Maxima Criterion (Optimistic Criterion): In this the best payoff of each alternative is
selected and then maximum among those best payoffs will be selected
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2. Maximin Criterion (Pessimistic Criterion): We select the worst payoff of each alternative
and then select the maximum one among those worst payoffs

3. Minimax Regret Criterion. In this we first select the best of each alternative and then
select the minimum among those.

4. Insufficient Reason Criterion. The average of all the possible conditions under each
alternative is taken and the one with best payoff is selected

The average return of large plant would be (0+180000)/2 = 90000

The average return of small plant would be = 60000
The average return of small plant would be = 100000

The best average return is given by third option of doing nothing, so it would be selected.

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 MANAGEMENT
SUPPLEMENTARY CONCEPTS

Supplementary Notes
General Management Part 2

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 Read This Before Continuing Further
The purpose of the supplementary notes is that it helps us prepare in depth for the exam. We have put certain
things in supplementary notes and not in the Concept notes because if we put all the content in concept notes
then it will make the concept course very lengthy.

Concept Notes – Information that must be read for the exam (Must have)

Supplementary Notes – Information that is nice to read for the exam (Nice to have)

Though we have mentioned above that supplementary notes are “nice to have” and not “must have” but in this
time of competition when there is cut-throat competition, “nice to have” also becomes kind of mandatory. Every
single mark counts. Questions can be asked from this in the exam

To summarize, do not leave this part unless and until you are really short of time.

Note: The content given in supplementary notes is not covered in videos since it would be too much time
consuming for an aspirant to watch video for supplementary part. Hence, please study these notes without fail
in case you want to cover the supplementary part.

While explaining some concepts, we have re-written some information which was already available in concept
notes just to give a full picture here in this document. So if you find some information which you have already
read in the course then you can skip that

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Contents
1 Principles of Planning: .................................................................................................................................4
2 Business Forecasting ....................................................................................................................................5
2.1 Steps of Forecasting:..................................................................................................................................6
2.2 Sources of Data Used in Business Forecasting:........................................................................................6
2.3 Techniques and Methods of Business Forecasting..................................................................................7
2.4 Qualitative Techniques: .............................................................................................................................7
2.5 Quantitative Techniques: ..........................................................................................................................8
2.6 Time Series Techniques of Forecasting: ...................................................................................................9
2.7 Causal Modelling: .................................................................................................................................... 10
2.8 Technological Forecasting: ..................................................................................................................... 10
3 Decision Making.............................................................................................................................................. 11
3.1 Approaches for Decision Making ........................................................................................................... 11
3.1.1 Routine Approach ............................................................................................................................ 11
3.1.2 SCIENTIFIC APPROACH..................................................................................................................... 11
3.1.3 QUANTITATIVE APPROACH ............................................................................................................. 12
3.1.4 CREATIVE APPROACH ...................................................................................................................... 12
3.2 Techniques for Decision Making ............................................................................................................ 12
3.2.1 NON-QUANTITATIVE TECHINIQUES OF DECISION MAKING ......................................................... 12
3.2.2 QUANTITATIVE TECHNIQUES OF DECISION MAKING.................................................................... 14
3.3 Decision Tree ........................................................................................................................................... 15
3.4 Biases in Decision Making ...................................................................................................................... 15
3.5 Decision Support System ........................................................................................................................ 16
3.6 Management Information System......................................................................................................... 17

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1 Principles of Planning:
Just as each systematic knowledge is based on some important principles, similarly management and
managerial functions are also depending upon some principles of planning.

Following are the principles of planning:

1. Principle of Contribution to Objectives: According to this principle, every plan and sub-plan should make
positive contributions towards achieving the objectives and goals of the institution.

2. Principle of Planning Promises: This principle of planning explains that the planning is related to the
future and for the future, there are several assumptions, expectations and promises .Hence, while
formulating plans, complete, clear and reliable knowledge should be collected, and forecasts should be
well prepared.

3. Principle of Efficiency: The efficiency of planning depends on the results. This principle tells that the
maximum results should be obtained from minimum cost and efforts.

4. Principle of Navigational Change: This principle of planning puts emphasis on the fact that just as a sailor
is attentive towards taking his boat to the destination, by paying regular attention to the speed, direction
and balance of the boat, each moment, similarly the managers should go on testing the plans, during
course of their implementations and required changes and improvement should be a continuous process.

5. Principle of Commitment: This principle determines the ‘Time period’ of planning. According to this
principle of the planning, the planning should necessarily be at least for that period, which is required for
fulfilling commitments made with employees, suppliers, debtors, and the consumers, etc
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6. Principle of Framework: Policies mean those general principles which govern the functions of the
organization for the achievement of its objectives. This principle of policy determination specifies that
the policies of the institution should be unambiguous, simple, sound and justified, to make its planning
effective. Besides, components of planning should also be kept in view.

7. Principle of Timing: This principle of planning Lays emphasis on the point that while determining the
objectives for the institution, the time limit for achieving various objectives may also be well determined.
Plans, sub plans, and programmes should also be prepared for achieving the objectives. Their time limits
should also be essentially determined.

8. Principle of Alternative: The success of planning depends upon the correct decision taken. Hence, before
taking decisions, various alternatives should be discovered and necessary information should be gathered
about them, and then the best alternative should be selected. According to this principle, the best, which
may contribute towards achieving the determined objectives in decided time, at the lowest cost, be
selected.

9. Principle of Limiting Factor: This principle states that managers should identify the factors having only
limited achievements of the desired goals while selecting the best alternatives and suitable solution of
critical and objectionable factors should be found.

10. Principle of Competitive Strategies: If any competitive institution exists, then the planning activities and
techniques of other Institutions should also be kept in view. By doing so, success in business, among the
competition, may be ensured.

11. Principle of Cooperation: This principal emphasis that the success of planning depends upon the
cooperation of the whole Organisation. Hence, in Planning formulation enough cooperation of the
executives, managers, and subordinates of various level should be obtained, so that plans may be
executed efficiently, and unnecessary hurdles may be removed to get desired results.

2 Business Forecasting
Business forecasting is an act of predicting the future economic conditions based on past and present
information. As future is always uncertain, there is a need of organised system of forecasting in a business.

Thus, scientific business forecasting involves:

(i) Analysis of the past economic conditions

(ii) Analysis of the present economic conditions; to predict the future course of events accurately.

The purpose is to provide management with information on which it can base planning decisions.
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2.1 Steps of Forecasting:
The process of forecasting consists of the following steps, also described as elements of forecasting:

1. Developing the Basis: The first step involved in forecasting is developing the basis of systematic
investigation of economic situation, position of industry and products. The future estimates of sales and
general business operations must be based on the results of such investigation. The general economic
forecast marks as the primary step in the forecasting process.

2. Estimating Future Business Operations: The second step involves the estimation of conditions and course
of future events within the industry. Based on information/data collected through investigation, future
business operations are estimated. The quantitative estimates for future scale of operations are made based
on certain assumptions.

3. Regulating Forecasts: The forecasts are compared with actual results to determine any deviations. The
reasons for his variations are ascertained so that corrective action is taken in future.

4. Reviewing the Forecasting Process: Once the deviations in forecasts and actual performance are found
then improvements can be made in the process of forecasting. The refining of forecasting process will
improve forecasts in future.

2.2 Sources of Data Used in Business Forecasting:

Data may be collected from primary or secondary sources depending upon the time, resources, and purpose
of the investigation.

(i) Primary Sources: It is a first-hand data collected personally by the investigator. It is costly and time
consuming. Primary data is collected if secondary data is not available. It is collected by personal interviews,
questionnaires or observations.

(ii) Secondary Sources: These sources of data refer to already published data or data collected by other
agencies. It is a second-hand data. Here task is more of a compilation of data.

The sources of secondary data are:

(a) Official reports of the government.

(b) Publications of Reserve Bank of India, Financial institutions etc.
(c) Annual reports of companies.
(d) Journals, Newspapers, Magazines etc.

Lot of care and caution is necessary before using the secondary data. Such data is cheaper, quicker and easily
available.

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2.3 Techniques and Methods of Business Forecasting
According to Fayol-the father of modern management— “Forecasting is the essence of management. The
success of a business greatly depends upon the efficient forecasting and preparing for future events.”

The techniques of forecasting can be grouped under:

1. Qualitative Techniques
2. Quantitative Techniques
3. Time Series Techniques of Forecasting
4. Causal Modelling
5. Technological Forecasting.

The factors to be considered for making the choice of techniques for forecasting are as follows:

(a) The purpose of forecast

(b) The degree of accuracy desirable.
(c) The time period to be forecast.
(d) Cost and benefit of the forecast to the company.
(e) The time available for making the analysis.

Let’s discuss the techniques of forecasting one by one

2.3.1 Qualitative Techniques:

A qualitative forecasting technique relies on individual or group judgment. When quantitative data are not
available, the use of ‘informed experts’ can be made. Sometimes the opinions of many “experts” are analysed
to predict some future occurrences.

Four approaches are used in this category:

i. Panel of Executive Opinion: It is also called as a jury-of-expert-opinion approach. It consists of combining

and averaging top management’s views about the future event. In this approach, generally the executives
from different areas such as sales, production, finance, purchasing is brought together. Thus, a varied range
of management viewpoints can be considered. Forecasts can be prepared quickly without elaborate data.

ii. Historical Analogy: This method is most used. It is based on the belief that future trends will develop in
the same direction as past trends. It assumes that the future will remain as in the recent past. Hence, past
trends are plotted on a graph or chart to show the curve.
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iii. Delphi Technique: This is another judgmental technique. It polls a panel of experts and gathers their
opinions on specific topics. The forecasting unit decides the experts whose opinions it wants to know. Each
expert does not know who the others are. The experts make their forecasts and the coordinator summarizes
their responses. Here, the experts express their views independently without knowledge of the responses of
other experts.

Based on anonymous votes, a pattern of response to future events can be determined. His technique is used
to reduce the “crowd effect” or “group think” in which everyone agrees with “the experts” when all are in
the same room.

iv. Market Survey: Another type of qualitative forecast is the market survey. In this approach, the forecaster
can poll, in person or by questionnaire, customers or clients about expected future behaviour. For example-
people can be asked about their probable future purchases of cars. This method is effective if the right people
are sampled in enough numbers. It asks a set of “experts”—consumers or potential consumers—what they
will do.

v. Internal Forecast: Under this technique indirect data are used for developing forecasts. For Example—For
developing sales forecasts, each area sales manager may be asked to develop a sales forecast for his area.
The area sales manager who oversees many sub-areas may ask his salesmen to develop a forecast for each
sub-area in which they are working. Based on these estimates the total sales forecast for the entire concern
may be developed by the business concern.

vi. Deductive Method: In the deductive method, investigation is made into the causes of the present
situation and the relative importance of the factors that will influence the future volume of this activity. The
main feature of this method is that it is not guided by the end and it relies on the present situation for probing
into the future. This method, when compared to others, is more dynamic in character.

vii. Direct vs. Indirect Methods: In the case of direct method, the different subordinate units on departments
prepare estimates and the company takes the aggregate of these departmental estimates. This method is
also called bottom up method of forecasting.

On the other hand, in the case of indirect method of forecasting, first estimates are made for the entire trade
or industry and then the share of the individual units of that industry is ascertained. This method is also called
as “top down” method of forecasting.

2.3.2 Quantitative Techniques:

Quantitative techniques are known as statistical techniques. They focus entirely on patterns and on historical
data. In this technique the data of past performance of a product or product line are used and analysed to
establish a trend or rate of change which may show an increasing or decreasing tendency.

Following are the important quantitative techniques used for the purpose of forecasting:

(i) Business Barometers Method: This is also called Index Number Method. Just as Barometer is used to
measure the atmospheric pressure similarly in business Index numbers are used to measure the state of

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economy between two or more periods. When used in conjunction with one another or combined with one
or more index numbers, provide an indication of the direction in which the economy is heading.

For example—a rise in the amount of investment may bring an upswing in the economy. It may reflect higher
employment and income opportunity after some period.

Thus, with the help of business activity index numbers, it becomes easy to forecast the future course of action
projecting the expected change in related activities within a lag of some period.

(ii) Trend Analysis Method: This is also known as ‘Time Series Analysis’. This analysis involves trend, seasonal
variations, cyclical variations and irregular or random variations. This technique is used when data are
available for a long period of time and the trend is clearly visible and stable. It assumes that past trend will
continue in future. This is considered valid for short term projection. In this different formula are used to fit
the trend.

(iv) Regression Analysis Method: In this method two or more inter-related series are used to disclose the
relationship between the two variables. Several variables affect a business phenomenon simultaneously in
economic and business situation. This analysis helps in isolating the effects of various factors to a great
extent.

For example- there is a positive relationship between sales expenditure and sales profit. It is possible here to
estimate sales based on expenditure on sales (independent variable) and also profits on the basis of projected
sales, provided other things remain the same.

(v) Economic Input Output Model Method: This is also known as “End Use Technique.” The technique is
based on the hypothesis of various sectors of the economy industry which are inter-related. Such inter-
relationship is known as coefficient in mathematical terms. For example—Cement requirements of a country
may be well predicted based on its rate of usage by various sectors of economy, say industry, etc. and by
adjusting this rate based on how the various sectors behave in future.

(vi) Econometric Model: Econometric refers to the science of economic measurement. Mathematical
models are used in economic model to express relationship among various economic events simultaneously.
To arrive at an econometric model several equations are formed with the help of time series. These equations
are not easy to formulate. However, the availability of computers has made the formulation of these
equations relatively easy. Forecasts can be solved by solving this equation.

To conclude, it can be said that all these techniques qualitative and quantitative, may give different results
in making forecasting. An organisation may choose any of these techniques, considering the size and nature
of the business accuracy required and the cost benefit factor.

2.3.3 Time Series Techniques of Forecasting:

These techniques assume that the “past is a good predictor of the future.” These prove useful when lot of
historical data are available and when stable trends axe apparent. These techniques identify a pattern
representing a combination of trend, seasonal, and cyclical factors based on historical data. These methods
try to identify the “best-fit” line by eliminating the effect of random fluctuations.
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This category includes the following:

i. Trend Projection: This method projects past data into the future. This can be done in a table or a graph.
This method fits a trend line to a mathematical equation and then projects it into the future by means of this
equation.

ii. Moving Average: In this method, the average of a limited number of significant results is calculated and
updated as new results become available by adding the latest result and dropping off the oldest.

iii. Exponential Smoothing: This technique is like the moving average, except that it gives more weight to
recent results and less to earlier ones. This is usually more accurate than moving average.

2.3.4 Causal Modelling:

In this category of forecasting techniques, causal models are constructed to explain the relationships bet -
ween the factor to be forecasted (sales) and other factors (price, advertising or product availability).

The following methods are included in this category:

i. Regression Analysis: Already discussed above

ii. Econometric Models: Already discussed above

iii. Economic Indicators: Economic indicators are data that can forecast the future state of the economy.
Examples of such indicators include the current rates of national productivity, inflation, cost-of-living index,
and level of unemployment.

2.3.5 Technological Forecasting:

It focuses on predicting what future technologies are likely to emerge and how they are likely to prove
economically feasible. It deals with technological changes that can affect the organization. In fact, some
technological advancements, such as word processing, computers, lasers, and pace technologies, have
greatly affected the operations of business.

The most widely used methods are:

i. Cross-Impact Analysis: This method attempts to identify and determine the significance of relationships
and interactions between specific events. To know this impact, a two or three- dimensional matrix is
developed. For example- an energy company can use this technique to know the impact and value of solar
heating.

ii. Morphological Analysis: This technique is useful in finding the multiple uses of any recent technology. It
identifies various dimensions of the object. It evaluates all varieties and combinations of those dimensions
to find the practical uses for them.

iii. Substitution Effect: This technique assumes that one technology that shows a relative improvement in
performance over the older technology will ultimately be substituted for the factor with the lower
performance. It indicates a patterned fashion for certain technologies.

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3 Decision Making
We have discussed about decision making in concept notes. Mainly we discussed about Types of decision
making, steps in decision making, models in decision making (economic and administrative man model) and
decision-making conditions such as -Risk, Certainty and Uncertainty

Now we shall discuss an additional topic

1. Approaches to decision making.

2. Techniques of decision making

3.1 Approaches for Decision Making

There may be several approaches for decision making as each manager, as a decision maker, acts in his own
ways. However, these approaches can broadly be classified into four broad categories: routine approach,
scientific approach. quantitative approach, and creative approach.

3.1.1 Routine Approach

Routine approach of decision making involves deciding based on 'what has always been done when the
problem of this type arose'. Often, organizations, particularly large ones, develop standard operating
procedures (SOPS) to make decisions on problems of recurring nature. Standard operating procedures are
formal procedures for accomplishing tasks. Routine decisions are made based on these procedures. Though
routine approach of decision making is the most common with organizations because it facilitates to follow
similar practices throughout the organization, it has some serious limitations because this approach lacks
innovation in decision making.

3.1.2 SCIENTIFIC APPROACH

Kepner and Tregoe have suggested scientific approach for managerial decision making. They contend that
"what a manager needs for effective problem analysis is an orderly system for processing information, a
system in which certain steps follow others in a fixed order."

Generally, scientific approach of decision making follows the following steps in sequence:

1. Identification of the problem,

2. Acquiring preliminary observations about the problem.
3. Stating tentative solutions to the problem.
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4. Investigating the problem thoroughly, using both current knowledge and controlled experiments.
5. Classification of relevant data obtained.
6. Stating tentative answer to the problem.
7. Adjusting and stating answer to the problem.

3.1.3 QUANTITATIVE APPROACH

With the introduction of computers in business, quantitative approach of decision making has been
developed. The emphasis in the quantitative approach is on mathematical modelling of systems,
Comparisons of various feasible actions such as cost minimization, profit maximization, return on investment,
etc, are expressed by measurable values. Thus, quantitative approach of decision-making proceeds in the
following manner:

1. Formulation of the problem.

2. Building a mathematical model to represent the system under study.
3. Deriving the answer from the model.
4. Testing the model and answer derived to ensure its practicability.
5. Placing needed constraints over use of model and answer.
6. Selecting the final answer.

There are various quantitative techniques for decision making.

3.1.4 CREATIVE APPROACH

Some managers feel that decision making should not be viewed as a logical action, that is, the problem need
not be defined, and strictly rational steps need not be taken to decide what to do.

Instead, the decision maker studies the interactions of information, people, and facilities involved to bring a
combination which is unique in some way. This is done through creative approach which involves creativity.
Examples of creativity in decision making are creation of new product, creation of new method of working,
creation of new market, etc.

3.2 Techniques for Decision Making

In the above approaches, we have seen that Quantitative Decision making is one of the approaches to
decision making. So, in this section we will study about various Quantitative and non-quantitative techniques
of decision making

3.2.1 NON-QUANTITATIVE TECHINIQUES OF DECISION MAKING

Non-quantitative techniques put emphasis on qualitative aspects in decision making. In application, these
techniques are highly personal, widely known, and considered by many as the natural way to decide.
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Generally, there are following non-quantitative techniques of decision making: (i) intuition, (ii) facts, (i)
experience, (iv) considered opinions, (v) Brainstorming (vi) NGT and (vii) Delphi technique

1. Intuition: Intuitive decision-making ability is also known as 'sixth sense' and involves being able to gather
information that other individuals may miss. It is the opposite of rational decision making, which is when
individuals use analytics, facts, and a step-by-step process to come to a decision

Intuition is power of mind by which it immediately perceives truth of the things without any reasoning
or analysis. Decision making based on intuition is characterized using hunches, inner feelings, or the gut-
feelings of the decision maker in making a decision. The common explanation by the intuitive decider is,
"it is just the way I feel about it." In fact, many decisions in the business have been made based on
intuition and these decisions have proved to be successful. For example, the intuition of Rahul Bajaj to
launch high end pulsar did wonders for the Bajaj Auto.

2. Facts: Facts are popularly regarded as an excellent basis on which decisions can be made. However,
decision making based on facts suffers from two limitations:
I. Many times, facts are not easily available. To acquire them may involve cost and time, and sometimes,
the magnitude of such cost and time may be too high.
II. Facts alone are not sufficient to make decisions. They only help in reducing some uncertainty in the
decision situation

3. Experience: A decision maker's experience provides him guidance for decision making. It helps to answer
the question involving 'what to do in a particular situation'. But while using experience in decision making,
one must evaluate whether the experience is relevant for the situation under which the decision is being
made. A manager should use experience but need not be blindly bound by it.

4. Considered Opinions: Considered opinions, as a technique for decision making, involve considering
opinions of knowledgeable persons in the field concerned. In considered opinions technique, relevant
data is collected and analysed. The results are discussed in a group meeting. Opinions of various
participants are sought and analysed to arrive at a decision.

A major advantage of considered opinions technique is that varieties of viewpoints are taken into
consideration. This may result in better decision and its acceptability. However, the decision-making
process becomes lengthy and time consuming. Therefore, if urgency in a decision is important, this
technique is not relevant.

5. Brain Storming: Brain storming is just a process for identifying solutions to problems and options to
pursue. In Brainstorming session, all the members discuss various ideas. These ideas are noted down and
evaluated. During evaluation process each idea is considered. The best idea is selected after evaluating
all the ideas. Brain storming is a time for getting ideas out of people's head and therefore personal biases
should be avoided while considering the ideas

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 6. Nominal Group Technique (NGT): NGT is a decision-making method for use among groups of many sizes,
who want to make their decision quickly, as by a vote, but want everyone's opinions considered. In this
approach
a. Around 6 to 10 participants ae bought together and presented with a problem
b. The develop solutions independently often writing them on cards
c. All people get time to share their ideas to the group
d. Group members individually designate their preferences for the best solution by secret ballo t

7. The Delphi Technique: It is used as a multipurpose planning tool. The Delphi technique is a group process
that anonymously generates ideas or judgments from physically dispersed experts. Unlike the NGT,
experts' ideas are obtained from questionnaires or via the internet as opposed to face- to- face group
discussions. The areas where the experts differ are then discussed between them to reach consensus.
Delphi method is structured communication technique for groups, originally developed for collaborative
forecasting but has also been used for policy making.

3.2.2 QUANTITATIVE TECHNIQUES OF DECISION MAKING

In quantitative techniques, variables involved in a decision are quantified and relationships among these
variables are analysed to find out impact of each variable. Various quantitative techniques of decision making
have been developed over the period which have been integrated into a new discipline known as 'Operations
Research'.

Benefits of Quantitative Techniques:

1. Wide Scope of Use. They can be used for all the activities for which data is available

2. Optimum Use of Resources. Use of quantitative techniques helps in optimum allocation of resources in
the organization.

3. Quick Decision Making. The growing competition, both in national and international markets, has
necessitated quick decision making by managers to take the advantages of market factors. Quick decision
making requires the analysis of many variables simultaneously. This is exactly done by quantitative
techniques.

Limitations of Quantitative Techniques

1. Magnitude of Calculation and Cost. In quantitative techniques, there is lot of data to be analysed and for
that one needs complex machines which are costly. Small organizations may not be able to afford this cost

Therefore, managers should evaluate the cost of optimizing the solution in the light of benefits accruing from
it. For smaller organizations, this cost may be prohibitive. Therefore, the use of quantitative techniques is
limited to the organizations which can afford them.

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3.3 Decision Tree
Decision Tree: Decision tree is the most powerful and popular tool for classification and prediction. A
Decision tree is a flowchart like tree structure, where each internal node denotes a test on an attribute, each
branch represents an outcome of the test, and each leaf node (terminal node) holds a class label.

A decision tree for the investment options is given below

The steps in constructing a decision tree are as follows

1. The first step is construction of decision tree in terms of various alternatives available. In our example
the various alternatives are we can invest in Mutual funds, Bonds or Stocks
2. The second step in decision tree is requires estimation of probability for various events
3. The third step is the calculation of Payoff from each alternative in various events. Payoff is calculated
by multiplying the probability of each even with the expected outcome of that alternative

3.4 Biases in Decision Making

Biases usually affect decision-making processes. Here is a list of commonly debated biases in judgment and
decision-making:

1. Selective search for evidence (also known as confirmation bias): People tend to be willing to gather
facts that support certain conclusions but disregard other facts that support different conclusion

2. Premature termination of search for evidence: People tend to accept the first alternative that looks
like it might work.

3. Wishful thinking is a tendency to want to see things in a certain – usually positive – light, which can
distort perception and thinking. Wishful thinking is the formation of beliefs and making decisions
according to what might be pleasing to imagine instead of by appealing to evidence, rationality,
or reality. It is a product of resolving conflicts between belief and desire

4. Choice-supportive bias or post-purchase rationalization is the tendency to retroactively ascribe

positive attributes to an option one has selected. It is a cognitive bias. For example, if a person

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 chooses option A instead of option B, they are likely to ignore or downplay the faults of option A while
amplifying those of option B. Conversely, they are also likely to notice and amplify the advantages of
option A and not notice or de-emphasize those of option B.

5. Recency: People tend to place more attention on more recent information and either ignore or forget
more distant information

6. Primacy Effect: The primacy effect, in psychology and sociology, is a cognitive bias that results in a
subject recalling primary information presented better than information presented later. For
example, a subject who reads a sufficiently long list of words is more likely to remember words toward
the beginning than words in the middle.

7. Repetition bias is a willingness to believe what one has been told most often and by the greatest
number of different sources.

8. Attribution asymmetry: People tend to attribute their own success to internal factors, including
abilities and talents, but explain their failures in terms of external factors such as bad luck. The reverse
bias is shown when people explain others' success or failure.

9. Sunk-cost fallacy is a specific type of framing effect that affects decision-making. It involves an
individual deciding about a current situation based on what they have previously invested in the
situation. An example of this would be an individual that is refraining from dropping a class that they
are most likely to fail, due to the fact that they feel as though they have done so much work in the
course thus far.

10. Optimism bias is a tendency to overestimate the likelihood of positive events occurring in the future
and underestimate the likelihood of negative life events. An optimism bias can alter risk perception
and decision-making in many domains, ranging from finance to health.

3.5 Decision Support System

A decision support system is a computer system the management level of the organization that combines
data, sophisticated analytical tools, and user-friendly software to support semi-structured and unstructured
decision making. These systems present the data in simple form so that complex decisions can be made easily

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3.6 Management Information System
Management information system is a system designed to supply information required for effective
management of an organization. Quality of decisions is based on quality of information and hence
Management Information system become especially important

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 Earlier we have discussed about functions of management given by KOONTZ and O’DONNEL
i.e. Planning, Organizing, Staffing, Directing and Controlling. In this part we will discuss on Organizing.

1. Organizing
It is a function in which the synchronization and combination of human, physical and financial
resources take place. It basically deals with following activities

• Identification of activities and division of work

• Classification of grouping of activities and assigning them to departments
• Assignment of duties.
• Creating hierarchy and doing delegation of authority and creation of responsibility.
• Coordinating authority and responsibility relationships.

We will discuss about these in later sections

Principles of Organization

1. Orientation towards Goals and Objectives: There should be unity among all the objectives at
organizational, Departmental, and Individual level
2. Specialization: Every department should be given a specific work to be performed.
3. Co-ordination: All the activities of all the individuals and departments should be interlinked
with each other.
4. Delegation of authority and creation of Responsibility: The superior should pass on the
authority to their subordinates. There should be fixation of responsibility after the authority is
delegated
5. Balance: There should be balance between authority and responsibility, centralization and
decentralization, human and material resources etc.
6. Unity of command: This principle suggests that subordinate should get orders only from one
boss at a time.
7. Span of Control: Span of control indicates the number of subordinates under a manager.
Number of subordinates under one superior should be appropriate so that he can manage
them effectively
8. Scalar Chain: Scalar chain is a chain of command or authority which flows from top to bottom.
With a chain of authority available, wastages of resources are minimized, overlapping of work is
avoided
9. Flexibility: The organizing process should be flexible so that any change can be incorporated.

1.1 Benefits of Organization

1. Well Defined Jobs:
2. Specialization:
3. Clarifies Authority:

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 4. Co-ordination:
5. Optimum use of resources.
6. Facilitates growth and diversification.
7. Humane treatment of employees.

1.2 Process of Organizing

1. The first step in organizing is to identify and enumerate the activities required to achieve the
objectives of the enterprise
2. The various activities are then classified into appropriate departments and divisions based on
functions, products, territories, customers etc.
3. The individual groups of activities are then allotted to different individuals based on their ability
and aptitude. The responsibility of every individual should be defined clearly to avoid duplication of
work and overlapping of effort.
4. Every individual is given the authority necessary to perform the assigned task effectively. Authority
delegated to a person should be commensurate with his responsibility.
5. The activities and efforts of different individuals are then synchronized. Such co-ordination is
necessary to ensure effective performance of specialized functions.

1.3 Organizing Charts

An organizational chart is a diagram that shows the structure of an organization as well as the
relationships and relative ranks of its positions. Organization chart can be divided into master
chart and supplementary charts. Master chart shows the entire formal organization structure
whereas supplementary chart shows the detail relationships, authority, and the duties within
the prescribed area of department or major component of the organization

There are 3 types of charts on an organization (i) Vertical or top-down chart (ii) horizontal or left
to right chart and (iii) Circular chart

1. Top-Down Chart: In the top-down chart, highest position is shown at the top level followed by
other positions in the hierarchy
2. Left to Right Chart: In the left to right chart, the highest position is shown at the extreme left
followed by other positions in the hierarchy from left to right as shown in figure below. It not
used very much

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3. Circular Chart: In circular chart, center of circle represents the highest position followed by
other positions in the hierarchy on respective circles. This, closer is the position to the center,
the more important it is. Positions of equal importance are in the same circle

1.4 Organizing Manuals

Organization manual is a repository for organization data commonly used by company managers. It
enables him to visualize the company organization as a whole and to see his own responsibilities as
part of the total picture. Manual should contain the following data:

1. Statement of company objectives and policies

2. Responsibilities and authorities at various levels, relationships among various levels
3. Delegation of authority existing in the organization
4. Organization methods, rules, and procedures
5. Span of control at various levels

2 Organization Structures
Organizations structure is a pattern of relationship between people and work within which
organizational activities are performed to achieve the objectives. An organization structure is a
framework through which management works to accomplish its objectives. It is primarily concerned
with the allocation of duties and responsibilities, and delegation of authority

Need for Organizational Structures

1. Communication: Proper Organizational structure is required for good Communication
2. Coordination: Proper Organizational structure helps in Coordination between people at
different level and in different departments
3. Control: Proper Organization structure ensures there is proper control by defining which
position is controlled by which other position

2.1 Formal and Informal Organization

1. Formal Organization: Formal organization refers to structure of well-defined jobs, having definite
authority and responsibility.
Features of Formal organization:
i. It is a structure of well-defined authority and responsibility.
ii. It is established to achieve well defined objectives.
iii.There is superior-subordinate relationship among all the people.
v. Rules and regulations are followed by all the people.
vi. It is stable in nature. It comes to an end only after closure of the organization.

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2. Informal Organization: It is a network of personal and social relations existing in a formal
organization. People in the organization do not always follow formal lines. Employees in one
department know those in other departments. In such cases informal organizations get developed

Features of Formal organization:

i. It is a network of personal and social relations existing in a formal organization.
ii. It is established to develop personal and social relations.
iii. There is no question of granting authority and deciding responsibility as relations are social in
nature.
iv. There are no well-defined objectives to be achieved, no rules and regulations to be followed
and no need for coordination
v. It is not stable in nature. Relationship can come to an end at any time.

2.1.1 Pros and Cons of Informal Organizations

Informal Organizations are also important to exist because
I. It provides social satisfaction to the employees
II. It helps the formal organization to get the work done
III. The informal group develops a communication channel or system (i.e., grapevine) to keep its
members informed about what management actions will affect them in various ways. Many
astute managers use the grape- vine to "informally" convey certain information about
company actions and rumors.
IV. They provide social control by influencing and regulating behavior inside group.
V. Act as Safety Valve: The informal group provides a means for relieving tension and other
emotional and psychological pressures by allowing a person to discuss them among friends
openly and candidly
VI. Lighten Management Workload: This encourages delegation, decentralization
VII. Fill in Management capabilities: People help each other to fill in the weakness

Informal Organizations have some drawbacks also

I. Resistant to change:
II. Role of Conflict: What is good for and desired by informal group members is not always good
for the organization. Doubling the number of coffee breaks and the length of the lunch period
may be desirable for group members but costly and unprofitable for the firm
III. Rumors: Information Organization leads to lot of rumors which can cause disturbance in the
company

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 IV. Conformity to Social Control: Social control promotes and encourages conformity among
informal group members, thereby making them reluctant to act too aggressively or perform at
too high a level

3 Forms of Organization Structures

We are going to study the following Organization structures
1. Line Organization
2. Line and Staff Organization
3. Functional Organizational Structure
4. Divisional Organizational Structure
5. Matrix Organizational Structure
6. Team-based Organization
7. Committee
8. Task Force
9. Free Form Organization
10. Virtual Organization
11. Boundaryless Organization

3.1 Line Organization

Line organization is the oldest and simplest form of formal organization. In this organization the
line of authority flows downward from top to bottom level. The line of authority is straight and
vertical. On the other hand, responsibility moves upward from bottom to top level

Characteristics of Line Organization

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 1. There are direct vertical relationships among superior and subordinates.
2. Principle of scalar chain and unity of command is strictly followed.
3. All departmental managers have equal status.
4. It is mainly suitable to small organizations.
5. It does not have any specialized staff to advice on complex matters
6. Line management has extremely high authority which can be misused

3.2 Line and Staff Organization

This type of organization tries to combine the activities of line and staff executives. Line executives are
“Doers” whereas the specialists are “Thinkers”.

Line managers have total authority over those who report directly to them, but staff workers have
primarily advisory authority. Their function is to create, develop, collect, and analyze shop information,
which flows to line workers in the form of advice.

Characteristics of Line and Staff Organization

1. There are two aspects of administration in this organization i.e. planning and execution.
2. The staff provides guidance and advice to line executives. Such guidance is offered whenever it
is demanded by line. So, we have specialization of staff here which can give expert advice
3. It is mainly suitable for large organizations
4. It involves more cost and can lead of conflict between line and staff.
5. Staff steals the show, and any good performance is dedicated to them. Line may feel dissatisfied

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3.3 Functional Organization
Functional organization is a mid-way between line and staff authority. In this entire department is
created for a particular area of work like marketing department, production department etc.
Manager from one department can give advice/order to person from other department but only
related to his/her functional area. This form was introduced by F.W. Taylor to bring about
specialization of management.

Characteristics of Functional Organization

1. All the organizational activities are divided according to specified functions.

2. Each function is performed by specialist.

3. A superior specialist has a right to give orders relating to these specific functions.

4. Suitable for Large organizations

3.4 Divisional Organization Structure

The divisional structure or product structure consists of self-contained divisions. A division is a
collection of functions which produce a product. For example, a company may have a Footwear
division, Medicine division and Juices division. Each of these divisions would have a function such as
Marketing and Finance.

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3.5 Matrix Organization Structure
Matrix organization is a combination of two or more structures. It can be combination of project
organization and functional organization. Project organization structure is one in which divisions are
created based on the projects undertaken by the organization. On the completion of the project, the
division is abolished, and its resources are allocated to other projects

In matrix organizational structure, the project manager is appointed for each project to coordinate the
activities of that project. Personnel are drawn from their respective functional departments.

Project Managers and Functional managers work in close co-operation with each other. The authority
of departmental managers flows downwards whereas authority of project manager’s flows across.
Thus, each functional staff has two bosses – his functional superior and his Project Manager.

Characteristics of Matrix Organization

1. It is a hybrid and complex structure. It is a combination of project organization and functional

organization.
2. Offers more specialization as project managers and functional managers specialize in their areas.
3. Subordinates receive orders from two bosses, so unity of command principle is not followed

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3.6 Team based Organization Structure
Team-based organizations vary from traditionally hierarchical, directive organizations. Team is
small number of people with complementary skills who are committed to a common purpose,
performance goals and approach for which they hold themselves mutually accountable. Major
characteristics of team-based organization include trust, empowerment, goal setting, autonomy,
team accountability and shared leadership.

There are 4 types of teams which we shall discuss below

1. Problem Solving Team: A problem solving team, also known as corrective action team, is
constituted to solve specific problems which an organizational may be facing.
2. Cross-Functional Team: Cross Functional Team draws its members from different functional
areas, particularly from those which have high interdependence. The basic objective of cross-
functional team is to make decisions and solve problems in those areas which cannot be done
by a particular functional department
3. Self-Managing Team: Self- managing team, also known as empowered or self-directed team
sets Goals and inspects its own work, prescribes work schedules, and review its performance
4. Virtual Team: Virtual team uses information technology to tie together people in different
parts of the world. Members interact among themselves using online communication devices.

3.7 Committee
A committee is a group of people who work collectively, discuss, decide, and recommend
solutions to the problems (of a concern) which possibly cannot be solved by an individual.

Types of Committee:

1. Standing (ad hoc) or Permanent Committee: A standing, or permanent committee is

permanent committee needed for regular problems. A temporary committee or ad hoc is
formed to face and solve problems arising occasionally.
2. Line Committee or Staff Committee: If a committee is vested with authority to decide and
their decisions are implemented for sure then it is a line committee. On the other hand, if a
committee is appointed merely to counsel and advice, it is known as staff committee
3. Executive Committee: It is a committee which has power to administer the affairs of the
business
4. Coordinating Committee: Such a committee is generally formed to coordinate the functioning
of different departments. It consists of the representatives of different departments who
meet periodically to discuss their common problems
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Advantages of a Committee: Pooling of knowledge and Experience, Motivation to people,
innovation and brainstorming, Representation of interest groups like backward classes, SC/STs etc.

Limitations of a Committee:

1. High Cost and Slow Decisions

3.8 Task Force

A task force is a small group, usually four to twelve people coming from different parts of an
organization, that brings together a specific set of skills to accomplish a short-term task.

Task force is somewhat like ad-hoc committee but there is a difference.

1. Task has broader powers to take decisions and actions. They can investigate, plan, research
and do lot of analysis
2. Task force may have a longer tenure as compared to ad-hoc committee

3.9 Free- Form Organization

Free form organization is also called naturalistic, organic, or ad-hoc organization. It assumes that
organization is open system, and the basic task of the manager is to facilitate change in the
organization.

Key features of Free-Form Organization are given below

1. There is a small central group at the top which is relatively stable. It consists mainly planners
and centre of control and evaluation
2. Operating divisions are regarded temporary or permanent, depending on the potential to
generate profit. A
3. Therefore, there is no traditional superior-subordinate relationship and hence it puts
emphasis on democratic values of the society such as equality
4. Free Form organisations are generally suitable for those industries which are working in
highly dynamic environment

There are two types of free-form organizations

1. Virtual Organization
2. Boundary less Organization

3.9.1 Virtual Organizations

Virtual organizations are also known as Networked Organization or Modular Organization.
Virtual organization is one temporary network of independent organizations – suppliers,
customers and sometimes even competitors linked by Information technology to undertake a
specified venture or share their skills

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A virtual organisation has the following characteristics: Flat and Dynamic organisation, Informal
communication, Multi-disciplinary (virtual) teams with varied strengths, Vague organisational
boundaries, Goal orientation, Sharing of information

The biggest problem with virtual organization is creation of trust. Often clash of interest come to
forefront much sooner than expected

3.9.2 Boundaryless Organizations

Boundary less organization was the term coined by Jack Welch, former chairman of GE.

1. It seeks to eliminate vertical and horizontal boundaries and the boundaries between the
organization and its customers and suppliers.
2. It de-emphasizes the chain of control, span of control and departments within the
company. There is no hierarchy. The span of control is unlimited as one can talk to anyone
3. It is driven by self-managed teams
4. Everyone participates in decision making
5. 360-degree performance appraisal system is used
6. Job rotation is given emphasis to develop multi-skills among employees

Boundaryless organization is a structure that organization may adopt whereas virtual

organization is alliance between two or more organizations to achieve certain specified
objectives

Boundaryless organizations relies heavily on information technology. Therefore, some people

call it T-form (technology based) organization

3.10 Factors Affecting Organization Structure

As per contingency approach to organizing, there is no structure suitable for all the organizations.
Organization structure is impacted by many factors. These are shown below

3.10.1 Environment

The organizational structure depends on the environment of the organization. Burs and Stalker have
suggested mechanistic system for stable environment and organic system for dynamic environment

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3.10.2 Strategy
The organization structure needs to be in line with strategy of the organization. The
organizational actions proceed in a sequence: new strategy formulation, emergence of new
problems, a shift to more appropriate structure

3.10.3 Technology
Technology used also impacts the organizational structure. An organization may use following
technologies

1. Unit Production: Unit production means production of individual items as per

customization by customer
2. Mass Production: Large batch and mass production of goods such soaps
3. Process Production: Production of materials that are sold by weight or volume, for
example chemicals

It is generally believed that span of control for higher management is lower in unit and process
production as compared to mass production.

3.10.4 Size
The impact of size on structure is as follows

1. Small organization can work with simple organizational structure whereas large organizations
require complex structure
2. In large organizations we need various supporting functions (staff functions) such as HR, Legal
etc. whereas there is no need of such staff functions in smaller organizations
3. In large organization there is high degree of formalization while making decisions, delegation
of authority etc. whereas there is low degree of formalization in smaller organizations

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3.10.5 People
The type of people and perception of people also affects the organizational structure. In
organization there are two kinds of people

1. Framers: Framers means top level management who frames policies.

a. If their perception is towards theory X (emphasis of rigid control), then centralized
structure. On the other had if their philosophy is towards theory Y (emphasis on
individual autonomy), the decentralized structure
b. If they believe in reactive approach to environmental changes then their organization
will be more of mechanistic. On the other hand, if they believe in proactive approach to
environmental changes then their organization will be closer to organic system

2. Participants: Participants means people other than top level management. People can be
grouped based on their needs. Skilled and Professional workers need more autonomy and
participation in decision making. So, for them organic system is more suitable. Unskilled
workers feel uncomfortable when things are not clear, so they will be happy in mechanistic
system

4 Departmentalization
Departmentalization (or departmentalization) refers to the process of grouping activities into
departments. Division of lab our creates specialists who need coordination. This coordination is
facilitated by grouping specialists together in departments.

• Functional departmentalization - Grouping activities by functions performed. Activities can

be grouped into departments for example human resources, IT, accounting, manufacturing,
logistics, and engineering. The functions can be divided into basic and secondary functions

i. Basic Function: These functions are known as organic functions and these are essential for
the organization. For example, in a manufacturing organization, basic functions would be
production and marketing
ii. Secondary Functions: These are the ones which are derived from the basic functions. For
example, marketing department may further contain sections for sale, market research
iii. Staff Functions: Departments are created for performing those functions which provide
support to basic functions. These are known as staff functions. Such functions are related
to finance, human resource, information technology and legal matters etc.

• Product departmentalization - Grouping activities by product line. Tasks can also be grouped
according to a specific product or service, thus placing all activities related to the product or
the service under one manager.

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 • Customer departmentalization - Grouping activities based on markets served or distribution
channel used. For example, based on distribution channels, pharmaceutical firm can be
broken down into three departments that serve retail, wholesale, and government accounts.

• Geographic departmentalization - Grouping activities based on territory. For example, the

Indian Railways has divided organization into 4 zones – North, East, West, and South.

• Process departmentalization – It involves, grouping activities based on process involved in

production. For example, an organization manufacturing textile creates department for each
process of manufacturing textiles: Spinning, dyeing, Weaving, and finishing.

• Divisional departmentalization - When the firm develops independent lines of business that
operate as separate companies, all contributing to the corporation profitability, the design is call
divisional departmentalization or (M-FORM).

5 Span of Control
Span of control is also called as span of management or span of supervision i.e. number of
subordinates reporting to the senior. This concept was introduced by Sir Ian Hamilton.

Narrow and Wide Span of Management

A small, or narrow, span of control results in each manager supervising a small number of employees,
while a wide span of management occurs when more subordinates report directly to a given manager.

Span of control has 2 implications

1. Wider the span of management, higher is the number of subordinates reporting to a manager and
hence more complex is his job
2. Span of control also determines the organization structure in terms of it being tall or flat. Wider
the span of control, less the number of managers and hence flatter the organizational structure
whereas narrow span of control means more managers in a company and hence taller the
organizational structure

Factors Affecting Span of Control

1. Nature of work: If the work to be performed is of routine nature, then span of control can be large.
2. Experience of subordinates: If subordinates are enough capable and experienced then span can be
large whereas if there are less experienced subordinates then span should be less
3. Capability and experience of superior: More the experience of manager, larger the span can be
4. Extent of delegation of authority or degree of decentralization of authority: If manager delegates
more and clear authority then span of control may be large
5. Use of standing plans: the organization has developed proper standing plans, then subordinates can
follow the same then span of control can be kept large

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6. Geographical Dispersion: If the branches of a business are widely dispersed, then the manager will
find it difficult to supervise each of them, as such the span of control will be smaller.
7. Similarity of tasks: If the tasks that the subordinates performing are similar, then the span of
control can be wider
8. Volume of other tasks: If the boss has other responsibilities, such as membership of committees,
involvement in other projects, liaising with stakeholders, the number of direct reports will need to
be smaller

6 Power
Power refers to capacity that A (agent) must influence the behavior of B (target) so that B does
something he or she would not otherwise do. The response to the power of one person by
another (target) can be in the following way

1. Resistance: It involves target thwarting attempt of others to work against his wishes
2. Obedience: Obedience refers to a person’ s (target) acceptance of influence of power
holder unwillingly because target has high dependency on agent
3. Compliance: Compliance refers to a person’ s acceptance of influence of power holder
because he is expected to be rewarded for responding to it
4. Conformity: Conformity refers to a person’ s acceptance of influence of power holder
because of his desire to be in mainstream of social behavior.
5. Commitment: Commitment refers to a person’ s acceptance of influence of power holder
because of his dedication to a cause or activity

6.1 Basis of Power

Raven has identified power bases of two broad categories: Positional and personal.

Positional Power: Positional Power also known as formal power emerges from the position of the
individual.

i. Legitimate Power: In organization, this legitimacy is in form of authority which is delegated

to the positions of organizational members
ii. Reward Power: Reward Power is based on one’s control and allocation of material
resources and rewards.
iii. Coercive Power: In organizational context, it may be in form of action for threat for
dismissal, suspension, demotion, or other method of embarrassment for the people
iv. Information Power: Information power comes from access to and control of sensitive
information.

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Personal Power: Personal power is informal and resides with a person, regardless of his position
in the organization.

i. Expert Power: Expert power is that capacity to influence others which is based on one’s
experience, special skill, or knowledge
ii. Referent Power: Referent power is based on identification which involves learning by an
individual through copying the behavior of the other person which he takes as an ideal.
iii. Charismatic Power: It emerges from individual’s charisma, a quality that is unique.
Because of this charisma, the individual can articulate attractive vision.

7 Delegation of Authority
Before we discuss about delegation of authority in detail, lets discuss about 3 elements of
delegation of authority – Authority, Responsibility and Accountability

7.1 Authority
Authority is the legitimate right of a position holder to giver orders to others and get these obeyed.
There are three theories on Authority

1. Formal Theory of Authority: As pet this theory the source of authority to a position holder is
delegation of authority from the next higher level in the organization.
2. Competence Theory of Authority: As per this theory individual derives authority because of
personal competence.
3. Acceptance theory of Authority: According to this theory the subordinate will obey the orders if
it meets certain requirements: he understands the order properly, order is not inconsistent with
the organizational purpose, order is compatible with his personal interest as a whole . Bernard
also defined term Zone of Indifference or Area of Acceptance. It indicates the specific limits that
are set by individuals themselves with in which they will respond willingly to the exercise of
authority over them

When we talk of organizational context, authority is taken as prescribed by the formal theory of
authority

A manager alone cannot perform the entire task assigned to him. To meet the targets, he should
delegate the authority. Delegation of authority means division of authority and powers downwards to
the subordinates. Authority always flows from top to bottom.

Power Authority
Power is much broader as compared to Authority is limited by organizational position
authority because power can be based on
organizational position or personal position

Personal power is legitimized by rules. Authority is legitimized rules, regulations etc.

Regulations etc.
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Power reflects the political realties within the Authority is the central element of formal
organization and relates to informal patterns of organization and systematic communication
action

7.2 Responsibility
Responsibility is duty of the person to complete the task assigned to him. Responsibility without
adequate authority leads to discontent and dissatisfaction among the people. Responsibility flows
from bottom to top.

Parity of Authority and Responsibility: Principle of parity of authority and responsibility suggest that
authority of a person should match his responsibility. According to this principle, the manager should
keep a balance between authority and responsibility. Both should go hand in hand.

Difference between Authority and Responsibility

7.3 Accountability
Accountability is the obligation to carry out responsibility and exercise authority in terms of
performance standards. 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 rests with ’B’, but accountability still rests with ’A’. Accountability also flows upwards like
responsibility, but it cannot be delegated.

7.4 Process of Delegation

Delegation of authority is the base of superior-subordinate relationship, it involves following steps: -

1. Assignment of Duties - The delegator first tries to define duties to the subordinate.
2. Granting of authority - Subdivision of authority takes place when a superior divide and shares
his authority with the subordinate.
3. Creating Responsibility and Accountability - The delegation process does not end once powers
are granted to the subordinates. The subordinate becomes responsible and subordinate
becomes accountable for the completion of the task.

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 Therefore, it is said that authority is delegated, responsibility is created, and accountability is imposed

7.5 Principles of Delegation

1. Principle of result expected- Suggests that every manager before delegating the powers to the
subordinate should be able to clearly define the goals as well as results expected from them.
2. Principle of absolute responsibility- This says that the authority can be delegated but responsibility
cannot be delegated by managers to his subordinates which means responsibility is fixed.
3. Principle of Authority level- Manager should exercise his authority within the jurisdiction /
framework given. No misuse should be done

7.6 Factors affecting Delegation

There are 3 factors affecting delegation

Factors in superior Factors in Subordinate Organizational Factors

Superiors love for authority might Subordinates having better Organization culture also impacts
stop him from delegating it. capability to carry out work delegation. If organizational
Superior’s perception that may get more authority strongly believes in delegation,
subordinates lack capability might then an autocratic leader will also
stop superior from delegating have to delegate
authority
Some superior fear subordinates Delegation of authority is
may perform work better than and formal, but its exercise is
Such superiors refrain from personal. A competent
delegating subordinate may exercise
authority better than others

8 Centralization and Decentralization

Centralization is the process where the activity of an organization, particularly those regarding
planning and decision making gets concentration in few hands. A centralized organization
systematically works to concentrate authority at the upper levels.

Decentralization is a systematic delegation of authority at all levels of management and in all the
organization.

Implications of Decentralization

Advantages Disadvantages
There is less burden on the Chief Executive as in In a decentralization structure, co-ordination to
the case of centralization some extent is difficult to maintain as there are lot
many department divisions and authority is
delegated
Subordinates when take decisions feel motivated and
If not implemented properly then it will lead to
Subordinates develop new skills chaos

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 Difference between Delegation and Decentralization

Decentralization is not the same as delegation. In fact, decentralization is all extension of delegation.

Area Delegation Decentralization

Meaning Managers delegate some of their function and
Right to take decisions is shared by top
authority to their subordinates. management and other level of management

Scope Scope of delegation is limited as superior Scope is wide as the decision making is shared
delegates the powers to the by the subordinates also
subordinates on individual bases.
Responsibility Responsibility remains of the managers and Responsibility is also delegated to subordinates.
cannot be delegated
Freedom of Freedom is not given to the subordinates Freedom to work can be maintained by
Work as they must work as per the instructions of their
subordinates as they are free to take decision
superiors and to implement it.
Grant of Authority The authority is granted by one individual to It is a systematic act which takes place at all
another. levels and at all functions in a concern.
Degree Degree of delegation varies from concern to Decentralization is total by nature.
concern and department to department. It spreads throughout the organization i.e. at
all levels and all functions
Withdrawal Delegated authority can be taken back. It is considered as a general policy of top
management and is applicable to all departments.

9 Empowerment
Empowerment is management practice of sharing power, information and rewards with
employee and making them competent so that they can take initiative to make decisions to solve
problems and improve their work performance

There are five elements to empowerment

1. Helping Employees achieve Job mastery – giving training and coaching

2. Allowing More Control – giving employees discretion over job performance
3. Providing successful role models – allowing them to observe peers who are performing successfully
on the job
4. Using Social reinforcement and persuasion – giving praise, encouragement, and verbal feedback to
raise confidence
5. Giving Emotional Support – reduction of stress and anxiety through personal care

10 Authority Relationship
Some managers perform those functions which contribute directly to the achievement of
organizational objectives. For example, Manufacturing and marketing functions. Such functions
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are called line functions. On the other hand, some managers are involved in functions which
provide support to line functions, for example, HR and Legal affairs. These functions are called
staff Functions

Line and staff authority are two kinds of authority. Line authority is the type of authority that
reflects superior-subordinate relationships characterized by the power of decision making. Staff
authority refers to the right to advice on improving the effectiveness for line managers in
performing their duties.

10.1 Nature of Line Authority

Line authority established a line authority between a superior and his subordinates. It works as
Chain of Command, Channel of Communication and fixes Responsibility and Accountability

10.2 Nature of Staff Authority

Staff Authority is exercised by personnel in staff function over personnel in line function. The
degree of authority may vary. The staff authority can be in following forms

1. Advisory Staff Authority: An advisory staff manager makes suggestions to the line managers.
Line manager may put it into action or not. So, advisory staff authority is not obligatory on line
manager
2. Concurring Staff Authority: When concurring staff authority is granted, no action can be taken
until the staff person agrees to it.
3. Control Staff Authority: Certain managers with staff authority have authority to control
certain operations in line departments. For example, auditing, quality inspection departments
have staff authority, and they can control certain operations in line departments
4. Functional Staff Authority: Functional Staff authority is max authority a staff personnel can
get over line personnel. Sometimes functional staff authority is also known as Functional
authority to view it separately from Staff authority. It is the legitimate right given to staff
personnel to give instructions to the line personnel in any department with respect to certain
specific processes, procedures etc. related to their function.

10.3 Line and Staff Conflict

Often there is conflict between line and staff which is very harmful to the organization. The
factors responsible for such conflict are

Viewpoint of Line Managers Viewpoint of Staff Managers Nature of Line-Staff Relationship

Lack of Responsibility: Line Lack of Proper use of Staff: Staff Different Backgrounds: Line and
Mangers view that staff people personnel feel that line managers Staff personnel have different
do not carry any responsibility do not always implement their backgrounds which leads to
but enjoy authority. advice and in case of failure staff conflict
is made scapegoat
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Encroachment of Authority: Line Resistance of New Ideas: Line Lack of Demarcation between
personnel feel that staff managers often resist new ideas Line and Staff: There is often
personnel unnecessarily interfere given by staff because confusion about exact areas
with working of their department implementing new ideas would where line and staff have
mean change in present way of authority. There are chances of
working overlap which creates conflict
Lack of Practical Understanding: Lack of Proper Authority: Staff Lack of proper understanding of
Line personnel feel staff people Personnel feel that they do not Authority: Even if line and staff
are not able to understand the have proper authority granted to authority is made clear, people
actual problem on ground and them and it is line personnel may fail to understand the exact
their suggestions are not practical enjoying all the authority nature of line and staff authority
and may interfere in other’s
areas leading to conflict

10.4 Service Department

A service department is basically grouping of activities that facilitates the operation of other
departments, contributing to their efficiency, for example lightning department, Maintenance
department, cleaning department etc. Service departments are like staff function but there is
important distinction between them. Staff functions are created for activities which are especially
important or strategic in nature such as HR and Legal Affairs etc. whereas service department is
created for lesser important or routine activities like cleaning, maintenance etc. Staff functions
are higher up in the hierarchy whereas service departments are put a low level in hierarchy

11 Organizational Conflict
Conflict is breakdown in in standard mechanism of decision-making.

11.1 Views on Conflict

Traditionally, the conflict in an organization has been viewed very negatively. Conflicts shall be
avoided

Human relations view of conflict also believed that conflict is harmful. But it believed conflicts
are bound to happen. Conflicts must be resolved amicably

Interactionist View of Conflict is based on the belief that conflict is only a positive force in the
group as it helps in better decision making, creativity and innovation

11.2 Types of Conflict

Conflict is classified into the following four types: Interpersonal, Intrapersonal, Intergroup and
Intragroup

1. Interpersonal conflict refers to a conflict between two individuals. Interpersonal conflict is of

2 types

I. Vertical Conflict or hierarchical conflict arises between superior and subordinates.

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 II. Horizontal conflicts involve a disagreement between two people at the same level in
the same department or different department.

2. Intrapersonal conflict occurs within an individual. The experience takes place in the person’s
mind involving the individual’s thoughts, values, principles, and emotions. Intrapersonal
conflict arises due to Role Conflict or Goal Conflict

I. Role Conflict: Role conflict occurs when a person in a role is not able to respond
the expectations of other persons. One of common reason for role conflict is role
overload. In role overload, the managers may delegate too much work but the
time to that is less

II. Goal Conflict: Incompatible goals also lead to intrapersonal conflict. Incompatible
goals are of following types

▪ Approach-Approach Conflict: Such a conflict arises when a person must

choose from two or more equally attractive goals.

▪ Avoidance-Avoidance Conflict: Such a conflict occurs when a person must

choose between two alternatives each with negative aspects.

▪ Approach -Avoidance Conflict: In this type of conflict, an individual is faced

with an alternative that has both positive and negative consequences.

3. Intergroup conflict takes place when a misunderstanding arises among different teams or
departments within an organization. Reasons for intergroup conflict are Varied sets of goals
and interests of these different group, Competition and Resource sharing between teams

4. Intragroup conflict is a type of conflict that happens among individuals within a team.

11.3 Conflict Resolution

People deal with conflict in a variety of ways; therefore, you need different conflict resolution
strategies.

Kenneth Thomas and Ralph Kilmann developed five conflict resolution strategies that people use
to handle conflict

1. Avoiding or Repression of Conflicts: Avoiding is when people just ignore or withdraw from
the conflict. When conflict is avoided, nothing is resolved.
2. Competing (Confrontation): Competing is used by people who go into a conflict planning to
win. They are assertive and not cooperative. Competing might work in sports or war
3. Accommodating: Accommodating is a strategy where one party gives in to the wishes or
demands of another. They are being cooperative but not assertive.

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4. Collaborating (Smoothing or Defusion of Conflict): Collaborating is the method used when
people are both assertive and cooperative. A group may learn to allow each participant to
contribute with the possibility of co-creating a shared solution that everyone can support.
5. Compromising or Containment of Conflict: The concept is that everyone gives up a little bit of
what they want, and no one gets everything they want. Compromise is reached through
bargaining or through mediation and arbitration.
6. Conflict Stimulation: The strategy of conflict stimulation is based on interactional view of
conflict that conflict is not bad for the organization. In this conflict is encouraged

12 Coordination
Coordination is the process by which manager synchronizes the activities of different
departments or sections.

Coordination is the essence of management as it is inseparable from the following managerial

functions. Coordination is not something which can be ordered by a manager. Instead it is
something which managers attempts to achieve while performing his functions of planning,
organizing, staffing, directing, and controlling.

Difference between Coordination and Cooperation

1. Coordination is related to synchronization of efforts whereas cooperation is motto or a

spirit
2. Cooperation leads to building of institutions such as cooperative society whereas
coordination being a process is required in all such institutions and organizations
3. Cooperation may exist without coordination. In cooperative societies there is cooperation
among people but there may be lack of coordination leading to inefficiency
4. Coordination is deliberate effort, but cooperation is voluntary attitude

12.1 Types of Coordination

Coordination can be of following types

1. Internal Coordination: Internal coordination is all about establishing a relationship between

all the managers, executives, departments, divisions, branches, and employees or workers.
Internal coordination is of 3 types as discussed below
I. Vertical coordination – In vertical coordination, a superior authority coordinates his
work with that of his subordinates and vice versa.
II. Horizontal coordination – In horizontal coordination, employees of the same status in
different departments establish a relationship between them for better performance.
III. Substantive or Procedural Coordination: Substantive Coordination is about how the
work needs to be divided so that is can be performed in synchronized way. Procedural
coordination is about how a task needs to be completed following a certain procedure.

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2. External Coordination: As the name suggests, external coordination is all about establishing a
relationship between the employees of the organization and people outside it
like market agencies, public, competitors, customers, government agencies etc.

12.2 Techniques of Coordination

1. Chain of Command: A manager can use vertical coordination by using his authority and
issue orders to subordinate in coordinated way.
2. Leadership: Co-ordination becomes possible through leadership as it provides individual
motivation and persuades the group
3. Committees: A committee is a group of persons and the decisions of the committee are
group decisions which provide co-ordination among various activities
4. Communication: Effective communication regulates the flow of work, co-ordinates the
efforts of the subordinates of an enterprise
5. Staff Meetings: Periodic staff meetings can be extremely helpful in promoting
coordination.

12.3 Principles of Coordination

1. Early Stage Principle: This principle states that coordination must start at an early stage. Thus,
it can be said that this should start at the planning stage.

2. Continuity Principle: The process of coordination should begin at the time the organization
starts. This shall also continue until an organization exists.

3. Direct contact Principle: This principle is based on the theme that coordination is better
achieved through mutual understanding and not by force, order, or coercion. It states that
managers should directly contact their subordinates.

4. Principle of Dynamism: Dynamism is required because of continuous changes in environment

due to which there would be changes required in process of coordination also

5. Reciprocal relation Principle: The actions and decisions of one department or the person will
affect other departments and people in the organization. So, before taking any decision every
manager must find out the effect of that decision on the other departments.

6. Clarity of objective Principle: Coordination in an organization is possible only when there are
clear objectives set in the organization.

7. Principle of Timing: It states that various organizational units and members shall synchronize
the timing of their work performance.

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 MANAGEMENT
SUPPLEMENTARY CONCEPTS

Supplementary Notes
General Management Part 3

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 Read This Before Continuing Further
The purpose of the supplementary notes is that it helps us prepare in depth for the exam. We have put certain
things in supplementary notes and not in the Concept notes because if we put all the content in concept notes
then it will make the concept course very lengthy.

Concept Notes – Information that must be read for the exam (Must have)

Supplementary Notes – Information that is nice to read for the exam (Nice to have)

Though we have mentioned above that supplementary notes are “nice to have” and not “must have” but in this
time of competition when there is cut-throat competition, “nice to have” also becomes kind of mandatory. Every
single mark counts. Questions can be asked form supplementary notes

To summarize, do not leave this part unless and until you are short of time.

Note: The content given in supplementary notes is not covered in videos since it would be too much time
consuming for an aspirant to watch video for supplementary part. Hence, please study these notes without fail
in case you want to cover the supplementary part.

While explaining some concepts, we have re-written some information which was already available in concept
notes just to give a full picture here in this document. So, if you find some information which you have already
read in the course then you can skip that

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Contents
1 Graicunas Theory of Span of Control .......................................................................................................... 3
2 Peter Drucker and Organization Structure ................................................................................................. 4
3 Degree of Decentralization ......................................................................................................................... 4
4 Group Dynamics .......................................................................................................................................... 5
5 Group Cohesiveness .................................................................................................................................... 5

1 Graicunas Theory of Span of Control

Graicunas introduced a theory on span of management which explains three kinds of relationships that a
superior can have with subordinates. He formulated a theory and suggested the number of subordinates
under one superior based on mathematical calculation

Direct single relationship: This is the relationship between the superior and his immediate subordinates. It represents
direct contact of the superior with his subordinates. If there are 3 subordinates (A, B and C) under one superior (X), there
will be three direct single relationships, represented by the formula n. These are relationships between X and A, X and B,
and X and C

Cross relationships: While the subordinates work under the same superior, they also interact amongst themselves. These
are the relationships amongst subordinates. A’s interaction with B and B’s interaction with A will be different as viewed by
the managers and, therefore, this relationship will also be different. Based on the formula n (n -1), with 3 subordinates, 6
such relationships will be formed. These are between:
A and B, B and A, A and C, C and A, B and C, C and B

Direct group relationships: This is the relationship of superior with subordinates in the presence of other subordinates. All
possible combinations of superior and subordinate relationship-exist in group relationships. It represents contact of the

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superior with one or more subordinates while others (one or more) assist the relationships. The number of relationship (9)
is represented by the formula:

For one superior (X) and three subordinates (A, B, C), there will be 9 direct group relationships as follows :
1. X and A with B providing assistance
2. X and A with C providing assistance
3. X and B with C providing assistance
4. X and A with BC providing assistance
5. X and B with AC providing assistance
6. X and C with AB providing assistance
7. X and AB with C providing assistance
8. X and AC with B providing assistance
9. X and BC with A providing assistance

The total number of relationships is sum of the above type of relationship. Graicunas showed with these formulas, that
each additional subordinate increases the number of potential interactions significantly. If the number of subordinates
increased from 2 to 3 then total number of relationships from 6 to 18.

The ideal number is between 5 to 8 for the subordinates in executive span and between 15 to 25 in first level
supervision (below to executive span)

2 Peter Drucker and Organization Structure

Peter Drucker has pointed out 3 specific ways to find out what kind of structure is needed to attaint the
objectives of a specific business, which are as discussed below

1. Activity Analysis: It involves finding out what kind of activities are required to attain the objectives of
the organization. The activities may be classified into areas such as marketing, production etc. After the
activities have been identified and classified into functional areas, they may be divided into departments
to be driven by departmental Managers
2. Decision Analysis: What decision are needed to obtain the performance necessary to the organization.
On what level these decisions are made. Analysis of foreseeable decision shows the structure of top
management and nature of authority that needs to be delegated to different levels of operating
management
3. Relation Analysis: With whom the manager will have to work. Such questions will help in deciding the
structure of organization.

3 Degree of Decentralization
To find put what is the degree of decentralization, criteria has been suggested b Allen and Earnest Dale

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 Allen Criteria Earnest Dale Criteria
Allen has given 3 questions to decide the degree of Earnest Dale has given 4 tests to find out the degree
decentralization. They are of decentralization in an organization. The degree is
1. What kind of authority is delegated? greater when
2. How far down in the organization is it 1. The number of decisions made by lower
delegated management are higher
3. How consistently it is delegated 2. The more important decisions are made by
lower management
3. Many functions are permitted by decisions at
lower levels. For example, if lower
management can also make decisions
related to finance then degree of
decentralization is higher
4. There is less checking on decisions at lower
levels

4 Group Dynamics
We have already seen that how informal structure in an organization are essential for its success. Social needs
are most compelling needs of the people to keep them motivated.

The social process by which people interact face-to-face with one another is called group dynamics. It
focusses on teamwork wherein small groups are constantly in touch with each other and share common
ideas to accomplish the given tasks. Every group chooses its leader who may be called an informal leader,
and he may effectively coordinate the group efforts towards realizing the objectives

5 Group Cohesiveness
By group cohesiveness we mean the degree of attachment of the members of the group. The greater the
degree of attachment, the greater is the likelihood that all the members will conform to the group standards.
Cohesive groups are more powerful and are more likely to act in unison when their expectations do not come
to be realized

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Important Points
1. This Summary Sheet shall only be used for Quick Revision after you
have read the Complete Notes
2. For Building Concepts along with examples/concept checks you
should rely only on Complete Notes
3. It would be useful to go through this Summary sheet just before
the exam or before any Mock Test
4. Questions in the exam are concept based and reading only
summary sheets shall not be sufficient to answer all the questions

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1 Management Processes
We have already discussed there are 5 functions of management given by KOONTZ and O’DONNEL
i.e. Planning, Organizing, Staffing, Directing and Controlling. Planning and Organizing have been
discussed in detail. In this chapter, we shall discuss about Directing, Staffing and Controlling

2 Staffing
Staffing is that part of the process of management which is concerned with acquiring, developing,
employing, appraising, remunerating and retaining people so that right type of people are available
at the right positions and at the right time in the organization

Importance of Staffing

1. Staffing helps in discovering and obtaining competent and personnel for various jobs.
2. It helps to improve the quantity and quality of the output by putting the right person on the
right job.
3. It helps to improve job satisfaction of employees.
4. It facilitates higher productive performance by developing competency through training and
development programs.
5. It facilitates growth and diversification of business.

2.1 Characteristics of Staffing

1. Staffing is an important managerial function- The operations of other four functions depend
upon the manpower which is available through staffing function.
2. Staffing is a pervasive activity- As staffing function is carried out by all mangers
3. Staffing is a continuous activity- Staffing function continues throughout the life of an
organization

2.2 Steps in Staffing

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 1. Manpower requirements- It involves forecasting and determining the future manpower
needs of the concern.
2. Recruitment- Once the requirements are notified, the concern invites and solicits
applications according to the invitations made to the desirable candidates.
3. Selection- This is the screening step of staffing in which the solicited applications are
screened out and suitable candidates are appointed as per the requirements.
4. Orientation and Placement- The appointed candidates are made familiar to the work units
and work environment through the orientation programs. Placement takes place by putting
right man on the right job
5. Training and Development- Workers are developed by providing them extra benefits of in-
depth knowledge of their functional areas. D
6. Remuneration- It is a kind of compensation provided monetarily to the employees for their
work performances. This is given according to the nature of job- skilled or unskilled, physical,
or mental, etc.
7. Performance Evaluation- Evaluating the performance of employee and working on weak
areas
8. Promotion and transfer-

We will discuss about Manpower Requirements, Recruitment and Selection in detail in the upcoming
part of this document. The rest of the steps – Orientation and Placement, Training and Development,
Remuneration, Performance Evaluation, Promotion and Transfer will be discussed in chapters on
HRD.

2.3 Manpower planning

Manpower Planning which is also called as Human Resource Planning consists of putting right
number of people, right kind of people at the right place, right time, doing the right things for which
they are suited for the achievement of goals of the organization. It is of two types

1. Strategic workforce planning: It usually covers a three to five-year forecast period, aligned
to business needs and outcomes.

2. Operational workforce planning usually covers the next 12–18 months and should align
with the timeframe of the business planning cycle.
Steps in Manpower Planning

1. Analyzing the current manpower inventory-Before a manager makes forecast of future, the
current manpower status must be analyzed.
2. Making future manpower forecasts- Forecasts needs to be done with respect future
requirement of manpower for new projects, in new skills etc.
3. Developing employment programs- Once the current inventory is compared with future
forecasts, the employment programs can be framed and developed accordingly, which will
include recruitment, selection procedures and placement plans.

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 4. Design training programs- Training programs depend upon the extent of improvement in
technology and advancement to take place.

2.4 Recruitment
Recruitment (hiring) is a core function of human resource management. Recruitment is just about
attracting talent i.e. identification of sources from where the personnel can be employed and
motivating them to offer themselves for employment

Sources of Recruitment

1. Internal sources –Under this policy, if there is any vacancy then the persons already working
in the organization are appointed to fill it by doing their transfers or promotions
.
2. External sources or recruitment from outside – Most of the concerns must look for the
external sources for recruitment the required number of employees with the requisite
qualifications.

The external sources of recruitment include.

I. Direct Recruitment –For that organization may receive direct applications from the
candidate through emails or submitted on website
II. Recruitment through the jobbers or Intermediaries or Placement agencies– In many
cases the companies take help from external agencies for recruitment to save time

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 III. Recruitment at the factory gate (Direct Recruitment) – Under this system, large
numbers of unemployed workers assemble at the factory gate for employment. The
factory manager, or labor superintendent or some other official may select the
necessary workers.
IV. Recruitment through advertisement –The vacancies are advertised in the popular
daily newspapers and applications are invited from the persons having required
qualifications.
V. Recruitment through the recommendation of the existing employees
VI. Campus Recruitment from colleges or universities or educational institutions
VII. Recruitment through employment exchange
VIII. Social Recruiting: Social recruiting is the use of social media for recruiting including
sites like Facebook and Twitter
IX. Job Fairs: In a job fair, various academic institutions located in large city jointly
organize recruitment program. In this program, candidates of different institutes,
even from non-organizing institutes, come by paying the prescribed fee. Organizations
visit the fair by invitation.
X. Casual Callers: Casual callers or unsolicited candidates are those applicants who offer
themselves for employment in an organization to fill vacancies which will arise in
future. The organization may consider them for employment in case of vacancy

2.5 Selection
The Selection is a process of picking the right candidate with prerequisite qualifications and
capabilities to fill the jobs in the organization. Steps in selection process are given below

1. Preliminary Interviews- It is used to eliminate those candidates who do not meet the minimum
eligibility criteria laid down by the organization.
2. Receiving Applications: Once the individual qualifies the preliminary interview, he is required
to fill in the application form in the prescribed format. This information helps the interviewer
to get the fair idea about the candidate and formulate questions to get more information about
him
3. Screening Applications: Once the applications are received, these are screened by the
screening committee, who then prepare a list of those applicants whom they find suitable for
the Job.
4. Employment Tests: To check the mental ability and skill set of an individual, several tests are
conducted. Such as intelligence tests, aptitude tests, interest tests, psychological tests,
personality tests, etc.
I. Intelligence Tests: These are tests to measure one ‘s intellect or qualities of
understanding. The intelligence is measured as Intelligent Quotient which is calculated as
follows

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 II. Aptitude Tests: Aptitude refers to one ‘s natural propensity or talent or ability to acquire
a particular skill. It could relate to mechanical dexterity, clerical, linguistic, musical,
academic etc. However, aptitude tests do not measure motivation
III. Interest test: It is used to discover the area of interest for a person. It is assumed that
person interested in a particular type of Job can do much better than the person who is
not interested.
IV. Achievement Tests (Performance Test or Trade Test): These are proficiency tests to
measure one ‘s skill, accomplishment or acquired knowledge. For example, typing test
may be conducted to check the speed, efficiency, and accuracy of the typist.
V. Personality Test: Personality test is administered to predict performance success for jobs
that require dealing with people, or jobs that are essentially supervisory or management
in character.
VI. PIP Tests: PIP tests are those which seek to measure one ‘s personality, interest and
preferences.
VII. Projective Tests: These tests expect the candidates to interpret problems or situations.
Responses to stimuli will be based on the individual ‘s values, beliefs and motives.
Thematic Apperception Test and Rorschach Ink Blot Test are examples of projective
tests.
In Thematic Apperception Test a photograph is shown to, the candidate who is then
asked to interpret it. The test administrator will draw inferences about the candidate ‘s
values, beliefs and motives from an analysis of such interpretation

The Rorschach test is a psychological test in which subjects' perceptions of inkblots are
recorded and then analyzed using psychological interpretation

3. Employment Interview. Here, the interviewer asks questions from the applicant to discover
more about him and to give him the accurate picture of the kind of a job he is required to
perform.
4. Checking References: The firms usually ask for the references from the candidate to cross
check the authenticity of the information provided by him.
5. Medical Examination: Here the physical and mental fitness of the candidate are checked to
ensure that he can perform the job.
6. Final Selection: Based on above steps the candidate is selected for the job.

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 7. Approval by Authority: The approval is sought from such authority for the appointment of
candidate
8. Employment Contract: Finally, the contract of offer letter is signed

2.5.1 Precautions in Using Selection Tests

Certain precautions need to be taken while administering these tests

1. Test Must be valid: Test validity is the extent to which a test accurately measures what
it is supposed to measure.
2. Test must be reliable: The reliability of test is the consistency with which it yields the
same across throughout the series of measurements.

2.5.2 Difference between Recruitment and Selection

1. While the recruitment refers to the process of attracting good applicants for jobs, selection
identifies the most suitable amongst the applicants.
2. In the recruitment process, the effort is to attract the candidates as many as possible and it
is regarded as a positive process. But selection is a negative process as it involves rejection of
many candidates.
3. Recruitment helps the manager to attract good candidates, the selection leads to making the
right choice

3. Directing
Directing and leading comprise the managerial functions of guiding, overseeing, motivating, and
leading people. Directing is also known as activating sometimes. This function is the executing
function of management. Directing mainly deals with following Elements

1. Effective Communication
2. Supervision
3. Motivation
4. Leadership of Employee
For Communication, Motivation and Leadership please refer the respective units from the syllabus.
In these units these aspects are described in detail. Overview of Supervision is given later in this
document.

Importance of Directing

1. Initiates Action: Directing or Direction function is said to be the heart of management of

process and therefore, is the central point around which accomplishment of goals take place.
A few philosophers call Direction as “Life spark of an enterprise”.

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 2. It Integrates Efforts - It is through direction the efforts of every department can be related
and integrated with others.
3. Means of Motivation - Direction function helps in achievement of goals. A manager makes
use of the element of motivation here to improve the performances of subordinates
4. Coping up with the changes - It is a human behavior that human beings show resistance to
change. It is directing function which is of use to meet with changes in environment, both
internal as external. Effective communication helps in coping up with the changes

3.1 Nature of Directing

1. It is performed by all levels of management.
2. It is continuous process. If there is work, there is direction required
3. Involves Human Factor
4. Delicate Function - Direction is supposed to be a function dealing with human beings. Human
behavior is unpredictable and therefore, it is termed as having delicacy in it to tackle human
behavior

3.2 Principles of Directing

The principles of directing can be divided into 2 types (i) Principles related to purpose of
directing and (ii) Principles related to directing process

3.2.1 Principles related to Purpose of Directing

1. Principal of Maximum Individual Contribution: Management should adopt that directing
technique which enables subordinates to contribute maximum
2. Principle of Harmony of objectives: - Directing is regarded as essential in personnel management
and directing should help all the members to satisfy their personal goals as well as organizational
goals.
3. Principle of efficiency: The executive should try to motivate sub-ordinates to increase
performance & attain objectives at minimum cost; otherwise direction will be ineffective.

3.2.2 Principles related to Directing Process

1. Principle of unity of command: Command must be come from only one executive or one
superior.
2. Principle of direct supervision: -Direct supervision and advice by the executive will boost the
Morale of the workers. This makes the atmosphere trustworthy in the organization.
3. Principle of communication: - A good system of communication between executives & sub-
ordinates ensures the success.

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 4. Principle of leadership: Good leadership will lead to cooperation, Co-ordination & confidence in
the working force
5. Principle of Follow Through: Mere giving orders is not sufficient, but management should find
out what difficulties’ subordinates are facing and should help the,
6. Principle of Comprehension: This principle states that subordinate should know what they must
do, how to do and when to do in a comprehensive manner.
7. Principle of use of Informal Organization: Management should try to understand, spot, and
make use of such informal organizations for making directing more effective
8. Principle of Appropriateness of directing technique: One can use various techniques while
directing such as authoritarian, consultative, and free reign. Manager should use directing
technique as per the demand of the situation.

3.3 Supervision
Supervision means supervising the work of subordinates whether they are doing right things and
in a correct way. Sometimes, directing is confused with supervising. But there is difference
between the two. Supervision has limited scope of overseeing and guiding the workers whereas
Directing has a wider scope which includes motivating and leading employees and engaging in
effective communication with them
A supervisor performs many functions

1. As a Planner - A supervisor must plan the daily work schedules in the factory. At the same
time, he must divide the work to various workers according to their abilities.
2. As a Manager - It is righty said that a supervisor is a part of the management team of an
enterprise. He is, in fact, an operative manager.
3. As a Guide and Leader - A factory supervisor leads the workers by guiding them the way of
performing their daily tasks. In fact, he plays a role of an inspired by telling them.
4. As a Mediator - A Supervisor is called a linking pin between management and workers. He is
the spokesperson of management as well as worker.
5. As an Inspector - An important role of supervisor is to enforce discipline in the factory.
6. As a Counselor - A supervisor plays the role of a counselor to the worker’s problem.

3.4 Directing and Human Behavior

Directing involves dealing with human beings. Human beings differ in various ways. Different
models have been developed to predict human behavior in each situation. There are 4 main
models of man: rational man, social man, self-actualization man and complex man.

3.4.1 Rational Man

Rational man model is based on the premise that an individual tries to match his effort and
reward (financial incentives) which he is likely to get for putting the effort. This model assumes
that individual is motivated by the financial incentives and he is willing to do things which
maximize economic returns. This model is also known as economic man model
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3.4.2 Social Man
Social man model is based on the understanding that man as a part of society seeks satisfaction
of his social needs which are in the form of maintaining social relationships. Man is motivated
is more responsive to group pressure rather than control by organization. He will obey superior
orders if they are in conformity with social needs.

3.4.3 Self-Actualization Man

It is based on principle that people have lot of potential which may be used to achieve
something unique. Self-Actualization is the ultimate need of an individual and he makes efforts
to satisfy this needs. He is primarily self-motivated and self-controlled. Management should
give him freedom to work and provide challenging jobs

3.4.4 Complex Man

This model suggests that rational, social, and self-actualizing models of man are simplistic
assumptions of people as they believe that person will behave in a certain manner. According
to this model, human behaviour is quite complex, and it is not easy to predict human behaviour.
As per this model, individuals have diverse type of needs. They differ in terms of intelligence,
personality, attitudes, values, and emotions affecting their behaviour. Therefore, individual
adopt different ways to satisfy the same need

4 Controlling
Controlling is the process of evaluating actual performance and, if necessary, taking
corrective actions so that the performance is in accordance with planned performance.

Controlling has the following features:

1. Controlling is both backward looking as well as forward looking. It is backward looking

because control action is based on the past performance. It is forward looking because one can
control future happenings and not the past.

2. Controlling is relevant at all management levels and is a continuous process

4.1 Relationship between Planning and Controlling

There is reciprocal relationship between planning and controlling.

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Planning as the Basis for Controlling: Planning is the basis for controlling. Planning decides
what is to be achieved; controlling measures whether this has been achieved or not.

Controlling as the Feedback for Planning: Controlling provides feedback to planning by

measuring actual results and comparing these with standards. If there is a deviation between
the two, this feedback alerts the planning process and actions are taken based on that.

4.2 Four Steps in Controlling

1. Set Standards: These standards are based on the plans established to initiate the work
2. Measure Performance: Record must be kept of work as it progresses so that performance
can be compared to the applicable standard.
3. Compare Performance: The results accomplished must be evaluated in terms of the
standards by which work is being judged. Interpretation involves not only comparison of
actual against standard but also identification of discrepancies and analysis of why these
variances have occurred. When actual performance is compared with standard performance
and deviation is analyzed then concept of critical point control shall be applied. Application
of critical point control implies that control shall be exercised on critical points only. Critical

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 points are those points in an organizations performance results which affect a major part of
the organization.
4. Take Corrective Action: When variations from plan occur, it is necessary to bring the work
going on back to the desired course.

4.3 Characteristics of Control

1. Control is a continuous process
2. Control is a management process
3. Control is embedded in each level of organizational hierarchy
4. Control is forward looking
5. Control is linked with planning
6. Control is a tool for achieving organizational activities
7. Control is an end process
8. Control compares actual performance with planned performance*
9. Control point out the error in the execution process
10. Control helps in minimizing cost
11. Control helps in achieving standard
12. Control saves the time
13. Control helps management for monitoring performance

4.4 Elements of Control

The four basic elements in a control system:

1. The first element is the characteristic or condition of the operating system which is to be
measured.
2. The second element of control, the sensor, is a means for measuring the characteristic or
condition.

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 3. The third element of control, the comparator, determines the need for correction by
comparing what is occurring with what has been planned. Some deviation from the plan is
usual and expected, but when variations are beyond those considered acceptable,
corrective action is required.
4. The fourth element of control, the activator, is the corrective action taken to return the
system to its expected output. In School it would be change in teaching methodologies

4.5 Types of Control

4.5.1 Strategic and Operational Control

Strategic control is concerned with tracking strategy as it is being implemented, detecting
problems or changes in underlying premises, and making necessary adjustments.

Operational control is concerned with action or performance and is aimed at evaluating the
performance of the organization as a whole or its different components-strategic business
units, divisions, and departments.

Difference between Strategic Control and Operational Control

Basis Strategic Control Operational Control

Basis Question Is the Organization moving in right Is the Organization
direction performing well
Aim Continuous questioning about basis Questioning about allocation
direction of strategy and utilization of
Organizational resources
Focus External Environment Internal Environment
Time Horizon Long-Term Short-Term
Exercise of Control By Top Management By all levels of Management
Main Techniques Environmental Scanning Budgets and other
techniques

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4.5.2 Forward, Concurrent or Feedback Controls

• Feedforward controls: Feed forward control monitors inputs into a process to

determine whether the inputs are as planned. If inputs are not as planned, corrective
action is taken to adjust the inputs according to the plan.

• Concurrent controls monitor ongoing employee activity to ensure consistency with

quality standards. These controls rely on performance standards, rules, and regulations
for guiding employee tasks and behaviors. Their purpose is to ensure that work activities
produce the desired results.

• Feedback controls involve reviewing information to determine whether performance

meets established standards. If any deviation is found between performance
standards and actual performance, the corrective action is undertaken. In business
organizations, top management control is mostly based on feedback.

4.5.3 Open- and closed-loop control

Suppose there is street Lightening System which makes the lights on every day at 7 in the
evening. If the lights should be needed on a dark, stormy day during daytime itself then the
timing device would not recognize this need and therefore would not activate the lights. So,
someone must manually switch on the lights. This is an example of Open loop Control

If control is exercised because of the operation rather than because of outside or

predetermined arrangements, it is a closed-loop system. The home thermostat is the classic
example of a control device in a closed-loop system. When the room temperature drops below
the desired point, the control mechanism closes the circuit to start the furnace and the
temperature rises

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4.5.4 Human and Machine Control
The elements of control are easy to identify in machine systems. For example, the characteristic
to be controlled might be some variable like speed or temperature, and the sensing device
could be a speedometer or a thermometer. In automatic machine systems, inputs of
information are used in a process of continual adjustment to achieve output specifications.
When even a small variation from the standard occurs, the correction process begins.

In human control systems, the relationship between objectives and associated characteristics
is often vague; the measurement of the characteristic may be extremely subjective; the
expected standard is difficult to define; and the amount of new inputs required is impossible
to quantify

4.5.5 What is Cybernetic Control?

Cybernetics, control theory as it is applied to complex systems. This is a type of automatic
control.

The above figure shows Cybernetic robotic hand used for automated manufacturing. So, in way
closed loop control or machine controls are kind of cybernetic controls

4.6 Control Areas

Though control is required in all the areas, but certain areas are more critical. Holden, Fish and
Smith have given 13 key areas which are important. These are

1. Control Over Policies

2. Control over organization structure
3. Control over personnel
4. Control over wages and Salaries
5. Control over costs
6. Control over methods and Manpower
7. Control over capital expenditure
8. Control over service departments
9. Control over line of products

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 10. Control over research and development
11. Control over foreign operations
12. Control over External relations
13. Overall control through budgeting of operations

4.7 Management by Exception

Concentrating on exceptional deviations from planned performance allows higher level
managers to detect those areas where their attention is required and should be given. This is
done through Management by Exception which focuses exclusively on critical problems to
control them. Management by exception is a system of identification and communication of
that signals to a higher-level manager when his attention is needed.

Management by exception has six basic ingredients: measurement, projection, selection,

observation, comparison, and decision making

4.8 Information Systems

"An information system can be any organized combination of people, hardware, software,
communication network, and data resources that collects, transforms, and disseminates
information in an organization."

4.8.1 Role of Information Systems in Controlling

Every manager in the organization must have adequate information about his performance,
standards, and how he is contributing to the achievement of organizational objectives. In the
light of this phenomenon, role of information systems in controlling is as follows:

1. Management Control: Management control is applicable to higher management levels.

It refers to the task of ensuring that activities are producing the desired results.
Information is supposed to act as guide to management control because control action
is guided by adequate information from the beginning to the end.

2. Operational Control: Operational control is concerned with action completed or

performance achieved and evaluates the performance at the operating level.
Operational control is exercised at two levels of an action-post-action control and
steering control. In post-action control, performance is measured after the action is
completed and corrective actions are taken for the next cycle of the similar action. In
steering control, corrective actions are taken during the process of completing the
action itself. Information systems provide information for exercising both these types
of control.

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 3. Decision Making Regarding Corrective Actions: Decision making is a process to arrive
at a decision; the process by which an individual or organization selects one position or
action from several alternatives. Information systems provide relevant information to
analyze the causes for deviation and the type of action to be taken.

4.8.2 Types of Information Systems

1. Transaction Processing Systems: Transaction processing system is applied for conversion,
manipulation, and analysis of raw data into a form that is more meaningful to users.
Transaction processing systems' main tasks are data gathering data manipulation, data
classification, data storing, calculation, and summarization.
2. Management Information Systems: Management information systems (MIS) provide
information in the form of reports and displays to managers and other professionals in the
organization. Management information systems provide information in structured form for
making structured and semi-structured decisions at the operating level. Management
information systems put emphasis on internal data.
3. Decision Support Systems: Decision support systems (DSS) are information system
applications that assist in decision making. These combine data, sophisticated analytical
models, and user-friendly software to make semi-structured and unstructured decisions.
The basic use of decision support systems is in the areas of planning, analyzing alternatives,
and search for solutions.
4. Executive Information Systems: Executive information systems (EIS) are information
systems at the strategic management level of an organization designed to address
unstructured decision making. They provide information to top-level managers in
interactive format through their access to critical success factors of an organization. The
use of EIS is primarily in the areas of strategic planning and strategic control.
5. Expert Systems: Expert systems are knowledge intensive computer programs that use
artificial intelligence.

Managers at different hierarchical levels require different types of information systems.

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4.9 Control Techniques

4.10 Control Techniques at Operational Level

Operations of an organization are concerned with converting inputs (materials, energy, etc.)
into outputs (goods and services) as efficiently as possible to optimize profit of an organization.
Responsibility for exercising control on operations lies with operations management.

4.10.1 Budgetary Control

The features of budgetary control can be identified as follows:
1. Budgetary control establishes a plan or target of performance which becomes the basis
of measuring progression of activities in the organization.
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 2. It tries to measure the outcomes of activities in quantified terms so that actual
performance can be compared with budgeted performance.
3. It tries to focus attention of the management on deviation between what is planned
and what is being achieved so that necessary actions are taken to correct the situation
and to achieve the objectives of the activities.

Types of Budgets

1. Master and Functional Budgets: A master budget is prepared for the entire organization
incorporating the budget of different functions whereas functional budget is prepared for a
single functional unit like production marketing etc.
2. Capital and Revenue Budget: Capital and revenue budget correspond to capital and revenue
expenditure, respectively. Capital expenditure is regarding creation of assets such as buying
a land, constructing factory, buying a machine etc. Revenue expenditure on the other hand
is about carrying out day to day expenditures such as paying salaries, paying rent,
maintenance of machines etc
3. Long term and Short-Term Budgets: The budget which is prepared for a year or so is called
a short-term budget. The budget which is prepared for a longer period than a year is called
a long-term budget.
4. Fixed and Flexible Budgets: Hey journey organizations prepare budgets which pertain to
only certain projected fix volume of operations for a year or so, such budgets are known as
fixed or static budgets. A budget which is designed to change in accordance with the
activities of the organization is known as flexible budget. It considers several levels of
activity.

Zero Based Budgeting

The problem with budgeting is that budgets are prepared taking previous year numbers as
base. But in constantly changing world, the activities/factors which were important last year
may not be important currently. This can be solved by using zero based budgeting. In zero
based budgeting the budgets are prepared from scratch without taking data of the past years.

4.10.2 Control through Costing

Control through costing involves the control over costs in the light of certain pre-determined
costs usually known as standard costs. Standard costs are pre-determined operation costs
computed to reflect quantities, prices, and level of operations. Thus, standard costing is a
method of cost accounting in which standard costs are used in recording certain transactions
and the actual costs are compared with the standard costs to find out the amount and reasons
of variations from the standard.

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4.10.3 Break Even Analysis
Break-even analysis (an especially important Control Technique) is basically concerned with the
cost-volume-profit relationships. Break-even analysis is made mathematically by applying the
formulae to trace the break-even point, contribution, margin of safety, and profit volume ratio,
or graphically by break-even chart concerning the profitability of the organization.
Mathematically, relationships can be expressed as follows:
Break-even point = Fixed costs/Contribution per unit
Contribution = Sale price per unit - Variable costs per unit
Margin of safety = Total sale proceeds - Sales at B.E.P.
Profit = Sales - Total costs (fixed + variable)
Or =Total contributions - fixed costs
Graphically, relationships can be shown by break-even chart as shown in Figure:

• This is a simple break-even chart showing a single product for the organization.
• The chart shows the level of cost and revenue for each level of sales and indicates that
at 2,500 units, the organization would break even implying that there is neither profit
nor loss.

4.10.4 Responsibility Accounting

The use of responsibility accounting (a control technique) focuses attention on management by
objectives rather than management by domination. Each person is responsible for his area of
operation, and for effective control, he must know what his costs should be and what his costs
have been. A responsibility center is an organizational unit such as division, department, or
section, headed by a responsible person whose responsibility is fixed in respect of results of
that organizational unit. There are three types of responsibility centers: cost centers, profit
centers, and investment centers.
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 1. In the cost centers, the control-system measures only the costs incurred by
responsibility centers; no attempt is made to measure the value of their outputs.
2. In profit centers, the targets are fixed in terms of profit which is measured by the
amount of input and output.
3. In the investment centers, managers are held responsible for the effective use of assets
as well as for revenue and cost.

In the conventional accounting, the product costing accumulates the cost to ascertain cost of
production, the responsibility accounting emphasizes cost control based on "who is
responsible for costs."

4.10.5 Internal Audit

Internal audit, also called operational audit, is an effective tool of managerial control. Internal
audit is carried out by managers themselves or by special staff appointed for this purpose. In
addition to ensuring that accounts reflect the facts, internal audit, also appraises policies,
procedures, use of authority, quality of management, effectiveness of methods, special
problems, and other phases of operations.

4.10.6 Quality Control

From operational point of view, quality means focussing on the production of increasingly
better products at progressively more competitive prices

Techniques for Quality Control

The first phase of quality control is carried out by statistical quality control while the second
phase is done through inspection control.

A. Statistical Quality Control: Statistical quality control (SQC), also known as statistical process
control (SPC), is a method of measuring and continuously improving work process before
the final inspection of the product. Therefore, it is preventive as well as remedial. In using
SQC, two considerations are important: setting tolerance limit of acceptable quality and
measuring the product quality.

1. Tolerance Limit: Tolerance limit is the variation in quality from the standard
specifications which can be acceptable. For example, a machine is manufacturing
ball bearings of 3.00 centimeters. There is a possibility that some of the bearings are
oversized and some are undersized. The management must decide the extent to
which these oversized or undersized bearings would be accepted. The management
may accept bearings between 3.10 or 2.90 centimeters.

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 2. Measurement of Quality: Measurement of quality is undertaken during the
operation itself so that if the machine starts producing items beyond the tolerance
limit is stopped immediately to avoid further losses. Thus, in the above case, if
bearing size goes beyond 3.05 or comes below 2.95 centimeters, the machine is
stopped to find out the fault in machine operations.

B. Inspection Control: n the inspection control, quality control in charge seeks to determine
the acceptability of parts or products. This may be done either for the raw materials which
are used in production process or which are in the form of finished products resulting from
the completion of production process. Inspection is made by comparing the quality of the
product to the standard, commonly known as specification, by means of a visual or testing
examination.

4.10.7 Quality Control through Quality Circle

Quality circle is a group of employees that meets regularly to solve problems affecting its
work area. This group carries on control and improvement within the workplace utilizing
quality control techniques with all the members participating. Generally, a QC consists of six to
twelve members from the same work area. QC generally recommends solutions for quality
and productivity problems which may be implemented by management.

QC ensures harmony in the organization, effective teamwork, problem-solving capacity, self-

discipline, better interpersonal and group relations, better communication, participation, job
satisfaction, and finally productivity and consequently organizational effectiveness.

4.10.8 Inventory Control

Inventory consists of raw materials, work-in-progress (semi-finished goods), and finished
goods. Inventory control tries to specify the optimum level of inventory that an organization
should keep. If we keep inventory too high, then it means we are doing high level of
investments in inventory which are not required. We would also be required to spend money
in storing that. On the other hand, if we keep inventory too low, it means we are taking a risk
of stock out

In 1970s, Japanese introduced the concept of just-in-time (JIT) inventory system, known as
Kanban in Japanese language. The basic theme of this system is to have no inventory. Raw
materials are bought more frequently and in small quantity to be used just-in-time, and finished
products are produced and delivered just-in-time to be sold.

Generally, for inventory control, two techniques are applied: ABC analysis and economic order
quantity (EOQ). Both these techniques have different perspectives for inventory control.

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a) ABC Analysis:
• ABC analysis is a widely used technique for classifying different items.
• This technique uses the values of different types of inventory for their classification.
• Group A consists of those items which have high value though their number may be
low.
• Group C items have extremely low value, but their number may be more.
• Group B items fall in between with average value and number.

Based on the study of inventory management systems in several companies, Arthur Synder
(Inventory Management Expert) has arrived on the conclusion that the composition of ABC
items in total inventory is roughly as shown in below Table:

• According to ABC analysis, maximum attention should be paid to group A items as these
are critical in terms of value followed by B and C groups.
• Thus, ABC analysis provides clue where attention should be focused in inventory
control.

b) Economic Order Quantity (EOQ):

Economic order quantity (EOQ) indicates the size of order that will result in the lowest total of
order cost and inventory carrying cost for an item of inventory. To estimate EOQ, two types of
costs are calculated: order cost and inventory carrying cost.

1. Order Cost: Order cost includes various items on which an organization must incur cost or
procuring raw materials. These include various types of administrative costs such as
• stock taking, order writing, agents' visit, business journeys, reminders, etc.
• consignment processing such as received notes, checking, recording, etc.
• invoice processing such as checking, approval, book entries, etc.
• and payment procedure such as cheque/draft preparation, mailing, etc.

Each time a purchase order is given, these costs are involved. Thus, this suggests that it is
preferable to purchase in bulk. However, inventory carrying cost must be calculated because if
you buy in bulk then you would have to store them which would mean storage cost for you

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2. Inventory Carrying Cost: Inventory carrying cost involves interest on the money locked in
inventory, cost of storage, cost of insurance for stock, and cost of material loss due to spoilage,
quality deterioration, obsolescence, etc. All these costs must be calculated in terms of per unit
of materials.

After identifying ordering cost and inventory carrying cost, economic order quantity is
calculated by using the following formula:

EOQ =

where S = Total quantity of materials required

O = Ordering cost per order
C = Carrying cost per unit

The above formula can be explained by an example. Suppose that an organization has arrived
at the following figures:
Total quantity required per annum = 5,000 units
Ordering cost per order= Rs 100
Carrying cost per unit= Rs 1

EOQ for the organization will be as follows: √(2 ∗ 5000 ∗ 100)/1 =1,000 units

EOQ formula gives figure for ordering materials per order.

Safety Stock (and Inventory Control):

Another issue that is relevant in inventory control is the estimation of safety stock that an
organization should keep regularly to continue its operation uninterruptedly. This is required
to meet unforeseen situations which may interfere with the regularity of material supply.

• For example, sometimes, thermal power plants owned by Government must be shut
because of lack of timely supply of coal which becomes very costly affair.

4.10.9 TIME-EVENT NETWORK ANALYSIS

Time-event network analysis helps to know how the parts of a programme fit together during
the passage of time and occurrence of events.

There are three major techniques for this analysis: Gantt chart, milestone budgeting, and
PERT/CPM though PERT/CPM is the most popular. Let us discuss them one-by-one.

1. Gantt Chart:
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 Gantt chart has been developed by Henry Gantt in early twentieth century in the form of
bar chart bearing his name. Gantt recognized that total programme goals should be
regarded as a series of interrelated derivative plans that people could comprehend and
follow.
• Based on this recognition, he has identified the relationship among different
activities required to complete a programme.
• Based on this premise, Gantt chart was developed which has been presented in
below Figure:

• Gantt chart shows that two or more activities which have sequential relationship must
be completed in that order.
• However, the chart does not depict the relationship between one group of activities
with another group of activities.
• For example, it shows relationship among two activities in task A but does not show
relationship between task A and task B, or other tasks.

To overcome this problem, milestone budgeting and PERT/CPM network have been
developed.

2. Milestone Budgeting:
Milestone budgeting, also known as milepost budgeting, breaks a project into controllable
pieces and then follows them carefully. For applying milestone budgeting, a project is
broken into sub-projects a that can be completed individually in a time sequence to
complete the project within the stipulated time. The milestone budgeting is an
improvement over Gantt chart in the sense that it establishes relationships between two
or more segments of a project. However, such a relationship is not completely depicted in
milestone budgeting.

To overcome this problem, PERT/CPM has been developed.

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4.10.10 PERT/CPM
PERT (Programme Evaluation and Review Technique) was developed by the special project
office of the US Navy in 1958. Almost at the same time, engineers at DuPont Company, USA,
also developed CPM (Critical Path Method)

Process of PERT/CPM:
A programme consists of a several activities and sub-activities. To complete the programme,
these activities and sub-activities should be completed in a proper sequence and in allotted
time. Since some of the activities can be taken simultaneously, a network is developed to show
the sequence, time taken, and time of start of activities. The whole process involved in the
preparation of PERT/CPM is as follows:

1. Identification of Activities. Activities represent jobs that should be performed to complete

a programme or project. Each activity takes some specific time under given conditions.

2. Sequential Arrangement of Activities. There is always a technological sequence in the

various activities of a project. Preceding and succeeding activities are arranged in a sequence.

3. Time Estimates of Activities. Performance of an activity takes time. To ensure that the
project is completed timely, there should be correct estimate of time taken by each activity.
However, the activities are performed in future and it may not be possible to forecast the
future happening correctly, consequently the correct time estimate of activities. To overcome
this problem, three-time estimates are taken:

(i) optimistic time showing the least time of an activity.

(ii) pessimistic time showing the maximum time of activity; and
(iii) most probable time which lies in between the two.

The expected time of an activity is calculated by o+4m+p/6;

where o=optimistic time, m = most probable time, p = pessimistic time

3. Network Construction. All activities of a programme are connected sequentially to form a

network known as PERT/CPM network. Rules for construction of PERT/CPM network are as
follows:

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 I. In the above figure, it is shown that to go from point 1 to 2, it takes 6 weeks
II. Then from point to we can parallelly start towards point 3 and 4 because these tasks are
not dependent
III. The critical path is the one which takes longest time shown in red above as time for the
path in red is 6+4+2+3+2+4 = 21 weeks

5. Critical Path. Based on analysis, critical activities are determined. These are represented by
a critical path which shows that if activities on this path are not completed in time, the entire
project will be delayed by the time the completion of an activity is delayed.

5 Role of Manager
Henry Mintzberg describes a set of ten roles that a manager fill. These roles fall into three
categories as shown below. Management roles depend upon formal authority and status of
organizational positions

1. Interpersonal: This role involves human interaction.

2. Informational: This role involves the sharing and analyzing of information.
3. Decisional: This role involves decision making.

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Interpersonal Roles

Interpersonal roles of managers are concerned with his interaction with others, both within the
organization and outsiders. There are three types of interpersonal roles: figurehead, leader, and
liaison

1. Figurehead Role: It is role of manager which includes those activities which are of
ceremonious and symbolic nature. For example, greeting the visitors, attending social
functions involving employees, making speeches etc.
2. Leader Role: Leader role of manager involves leading his subordinates and motivating them
for willing and enthusiastic contribution.
3. Liaison role: It is a role of manager which serves as a connecting link between organization
outsiders and the organization itself or between his unit and other units of the organization.

Information Roles
Information roles of a manager include communication - giving and receiving information both
within and outside the organization. There are 3 types of information roles
1. Monitor Role: Monitor role of a manager is to constantly collect information about those
factors which affect his activities maybe within the organization and outside it. In addition to
this monitoring must be done throught meetings
2. Disseminator Role: Disseminator role of a manager involves sharing of information with the
subordinates who may otherwise not be able in a position to collect it
3. Spokers Person Role: In the role of spokesperson a manager represents his organization
while interacting with outsiders such as customers suppliers government and other agencies
of the society.

Decision Roles

Decisional roles of manager involve making decisions so as to choose the best alternative which can
help in achieving the organizational objectives. There are 4 decision roles:

1. Entrepreneur: In performing on this role, a manager assumes certain risk which is involved in
terms of outcomes of the action because these are affected by various external factors. He
initiates changes, authorizes actions, sets goals and formulate policies
2. Disturbance handler: As a disturbance handler a manager is required to contain those forces
and events which tend to disturb the organizational equilibrium and normal functioning. He
also handles conflicts and complaints with in the organization

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 3. Resource Allocator: As a resource allocator, a manager allocates organizational resources of
various types to different organizational units . He approves budgets, schedules and sets
priorties
4. Negotiator: As a negotiator , a manager negotiates and works out agreements with various
interest groups in the organization such as shareholders employees and outsiders

Reconciling Management Functions and Roles

The mapping between management functions and management roles can be reconciled as shown
below

5.1 Lesser-Known Roles of Manager

Apart from Henry Mintzberg’s role, there are some other lesser known roles played by Managers

Role Played by Manager What is to be done in this role?

Communicator The role of communicator is to present the information in organized,
Clear and concise manner to the people in the organization
Networker A networker’s primary task is to work across organizational boundaries
to engage stakeholders and secure innovation support. Playing the role
of a networker means manager is able to:
1. Build productive linkages and coalitions across organizational
boundaries within your organization.
2. Draw others in as joint sponsors for your teams’ projects.
3. Search outside the organization for innovative ideas and
individuals who can help your projects.
4. Maintain a strong professional network outside your
organization.
5. Build relationships with those who want to support innovations
in your field.

It is almost similar to liaison role that we discussed in Henry Mintzberg’s

roles.

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 Enabling Role The enabler strives to build bridges of cooperation and goodwill with
other teams and stakeholders, while removing barriers to success. The
leader creates a favourable environment for all the resources to get
together and deliver results

Synergizing Role The Synergizing role is about creating synergies between the teams or
between the companies so that value and performance of two
teams/companies combined will be greater than the sum of the
separate individual parts.

The difference between enabler and synergizer is that enabler just

creates a favourable environment where as synergizer will use that
favourable environment and device a strategy for proper synergy
between the two systems
Balancing Role The manager balances the needs of the team members by bringing
harmony in project goal and individual goal. For example, if
somebody wants to learn new technology then the manager might give
him a role where he can be useful for the company by learning new
technologies
Developmental Role This role is related to career planning, training, and development of
employees so that individual development takes place and benefits
both the organization and the individual. The manager helps
employees to enhance their skills and upgrade their existing knowledge
for them to contribute more effectively towards the success of an
organization
Performance Management In this role the manager duly recognizes his employees, provides
training and development, provides feedback, and monitors the work
Link Building Link Building is a two-way communication between Management and
employees where a proper handover of information and assets takes
place. The manager motivates the employee by making them believe
that they contribute towards betterment of the society. This role gives
credibility towards the task.

6 Nudge Theory
Nudge theory is a flexible and modern concept for:

• Understanding of how people think, make decisions, and behave,

• Helping people improve their thinking and decisions,
• Managing change of all sorts, and
• Identifying and modifying existing unhelpful influences on people.

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Nudge theory was named and popularized by the 2008 book, 'Nudge: Improving Decisions
About Health, Wealth, and Happiness', written by American academics Richard H Thaler and
Cass R Sunstein

6.1 What Nudge Theory is all about?

The meaning of nudge in English dictionary is “prod (someone) gently with one's elbow in
order to attract attention”, another meaning is “a light touch or push”.

Humans, being not-so-rational, often need encouragement or intervention — a nudge — to get

going and do what is best for the country or society at large. The ‘Nudge Theory’ recognizes
this behavioral trait. It says that people, rather than being forced, can be encouraged, and
influenced to pursue or desist from certain actions through nudges. Nudges are not
mandates. So, while there is encouragement, there is no compulsion to comply and people
have the freedom to choose other options.

The use of Nudge theory is based on indirect encouragement and enablement. It avoids direct
instruction or enforcement. Here are some simple examples to illustrate the difference
between traditional enforced change and 'Nudge' techniques:

As per Nudge theory, central to behaviour is decision-making from the choices available.
Nudge theory is mainly concerned with the design of choices, which influences the decisions
we make. Nudge theory operates by designing choices for people which encourage positive
helpful decisions; for the people choosing, and ideally for the wider interests of society and
environment, etc.

6.2 Types of Nudges

There are many techniques through which people can be nudged. The main 3 techniques are
discussed below
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1. Defaults: A default option is the option an individual automatically receives if he or she
does nothing.
2. Social Proof: Refers to the tendency for individuals to look at the behavior of other people
to help guide their own behavior.
3. Increasing the Salience of Desired Option: When an individual's attention is drawn
towards a particular option, that option will become more salient to the individual, and he
or she will be more likely to choose that option. As an example, in snack shops at train
stations in the Netherlands, consumers purchased more fruit and healthy snack options
when they were relocated next to the cash register.

6.3 How Nudge Theory Relates to Other Theories

The roots of Nudge theory can be traced back to a wide variety of psychological models which
were introduced much earlier such as Maslow theory, Theory X and Theory Y, Transactional
Analysis etc.

For example, In Maslow theory, Maslow talks about nudging employees by giving them
opportunity to satisfy their need as go up the hierarchy of needs.

In terms of Douglas McGregor's Theory X and Theory Y:

• X-Theory equates to conventional enforcement, and

• Y-Theory equates to 'Nudge'.

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6.4 How People Think and Decide
Nudge theory proposes that the designing of choices should be based on how people actually
think and decide (instinctively and rather irrationally), rather than how leaders and authorities
traditionally (and typically incorrectly) believe people think and decide (logically and rationally).

Thaler and Sunstein illustrated the contrast between (irrational 'dumb', common) human
behavior, and (rational 'smart', far less common) logical behavior, by presenting two
(notionally) different types of people, which they called 'human' and 'econ'. Humans are (what
we might consider) 'real' people, who make 'real' human decisions (or fail to decide) as they
are irrational. Econs are an imaginary type of people - imagined to exist (instead of real people)
by economists, politicians, academics, etc. Econs (are imagined) always to think logically and
rationally

A crucial aspect of Nudge theory is recognizing that 'econs' do not really exist in terms of broad
societal behavior, whereas 'humans' definitely do.

According to Thaler-Sunstein Nudge theory

• 'Humans' are characterized as thinking 'automatically'.

• 'Econs' are characterized as thinking 'reflectively'.

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Thaler and Sunstein suggest that people use reflective decision-making very rarely, even for
especially important situations, such as in electoral voting, investing, major purchases, life
decisions, etc. The tendency of human decision-making being generally illogical, irrational,
weak, harmful, and often self-destructive is termed as heuristics. The word heuristics basically
means self-discovery, although in the context of Nudge theory, heuristics (which acts as a
plural or singular term) more broadly refers to the various internal references and
responses which people use in assessing things, developing views, and making decisions. By its
internal nature, heuristic thinking tends to be personal, emotional, subjective, and instinctive.

6.5 Heuristics
Following are some of the heuristics that can impact people’s decision and choices. If handles
in proper way, people can be encouraged to make good choices for themselves and society

1. Anchoring and Adjustment (comparison and guessing): an 'anchor' refers to a person's

perceived reference point in relation to a question for which the answer is not known
and is to be deduced.
2. Availability: Availability' in referring to visibility, or how commonly something is
perceived to arise in a general sense, which significantly influences people's assessment
of how likely it is to arise in a personal sense. For example, the visibility ('availability') of
homicides in the media is high as compared to that of suicides. This leads to the
incorrect belief among most people that homicides are more common than suicides,
when the opposite is true, by a considerable margin.
3. Optimism: People tend to under-estimate expenses/costs, timescales, complexity, and
difficulty of unfamiliar challenges. People tend to over-estimate rewards and the ease
of unfamiliar tasks. This tendency leads to complacency, inertia, extravagance, wastage,
delays, failures to make budgets and control spending, setting unreasonable goals and
expectations.
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 4. Status Quo Bias: People generally fear change, especially of uncertain nature. Inertia
(where people find it easier to do nothing rather than make a change) is a powerful
effect and has been used by leaders and communicators for generations.
5. Temptation: People tend to want short-term more than long-term reward, whether the
values are real or perceived. We see the 'temptation' heuristic being exploited to
extreme degrees in the operation of most gambling products/services.

There are many other heuristics apart from the ones listed above. But we need not go
through each and every point

6.6 Relevance of Nudge Theory

Nudge concept now offers vastly bigger implications and applications.

6.6.1 Government
Through Nudge, government can manage various problems. For example, in India the problem
of population increase can be handled through nudge in following ways

1. By giving incentives to family having two children such as subsidies in the school fee etc.
2. By running campaigns in which social media stars can be subtly shown having smaller
families and instead of having large number of children

6.6.2 Parenting
It can help parents modify the behavior of children through encouragement rather than
enforcement. For example, instead of enforcing the child to clean his/her room, the parents
can play games with the child to clean room. By doing this child will develop a behavior to keep
his room clean

6.6.3 Business
Leading companies are forerunners in applying nudge theory in corporate setting. These
companies are using nudges in various forms to increase productivity and happiness of
employees.

6.6.4 Healthcare
Lately, the nudge theory has also been used in different ways to make health care professionals
make more deliberate decisions in numerous areas. For example, nudging has been used as a
way to improve hand hygiene among health care workers to decrease the number of
healthcare associated infections.

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6.6.5 Fundraising
The nudge theory can also be applied to fundraising. Nudge theory can help to increase donor
contributions, increase continuous donations from the same individual and help to entice new
donors to give. There are some simple strategies used when applying nudge theory to this area

1. The first strategy is to make giving easy.

2. The second strategy to increase donors is to make giving more enticing.
3. Another strategy helpful to increasing donors is using social influence.

6.6.6 Investments/Savings
For example, tax breaks under Section 80C are a nudge to encourage people to invest in
financial instruments such as the Public Provident Fund and equity-linked savings schemes, in
place of gold or property.

Mutual fund SIPs, by making regular investing the default option, are also a nudge to investors
to avoid panicking during market falls.

6.6.7 Introducing Change through Compliance and not Confrontation

Nudge theory seeks to minimize resistance and confrontation, which commonly arise from
more forceful 'directing' and autocratic methods of 'changing' people/behavior. The difference
between Enforced change and change through Nudge Techniques is highlighted below

Here is a simple table showing varying characterizations of, and differences between,
traditional 'directed' change and Nudge-oriented interventions, in terms of keywords and
tactical notions.

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6.6.8 Leadership and Motivation
Nudge theory is truly relevant to leadership, motivation, and communication. A good leader is
one who facilitates the processes rather than enforcing them. Leader needs to increase
voluntary compliance and therefore nudge theory is very much relevant in context of
leadership.

In terms of motivation also, the rewards (nudges) should be in line with needs of the employee.
The needs are not constant and hence the nudges also need to be kept on changing

Other Areas
Apart from the above-mentioned area, Nudge theory can also be used in
1. Supervision and Team building
2. Self-development
3. Working with minorities, disabilities, and people with difficulties
4. Sports and Fitness Coaching
5. Counseling and Meditating
6. Marketing and Advertising
Closing Comments on Relevance of Nudge Theory
By offering insights into how humans think and act, the Nudge Theory can be used to drive
favorable behavior and avoid unfavorable ones, without resorting to drastic interventions such
as penal action or outright bans.

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6.7 Criticism of Nudge Theory
1. Short term Behavioral Change: We need to move away from short-term, politically
motivated initiatives such as the 'nudging people' idea, which are not based on any good
evidence and do not help people make long-term behavior change
2. Psychological Manipulation: Nudging is also seen as euphemism for psychological
manipulation which is not ethical. Nudges diminish autonomy, threaten dignity, violate
liberties, or reduce welfare
3. Small nudges are not enough: There is school of thought that small nudges are not enough.
For example, some argue that higher fuel taxes yield a better result than small nudges
towards better environmental decisions
4. Problem with experiments: A further criticism is that interventions suggested by the results
from controlled lab experiments may not necessarily work as effectively in the real world.

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 MANAGEMENT

Supplementary Notes
General Management Part 4

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 Read This Before Continuing Further
The purpose of the supplementary notes is that it helps us prepare in depth for the exam. We have put certain
things in supplementary notes and not in the Concept notes because if we put all the content in concept notes
then it will make the concept course very lengthy.

Concept Notes – Information that must be read for the exam (Must have)

Supplementary Notes – Information that is nice to read for the exam (Nice to have)

Though we have mentioned above that supplementary notes are “nice to have” and not “must have” but in this
time of competition when there is cut-throat competition, “nice to have” also becomes kind of mandatory. Every
single mark counts. Questions can be asked from supplementary notes

To summarize, do not leave this part unless and until you are short of time.

Note: The content given in supplementary notes is not covered in videos since it would be too much time
consuming for an aspirant to watch video for supplementary part. Hence, please study these notes without fail
in case you want to cover the supplementary part.

While explaining some concepts, we have re-written some information which was already available in concept
notes just to give a full picture here in this document. So, if you find some information which you have already
read in the course then you can skip that

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Contents
1 Controlling ................................................................................................................................................... 4
2 Control Techniques ..................................................................................................................................... 4
Overall Control Techniques: Control Technique at Organizational Level ............................................ 5
FINANCIAL RATIO ANALYSIS .......................................................................................................... 5
Return on Investment: .................................................................................................................. 6
VALUE ADDED ............................................................................................................................... 7
EXTERNAL AUDIT ........................................................................................................................... 8
MANAGEMENT AUDIT ................................................................................................................... 9
HUMAN RESOURCE ACCOUNTING ................................................................................................ 9

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1 Controlling

2 Control Techniques
The controlling techniques can be divided into

o Operational Level Control Techniques

o Organizational Level Control Techniques

We have already discussed about Operational level control techniques in this chapter. Let us discuss about
Organizational Level Control Techniques in this section

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 Overall Control Techniques: Control Technique at Organizational Level
In this section we will cover Control Technique which are applicable Organizational-wide.

Organizational-wide control is overseen by Top-management and thus interested in control technique--

financial and non-financial, which are applicable at organizational level. Techniques for overall control are
financial ratio analysis, value added, external audit, management audit, and human resource accounting.

FINANCIAL RATIO ANALYSIS

Financial ratio analysis identifies the relationship between two financial variables to derive meaningful
conclusion about their behavior. In the case of measurement of overall performance, generally, four groups
of ratios are considered: liquidity ratios, activity ratios, leverage ratios, and profitability ratios.

A brief description of these ratios is presented here:

1. Liquidity Ratios: Liquidity ratios indicate the organization's ability to pay its short-term debts. These ratios
are generally expressed in two forms: current ratio and quick ratio.
• Current ratio shows the relationship between current assets and current liabilities. This indicates
the extent to which current assets are adequate to meet current liabilities.
• Quick ratio indicates the relationship between liquid assets (cash in hand and with bank and short-
term debtors and investments) and current liabilities. It helps in identifying the organization's
ability to pay its current liabilities without considering inventory in hand.

2. Activity Ratios: Activity ratios show how funds of the organization are being used. These ratios are in the
form of inventory turnover ratio, receivable turnover ratio, payable turnover ratio, working capital
turnover ratio, and assets turnover ratio.
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 • Inventory turnover ratio indicates the number of times inventory is replaced during the period and
shows how effectively inventory has been managed.
• Receivable turnover ratio shows how promptly the organization can collect dues from its debtors.
• Payable turnover ratio indicates how products purchased from creditors have been managed.
• Working capital turnover ratio indicates how efficiently working capital has been managed.
• Assets turnover ratio indicates how effectively assets have been used to generate revenues.

3. Leverage Ratios: Leverage ratios indicate the relative amount of funds in the business supplied by
creditors/financiers and shareholders/owners. These ratios are in the form of debt-equity ratio, debt-
total capital ratio, and interest coverage ratio.
• Debt-equity ratio indicates the proportion of debt in relation to equity and indicates the financial
strength of the organization.
• Debt-total capital ratio shows the proportion of debt to total capital employed. This also indicates
the financial strength.
• Interest coverage ratio shows the interest burden being borne by the organization in relation to
its profit. Profitability Ratios

4. Profitability ratios: It shows the ability of an organization to earn profit in relation to its sales and/or
investment. Profitability ratios are expressed in terms of profit margin as well as return on investment.
• Profit margin, either net profit or gross profit, is expressed in the form of relationship between
profit and sales and indicates the degree of profitability of the business.
• Return on investment is measured by relating profit to investment. Return on investment is the
most comprehensive technique for controlling overall performance. Therefore, somewhat more
elaborate discussion is presented.

Return on Investment:
The efficiency of an organization is judged by the amount of profit it earns in relation to the size its
investment, popularly known as 'return on investment' (ROI).

• This technique does not emphasize absolute profit for judging the efficiency of an organization as
a whole or a division thereof, rather the amount of profit is related with the amount of facilities
or capital invested in the organization or the division.
• The goal of a business, accordingly, is not to optimize profit, but to optimize return on capital
invested in the business.
• This recognizes the fundamental fact that capital is a critical factor in almost any business and its
scarcity puts limit on progress.
• The rate of return on investment is calculated by dividing the profit by total investment.
• It can be computed in respect of historical data to reveal the rate of return realized or it may be
applied to budgeted data to give a projected rate of return.

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Advantages of Return on Investment: Return on investment is an integral part of the productivity and
efficiency accounting. It has the following advantages:

1. This technique offers a sound basis for inter-organizational comparison of financial performance. If
the rate of return on investment of the organization is lower in comparison to another organization,
management may analyze the causes for this, and suitable actions may be taken to arrive at desirable
rate of return on investment.
2. It provides basis for resource allocation to different organizational units and departments. Thus, it
puts restraint on the managers' demand for higher allocation of resources for their units/departments
which are not actually needed. Thus, the resource allocation in an organization is made on more
rational basis.
3. This system is helpful in authority decentralization. Each head of a department or section is
responsible for earning certain rate of return. Thus, autonomy may be provided to each head. Such
autonomy gives additional incentive to managers for higher efficiency.

Limitations of Rate of Return: There are some limitations of rate of return as a control technique:

1. The use of rate of return is associated with the fixation of a standard rate of return against which the
actual rate of return is compared. What should be this standard return is often questionable.
Comparisons of rates of return are hardly enough because they do not tell what the optimum rate of
return should be.
2. Another problem comes in the way of valuation of investment. The question is at what cost the assets
should be valued: at original cost, depreciated cost, or replacement cost. In an inflationary economy,
the problem of price adjustment becomes more acute, whatever basis of valuation is adopted.
3. The rate of return on investment sometimes hampers diversification if it has no flexibility. This is
because of the fact, that the rate of return is determined by the amount of risk; higher the risk, higher
the desirable rate of return.
4. Many times, the return on investment is followed so rigorously that expenditure such as research and
development which can contribute to the profitability in the long run are curtailed to show impressive
results in terms of rate of return. This practice, however, is detrimental to the organization in the long
run.

VALUE ADDED

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A recent phenomenon in measuring performance and taking corrective action is value added.

Value addition from the point of view of a shareholder is the value added to the shareholders by generating
profit more than the cost of capital employed in a business.

• It is the residual income after charging the company for the cost of capital provided by lenders and
shareholders.
• Mathematically, it is after-tax profit less the total annual cost of capital.

In India, companies like Infosys and Hindustan Unilever were the early adopters of value-added measures.
Many companies followed this practice later. Several companies routinely mention EVA in their annual reports
to demonstrate the extent to which they have been able to create shareholder value.

EXTERNAL AUDIT

According to government provisions, financial results of certain types of organizations are to be audited by
external auditors who are eligible for this.

• For example, financial results of companies are to be audited by a chartered accountant.

• Similarly, in case of other types of organizations, auditing is required if their sales are beyond the
prescribed limit.
• External auditors audit accounts of the concerned organization to ensure that the books of accounts
have been maintained properly and financial statements (Profit and Loss Account and Balance Sheet)
reflect true financial results.
• If there is any discrepancy, it is reported to management to take remedial action.

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 MANAGEMENT AUDIT

The various control tools, whether responsible for controlling the activities of the organization as a whole or
of its particular segments, focus attention on the end-results of activities. The actual results are compared
with standard results. They do not focus attention on the quality of managing as a system. Since the quality
of managing ultimately makes the difference between success and failure of an organization, this quality
should be assessed. Management audit is an attempt in this area.

Management audit involves evaluation of management as-a-whole. It is an independent and critical

examination of the entire management process.

Thus, it examines the total managerial process of planning, organizing, staffing, directing, and controlling
as well as organizational plans, objectives, policies, procedures, systems of control, etc., to advise the top
management for necessary adjustment in the organization to make it more effective.

HUMAN RESOURCE ACCOUNTING

In the present context, most of the organizations have realized that human resources are their most precious
resources. Therefore, they have not only taken measures to develop their human resources but also taken
measures to value these resources.

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Financial accounting which is concerned with measuring organizational performance in financial terms does
not make attempt to measure the value of human assets. To bridge this gap, behavioral scientists have made
attempts to measure the value of human assets. An early attempt was made by Likert and Bowers.

American Accounting Association has defined human resource accounting as follows”

“Human resource accounting is the process of identifying and measuring data about human resources and
communicating this information to interested parties."

• Thus, human resource accounting is primarily involved in measuring the various aspects related to
human assets.
• Its basic purpose is to facilitate the effective management of human resources by providing
information to acquire, develop, retain, utilize, and evaluate human resources.

Methods of Valuation of Human Assets

There are several methods suggested for the valuation of human assets. Major methods of valuation of
human assets are historical cost, replacement cost, standard cost, present value of future earnings, and
expected realizable value

1. Historical Cost: Historical cost is based on actual cost incurred on human resources. Such a cost may
be of two types--acquisition cost and learning cost.
• Acquisition cost is the expenses incurred on recruitment, selection, and placement of employees.
• Learning cost involves expenses incurred on training and development.
• This method is quite simple in its application, but it does not reflect the true value of human assets.
• For example, an experienced employee may not require much training and, therefore, his value
may appear to be low though his real value is much more than what is suggested by historical cost
method.

2. Replacement Cost: As against historical cost method which takes into account the actual cost incurred
on employees, replacement cost takes into account the notional cost that may be required to acquire
a new employee to replace the present one.
• In calculating the replacement cost, different types of expenses are considered which may be in
the form of acquisition and learning cost.
• Replacement cost is generally much higher than the historical cost.
• For example, Friedman has estimated that the replacement cost of an executive in middle
management level is about 1.5 to 2 times the current salary paid in that position.
• Replacement cost is much better indicator of value of human assets though it may present certain
operational problems.

3. Standard Cost: Instead of using historical or replacement cost, many companies use standard cost for
the valuation of human assets just as it is used for physical and financial assets.
• For using standard cost, employees of an organization are categorized into different groups based
on their hierarchical positions.
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 • Standard cost is fixed for each category of employees and their value is calculated on this basis.
• This method is simple but does not consider differences in employees put in the same group. In
many cases, these differences may be quite vital.

4. Present Value of Future Earnings: In this method, the future earnings of various groups of employees
are estimated up to the age of their retirement and are discounted at a predetermined rate to obtain
the present value of such earnings. However, this method does not give correct value of human assets
as it does not measure their contributions to achieving organizational effectiveness.

5. Expected Realizable Value. The above methods discussed so far are based on cost consideration.
Therefore, these methods may provide information for record purpose but do not reflect the true
value of human assets.
As against these methods, expected realizable value assumes that there is no direct relationship
between cost incurred on an individual and his value to the organization at a particular point of
time.

Flamholtz Model: This model determines an individual's value to an organization by the services he
is expected to render to the organization during the period he is likely to remain with the organization
in various position or service states.

Flamholtz has given two variables affecting an individual's expected realizable value (IERV):
i. Individual's conditional value: It is based on his abilities and activation level.
ii. Likelihood of an individual remaining with the organization: It is based on his job satisfaction,
commitment, motivation, and other relevant factors.

The individuals who score higher on the above factors have more value than those who score lower.

Advantages of Human Resource Accounting

This is since human resource accounting offers the following advantages:

1. It helps in giving valuable information to the management for effective managing of human resources.
2. It helps in measurement of standard cost of recruiting, selecting, hiring, and training people and
organization can select a person with highest expected realizable value.
3. Human resource accounting can change the attitude of managers completely, thereby, they would try
to maximize the expected realizable value of human resources and effective use of human resources
in the organization.
4. It also provides necessary data to devise suitable promotion policy, congenial work environment, and
job satisfaction to the people.

Problems in Human Resource Accounting

There are certain operational problems in human resource accounting because it attempts to measure
intangibles. Therefore, subjective factors may play crucial role.

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Thus, the major operational problems involved in human resource accounting are of the following types:

1. There is no well-set standard accounting practice for measuring the value of human resources. In the
case of financial accounting, there are certain specified standards which every organization follows.
However, in the case of human resource accounting there are no such standards. Therefore, various
organizations that adopt human asset valuation, use their own models. As a result, value of human
assets of two organizations may not be comparable.
2. The valuation of human assets assumes that the employees may remain with the organization for
certain specified period. However, this assumption may not hold true in today's context because of
increased human resource mobility.
3. There is a possibility that human resource accounting may lead to the dehumanization in the
organization if the valuation is not done correctly or results of the valuation are not utilized properly.
4. There is also a possibility that trade unions may oppose the use of human resource accounting. They
may want parity of wages/salaries with value of employees.

However, many of these problems are of operational nature or of attitudinal nature. These may be
overcome by developing suitable organizational climate and culture.

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 Important Points
1. This Summary Sheet shall only be used for Quick Revision after you have read
the Complete Notes
2. For Building Concepts along with examples/concept checks you should rely
only on Complete Notes
3. It would be useful to go through this Summary sheet just before the exam or
before any Mock Test
4. Conceptual Clarity is especially important for exam and reading only summary
sheets shall not be sufficient to answer all the questions

1 Concept of Organization
An organization may be defined as identifiable aggregation of human beings, deliberately
and consciously created for the attainment of certain goals with rational coordination of
closely relevant activities.

1.1 Distinguish features of an organization

1. Composition of Interrelated Individuals
2. Organization is a social unit which is deliberately constructed or reconstructed. It is a
system of consciously coordinated activities of two or more persons.
3. An organization is a conscious and purposive creation. It is a means towards the
achievement of common enterprise objectives.
4. Organization includes breaking up the entire work into different segments. This brings
in division of labor.
5. Coordination of various activities is as essential as their division. It helps in integrating
and harmonizing various activities.
6. An organization consists of various positions arranged in a hierarchy with well-defined
authority and responsibility.
7. The success of an organization depends upon the behaviour of the people and the
group. Individual groups and structures are the basis of group behaviour.

1.2 Advantages of a Good Organisation

1. Helps in Optimum Utilization of Technological Innovations
2. Helps in Administration
3. Promotes Growth and Diversification
4. Easy Co-Ordination
5. Training and Development of Personnel

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 6. Encourages Initiative: A good organisational structure will provide sufficient scope for
taking initiative.
7. Human relations improve in a good organisational set up.

2 Concept of Organizational Behaviour

Organizational behaviour (abbreviated as OB) is defined as follows:
Organizational behaviour is concerned with understanding, predicting, and influencing
human behaviour in organizational setting.

Organizational behaviour is the analysis of an organization’s structure, functions, and the

behaviour of its people. Behavioural study encompasses both groups as well as individuals.

2.1 Nature of Organizational Behaviour

Organizational behaviour has emerged as a separate field of study. The nature it has
acquired is identified as follows:

1. A Separate Field of Study and not a Discipline Only: By definition, a discipline is an

accepted science that is based on a theoretical foundation. But, O.B. has a multi-
interdisciplinary orientation and is, thus, not based on a specific theoretical
background.
2. An Interdisciplinary Approach: Organizational behaviour is essentially an
interdisciplinary approach to study human behaviour at work.
3. An Applied Science: The very nature of O.B. is applied. What O.B. basically does is the
application of various researches to solve the organizational problems related to
human behaviour. Hence, O.B. can be called both science as well as art.
4. A Normative Science: Organizational Behaviour is a normative science also. While the
positive science discusses only cause effect relationship, O.B. prescribes how the
findings of applied researches can be applied to socially accepted organizational goals.
5. A Humanistic and Optimistic Approach: Organizational Behaviour applies humanistic
approach towards people working in the organization. It, deals with the thinking and
feeling of human beings.
6. A Total System Approach: The system approach is one that integrates all the
variables, affecting organizational functioning.

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 2.2 Scope of Organizational Behaviour

When we talk about the scope of organizational behaviour, it extends to only 3 major
concepts:

1. Analysis at Individual Level: As the name itself suggests, this is where an individual is
studied from personality, motivation, interests, to attitudes of an individual who is a
part of an organization.

2. Analysis at Group Level: Now, the inter-individual concept is when there is

communication happening among the employees. Inter-individual represents persons
with their social group in the workplace, their subordinates, or their senior employees.
It helps understand the leadership styles and leadership qualities of a person; if a
conflict arises, it can be resolved easily, group dynamics.

3. Analysis at Organization Level: Here the study of the formation of an organization is

done. The areas looked into can be the structure of the organization, effectiveness in
the organization, etc. The efforts made by a group to achieve the objectives or goals of
an organization are what group behaviour is all about. The behaviour of everyone who
is a part of the group is taken into consideration.

2.3 Elements of Organisational Behaviour

The three internal organizational elements viz., people, technology, and structure and the
fourth element, i.e., external social systems may be taken as the scope of O.B.

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 1. People: The people constitute the internal social system of the organization. They
consist of individuals and groups. Groups may be large or small, formal, or informal,
official or unofficial. They are dynamic. They form, change, and disband. Human
organization changes every day. Today, it is not the same as it was yesterday. It may
change further in the coming days. People are living, thinking, and feeling being who
created the organization and try to achieve the objectives and goals. Thus,
organizations exist to serve the people and not the people exist to serve the
organization.
2. Structure: Structure defines the sole relationship of people in an organization.
Different people in an organization are given different roles and they have certain
relationship with others. It leads to division of labor so that people can perform their
duties or work to accomplish the organizational goal.
3. Technology: Technology imparts the physical and economic conditions within which
people work. With their bare hands people can do nothing so they are given assistance
of buildings, machines, tools, processes, and resources. The nature of technology
depends very much on the nature of the organization and influences the work or
working conditions. Thus, technology brings effectiveness and at the same restricts
people in various ways.
4. Social System: Social system provides external environment which the organization
operates. A single organization cannot exist also. It is a part of the whole. One
organization cannot give everything and therefore, there are many other
organizations. All these organizations influence each other.

2.4 Objectives of Organisational Behaviour

Given below are the basic objectives of organizational behaviour.

1. Improving Employee Behaviour

2. Enhances Leadership Skills
3. Increases the Motivation of Employees
4. Assists in Organisational Change
5. Creating a Desirable Workplace Culture

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 2.5 Disciplines contributing to Organizational behaviour

There are different disciplines that influence our study and understanding of behaviour in
organisations.

Psychology:
Organisational behaviour studies human behaviour which is concerned mainly with the
psychology of the people. Psychology, especially, industrial, or organisational psychology is
the greatest contributor to the field of organisational behaviour. Psychologists study
behaviour and industrial or organisational psychologists deal specifically with the behaviour
of people in organisational settings.

Psychology as a science, measures, explains, and suggests the appropriate human

behaviour. Job satisfaction, performance appraisals and reward systems are measured and
directed with the use of psychological theories and models.

Sociology:
Sociology also has a major impact on the study of organisational behaviour. Sociology
makes use of scientific methods in accumulating knowledge about the social behaviour of
the groups. Sociologist’s study social systems such as a family, an occupational class, a mob

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 or an organization. It specifically studies, social groups, social behaviour, society, customs,
institutions, social classes, status, social mobility, prestige etc.

Sociology contributes to organisational behaviour through its contribution to the study of

interpersonal dynamics like leadership, group dynamics, communication etc.

Anthropology:
Anthropology is concerned with the interactions between people and their environment,
especially their cultural environment. Culture is a major influence on the structure of
organizations as well as on the behaviour of people within organizations. Aristotle defined
anthropology as a science of man’s self-understanding. It particularly studies civilization,
forms of cultures and their impact on individuals and groups, biological features of man and
evolutionary pattern, speech, and relationship among languages.

Anthropology contributes in understanding the cultural effects on organisational behaviour,

effects of value systems, norms, sentiments, cohesion and interaction.

Political Science:
In recent times, political science has also started interesting the organisational
behaviourists. Political Science is usually, thought of as the study of political systems. But
political scientists are interested in how and why people acquire power, political behaviour,
decision making, conflict, the behaviour of interest groups and coalition formation. These
are also major areas of interest in organisational behaviour.

Economics:
Economists study the production, distribution and consumption of goods and services.
Students of organisational behaviour share the economist’s interest in such areas as labour
market dynamics, productivity, human resource planning and forecasting, and cost benefit
analysis.

Science:
Science is systematized knowledge. The scientific methods attempt to produce information
that is objective in the sense that it is certifiable and independent of a person’s opinions or
preferences. Scientific method is the backbone of organisational behaviour. Organisational
behaviour is based on the systematized study of facts, behaviour, their relationships, and
predictions.

Technology:
The level of technological development affects the behaviour of the employees. Modern
age is the age of computerization. It has come within the framework of the model of

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 organisational behaviour. The study of technological development is becoming essential for
understanding the organisational behaviour, because people are influenced by the
technological development. Human behaviour relations and environments develop as a
result of technological innovations.

Engineering:
Engineering also influences the study of organisational behaviour. Some topics are common
to engineering as well as organisational behaviour e.g., work measurement, productivity
measurement, workflow analysis, work design, job design and labour relations. In fact,
organisational behaviour is dependent on engineering for these technical jobs.

Medicine:
Nowadays, medicine has also come in connection with the study of human behaviour at
work. Stress is becoming a very common problem in the organizations as well as in the
people working in the organizations. Research shows that controlling the causes and
consequences of stress in and out of organisational settings, is important for the wellbeing
of the individual as well as the organizations. Medicine helps in the control of stress as well
as stress related problems.

Thus, it can be concluded that organisational behaviour has an inter-disciplinary focus. It

draws from a variety of other fields and attempts to describe behaviour as opposed to
prescribing how behaviour can be changed in consistent and predictable ways.

2.6 Foundations of Organizational Approach

Organizational behaviour is based on the knowledge generated through systematic
research and practices over a period of time. Finding of search researchers and practices
have led to emergence of three approaches:

1. Classical
2. Neo-classical
3. Modern approach

These approaches prescribe how do you will with human beings in an organization for
better results.

All the three approaches are already discussed in Chapter General Management Part 1.

2.7 Organizational Behaviour - Models

For developing and organizational behaviour models’ various variables are divided into two
groups:

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 1) Independent Variables: an independent variable is one which shapes a dependent or a
set of dependent variables. In OB models independent variables are at three levels:

a) Individual level: individuals are the building blocks of an organization. Individual-level

variables relevant to an OB model are personality, perception, learning, attitudes and
values, emotional intelligence, motivation, and decision making.

b) Group level: individuals work in groups or teams so as to achieve synergy, a

phenomenon in which outcomes of efforts of a group consisting of several individuals are
more than the sum total of outcomes of efforts of these individuals working
independently. Major group level variables are interpersonal behaviour, group dynamics,
work teams, power and politics, leadership, communication and organizational conflict.

c) Organizational level: organization level variables provide binding force to individual

level and group level variables by providing norms about what to do and how to do. Major
organization level variables are organizational structure, organization culture and
organizational change and stress management.

2) Dependent Variables: A dependent variable in the OB model is a factor or outcome that

is affected by some other factor or combination of such factors. OB scholars have identified
six dependent variables relevant for an OB model:

a) Productivity: productivity is concerned with converting inputs into outputs at the most
economical cost thereby to achieve organizational goals. Thus, productivity is a
combination of two phenomena efficiency and effectiveness.

b) Absenteeism is the failure of an employee to report for the work when he is scheduled
to work. An employee is considered as scheduled to work when the organization has work
available for him and the employees aware of this. This is known as unauthorised
absence.

c) Employee turnover is the voluntary or involuntary separation of employees from an

organization. In the present context it is the voluntary separation that is a major concern
for organizations as this turnover rate is quite high in some sectors in India like business
processing outsourcing, information technology, retailing and banking.

d) Job Satisfaction is the mental feeling of favourableness that an individual employee has
about his job. When the employee has high favourableness about his job, he is highly
satisfied. In the alternative case, he feels job dissatisfaction.

e) Deviant workplace behaviour is a voluntary behaviour that violates significant

organizational norms and in doing so, threatens the well-being of the organization or its

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 members. Some examples of deviant workplace behaviours are gossips at the workplace,
taking more time for lunch break than due, leaving workplace for trivial reasons etc.

f) Organizational citizenship behaviour is the extent to which an employee’s voluntary

behaviour contributes to organizational success. It implies that the employee give support
to the organization beyond his duties prescribed by the organization.

2.7.1 Types of Organizational Behaviour models

The five models of organisational behaviour are the:

Autocratic model:
• Autocratic model is the model that depends upon strength, power, and formal
authority.
• In an autocratic organization, the people (management/owners) who manage the
tasks in an organization have formal authority for controlling the employees who
work under them. These lower-level employees have little control over the work
function. Their ideas and innovations are not generally welcomed, as the key
decisions are made at the top management level.
Though this model is not much in use in the contemporary business environment, its use is
appropriate when:
(a) Urgent action is required,
(b) Employees are unskilled, inexperienced and submissive and
(c) Employees have strong lower order needs to satisfy.
Custodial model

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 • To overcome the shortcomings of the Autocratic model, the custodial model came
into existence. The insecurity and frustration felt by the workers under the
autocratic model sometimes led to aggression towards the boss and their families.
To dispel this feeling of insecurity and frustration, the need was felt to develop a
model which will improve the employer-employee relations. The custodial model
was used by the progressive managers.
• The custodial model is based around the concept of providing economic security for
employees – through wages and other benefits – that will create employee loyalty
and motivation.
• In some countries, many professional companies provide health benefits, corporate
cars, financial packaging of salary, and so on – these are incentives designed to
attract and retain quality staff.
• The difficulty, with this model is that it depends upon material rewards only to
motivate the employees. But the workers have their psychological needs also.
• Due to the drawbacks of this method, a search began to find out the best way to
motivate the workers so that they produce with their full capacity and capabilities.
Supportive model
• Unlike the two earlier approaches, the supportive model is focused around aspiring
leadership.
• It is not based upon control and authority (the autocratic model) or upon incentives
(the custodial model), but instead tries to motivate staff through the manager-
employee relationship and how employees are treated on a day-to-day basis.
• Managers adopt relationship-oriented organization behavior and allow employees to
participate in the decision-making process. Communication is two-way and a healthy
work climate is ensured which takes care of the human side of the organization.
This model is appropriate when:
(a) Workers’ higher-order needs are predominant,
(b) They are self-motivated to work, and
(c) Managers have trust and confidence in the employees.
Collegial model
• The collegial model is based around teamwork – everybody working as colleagues
(hence the name of the model).
• The overall environment and corporate culture need to be aligned to this model,
where everybody is actively participating – is not about status and job titles –
everybody is encouraged to work together to build a better organization.
• In this kind of collegial environment, the workers have job satisfaction, job
involvement, job commitment and some degree of fulfillment.
• The collegial model is especially useful in research laboratories and similar work
situations.
System model
• The final organisational model is referred to as the system model.

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 • This is the most contemporary model of the five models discussed in this article. In
the system model, the organization looks at the overall structure and team
environment, and considers that individuals have different goals, talents and
potential.
• The intent of the system model is to try and balance the goals of the individual with
the goals of the organization.
• Under this model, people work to satisfy their self-actualization needs.

2.8 Contemporary Issues in Organizational Behaviour

At present the contemporary organizational behaviour are as follows:

2.8.1 Responding to the Globalization

Globalization is a process by which people of the world are united into a single society. This
process is a combination of economic, technological, socio-cultural and political forces. In
the context of organizational behaviour, globalization has the following impact:

I. Cross -cultural Dynamics: globalization has led to emergence of cross-cultural

dynamics because people from different countries having different culture work
together. The basic implication of cultural diversity is that same set of practices
related to managing behavioural issues is not suitable for all cultures. Consideration
has to be given to matching practices with cultural characteristics of the employee

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 concerned. However, while adopting these practices, two aspects of culture should
be kept in view: ethnocentrism and cultural relativism.
• Ethnocentrism is the tendency to believe that one’s ethnic or cultural group
is centrally important and that all other groups are measured in relation to
one’s own.
• Cultural relativism, emerging out of negative reaction to ethnocentrism
states that there is no universal right way to behave, and ethical behaviour is
determined by cultural context. Thus, an individual’s beliefs and behaviours
should be understood in terms of his own culture. Cultural relativism views
that no culture is superior to any other culture when comparing systems of
morality, law, politics etc.
II. Shifting Jobs to countries with Low labour cost: In order to achieve competitive
advantage, organizations are putting emphasis on minimising cost through different
ways. One of these ways is shifting jobs to countries with low labour cost. However,
managing labour force in these countries is quite challenging cause of lower
productivity of labour force. Therefore, an organisation needs to develop positive
behaviour pattern in labour force to create value and provide customer satisfaction.
III. Increased Foreign assignments globalization has led to increased foreign
assignments. Employees of an organization having business operations in different
countries are transferred from one country to another. The employee concerned has
to adjust himself with a new location.
IV. Adapting to differing regulatory norms: Each country has certain regulatory norms
related to business operations including employee related norms. Such norms are
quite comprehensive in many countries like wage/salary, working hours etc. The
organization must adopt these norms in totality. These norms differ from country to
country this makes adaptation process quite cumbersome.
V. Impact on employee expectations: globalization has serious socio-cultural
implications. It raises the expectations of people of a country in the form of
international demonstration effect. In simple terms this effect is “do as what others
are doing, use what others are using”. This phenomenon has serious implications for
managing human resources as expectations of employees increase significantly.
VI. Impact on work practices: globalization brings contemporary management practices
in organisations including those relevant for work practices. Many newer concepts
like mentoring, counselling, work-life balance etc have been adopted by Indian
organizations in managing their human resources because of globalization.

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 2.8.2 Integrating mergers and acquisitions
Every organization strives for growth which may come either through grassroots projects or
merger and acquisition. While mergers and acquisitions have business sense as they result
in synergistic effect, they create the challenge of integrating acquiring and acquired
companies. While integration of non-human dimensions is easier, problem comes in people
integration because of two reasons:

A) People Attrition: in many cases of mergers and acquisitions rate of people attrition is
very high. This happen in those cases where the work culture of acquiring company is not
perceived to be positive as compared to that of acquired company.

B) Differences in Management Practices: management practices related to managing

organizational behaviour inquiring company and acquired company made for such
difference will be on the following aspects:

• Matching jobs and individuals - high matching versus low matching

• Development of people - high concern versus low concern
• Performance appraisal - modern versus traditional
• Promotion - merit based versus seniority based etc.

Managers have the prime responsibility of overcoming these feelings of personal of the
acquired company. Since mergers and acquisitions have become quite common these days
managers have to device suitable strategies for proper integration of people.

2.8.3 Managing Knowledge workers

Knowledge workers are those individuals who jobs are designed around the acquisition and
application of information for instance jobs in IIT or it enabled service organizations.
Because of unique characteristics of knowledge workers management then effectively
poses serious challenge before the managers because of the following reasons:

i. Challenging job: knowledge workers want to have challenging

ii. Autonomy: knowledge workers are quite creative and innovative, and creativity and
innovation cannot flourish in tightly controlled work environment.
iii. Immediate feedback and rewards: knowledge workers tend to consider themselves
as high achievers; a high achiever looks for immediate feedback about his
performance.
iv. Professional commitment: knowledge workers show more commitment in their
profession as compared to the other employees of organisation they serve in.

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 v. Lifestyle: In general, every employee prefers lifestyle which suits him the most. This
is happening because of environmental pressure which tends to create stress.
Knowledge workers tend to give very high importance to lifestyle.

With the changed workforce profile and emergence of knowledge workers, workforce
aspirations have increased. International demonstration effect and easy access to media,
have led to increased aspirations. For meeting these aspirations, workforce managers have
to create a new type of work environment to stimulate employees to put their best as well
as to attract talents for future requirements.

2.8.4 Managing Workforce Diversity

According to Moorhead and Griffin – “Workforce diversity is concerned with the similarities
and differences in such characteristics as age, gender, ethnic heritage, physical abilities and
disabilities, race, and sexual orientation, among the employees of organizations.”

Workforce Diversity – In India

Various categories of employees in the Indian organizations include the following:

A. Scheduled Castes (SCs) and Scheduled Tribes (STs):

The candidates belonging to scheduled castes and tribes determined by a notification of the
Central Government are given preferences to the extent of 15 percent and 7.5 percent
respectively in case of jobs in the government departments and public sector enterprises.

B. Other Backward Castes (OBCs):

The Central Government has made provisions for reserving jobs up to 27.5% in the
government departments and public sector undertakings for those who belong to other
backward classes.

C. Disabled or Physically Handicapped Persons:

D. Ex-Defense Personnel:
Ex-defense personnel or ex-servicemen who are trained and disciplined may also be offered
jobs in the organizations. This would increase workforce diversity is the organization.

E. Displaced Persons:
The people who are displaced because of acquisition of land for public purpose or because
of other causes like flood, militancy, etc. may be preferred for jobs in public enterprises on
humanitarian grounds.

F. Female Employees:

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 The ratio of women workers at the place of work is on the rise. This has been associated
with the problems of discrimination and sexual harassment. The organizations need to take
steps to deal with such problems.

For ensuring effective management of workforce diversity, organizations may take the
following measures:

Workforce Diversity – How to Manage Workforce Diversity Effectively?

A. Ensuring Top Management Commitment to Value Diversity:

No programme of significance can be successful without the conviction and active
support from top management.

B. Reviewing Hiring and Promotion Policies:

Top management’s commitment towards imple­menting diversity-in-workforce can be
materialized by fine-tuning the organizations existing hiring and promotion policies.

C. Organizing Diversity Training Programmes:

A diversity training programme aim at building greater understanding of cultural
differences among people and developing behavioural skills that allow employees to
positively respond to these differences.

D. Forming a Support Group:

The purpose of forming a support group is to provide a nurturing environment for
employees who would otherwise feel isolated or alienated.

E. Communicating through an Appropriate Language:

Language plays a powerful role in communicating the intent of the organization on
diversity programmes. Language sensitivity and guidelines for appropriate language help
managers and other organizational members effectively manage a diverse workforce.

F. Establishing Diversity Monitoring System:

To ensure effectiveness of the organization’s diversity management programmes,
certain measures—such as diversity reports and diversity audits—can be put in place.

2.8.5 Improving Product Quality

With the increased competition at the global level and discerning customers more and
more organizations are becoming conscious about the quality of their products/services.
Quality is a sense of appreciation that something is better than something else increasing
quality awareness has generated the adoption of following practices:

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 I. Emphasis on Total quality management:
Total quality management (TQM) is the continual process of detecting and reducing
or eliminating errors in manufacturing, streamlining supply chain management,
improving the customer experience, and ensuring that employees are up to speed
with training.

II. Emphasis on Kaizen

“Kaizen” refers to a Japanese word which means “improvement” or “change for the
better”. Kaizen is defined as a continuous effort by each and every employee (from
the CEO to field staff) to ensure improvement of all processes and systems of a
particular organization.

III. Moving towards six Sigma

Six Sigma is a disciplined, data-driven approach and methodology for eliminating
defects (driving toward six standard deviations between the mean and the nearest
specification limit) in any process – from manufacturing to transactional and from
product to service. Six Sigma at many organizations simply means a measure of
quality that strives for near perfection.

2.8.6 Improving Customer Services

In the present context customers have become kings because of availability of products
from alternative sources. In this situation, every organization tries to retain its customer
base by improving customer service. For providing customer services, organizations are
using various techniques like personal contacts, contacts through Internet, phones etc. In
these contexts, employees of the organizations play key role. They must deal with
customers in such a way that customers feel satisfied. This requires appropriate behaviour
on the part of employees. Knowledge of organizational behaviour helps the employee to
adopt appropriate behaviour.

2.8.7 Improving people skills

It has been seen that employees of an organization should have three types of skills:
technical, human, and conceptual. It has been observed that technical people have
proficiency in their discipline, but they lack in human skills. Therefore, their effectiveness is
adversely affected. Organizational behaviour aims at improving human skills of people by
providing knowledge about what type of human skills are relevant and how these skills may
be developed.

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 2.8.8 Enhancing employee wellbeing at workplace
Enhancing employee wellbeing at workplace is a key issue in the present context because
features of workplace are major source of employee satisfaction or dissatisfaction. Positive
workplace features lead to employee satisfaction while negative leads to dissatisfaction.
Employee’s satisfaction leads to better employee productivity. Therefore, organizations are
making efforts to enhance employee wellbeing at workplace through a number of measures
like empowerment, creating autonomy, flexibility in work schedule, job enrichment,
opportunity of growth etc.

2.8.9 Inculcating ethical behaviour

Ethical issues in organizational behaviour are in the forms of business ethics which refers to
a set of moral principles that should play significant role in guiding the conduct of managers
and employees in the operation of any organization these moral principles help in deciding
what is right or wrong action.

In the contemporary society need for ethics in organizational behaviour is due to the
following reasons:

I. Moral consciousness: every individual is morally conscious. Since an organization is a

collectivity of individuals for certain specified objectives, it tends to behave ethically.
II. Credibility: ethical behaviour helps in building credibility of an organization.
III. Social pressure: an organization is not an island in itself but is an organ of the
society. Therefore, various organs of the society put pressure on the organization to
behave ethically.
IV. Legal pressure: In order to avoid this dilemma, most of the societies enact laws
which define ethical and unethical behaviour. These legal provisions are of
mandatory nature.

Measures for inculcating ethical behaviour

Various measures that an organization can undertake Intel create ethics in employees are
as follows:

I. Top Management Leads Ethics by Example: One of the most noticeable ways that
companies can demonstrate their commitment to creating an ethical organizational
culture is to ensure that top managers and leaders lead by example.
II. Code of conduct/ethics: various organizations formulate code of conduct/ethics to
be followed in conducting various management practices.

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 III. Offer Formal Ethics Training: A formal ethics training program sends a strong
message about a company’s ethical stance. Seminars, workshops, and other ethical
training programs reinforce the organization’s standards of conduct and clarify the
types of behaviours that the company deems permissible or out of bounds.
IV. Whistle blowing: organizations may have effective system of whistle blowing to
curve unethical practices. In this system, organizational members are encouraged to
report upward about the unethical practices committed by any member.

There is a famous thing about ethical behaviour: “All the positives of a person’s ethical
behaviour are undone by just his/her single unethical behaviour”.

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 Summary Sheets
Personality and Perception

Important Points

1. This Summary Sheet shall only be used for Quick Revision after you have read the
Complete Notes
2. For Building Concepts along with examples/concept checks you should rely only on
Complete Notes
3. It would be useful to go through this Summary sheet just before the exam or before
any Mock Test
4. Questions in the exam are concept based and reading only summary sheets shall not
be sufficient to answer all the questions

1 Concept of Personality
According to Ruch, personality should include

1) External appearance
2) Inner awareness of self
3) Measurable traits with respect to inner and outer character

For example, Dhirubai Ambani had traits of proactivity, Risk Taking ability, Openness,
Conscientiousness, Timeliness, and determination which made him a great businessman

2 Personality Theories
Let us discuss some theories which makes us understand the application of these theories

2.1 Pychoanalytic Theory

Psycho analytical stresses upon idea that the events or things that happen to children during
childhood affect their development or affect their functioning as adults. For example, if a child
has been deprived of food in childhood, as an adult the child may eat food extremely fast. The
deprivation related events would get stored in the unconscious mind.

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 As per Sigmund Freud mind consists of id, ego and super-ego

1. Id operates in the unconscious mind and mainly dictates pleasure seeking activities Id
does not care about the implications of actions
2. Ego operates in conscious mind and is associated with reality principle. While id
represents the unconscious part, ego is conscious. Ego keeps the id in check through the
realities of external environment through intellect and the reason.
3. Super Ego represents social and personal norms and serves as ethical constraint. It is
one’s conscience.

Criticism of this theory

The psychoanalytic theory of Freud is based on theoretical conception, rather than a
measurable item of scientific verification. This theory does not give total picture of behaviour
emerging from personality.

2.2 Socio-psychological Theory

The Socio-Psychological Theory asserts that individual and society are interlinked.

Thus, the theorists believe that socio-psychological factors, i.e., the combination of both the
social (family, society, wealth, religion) and the psychological factors (feelings, thoughts,
beliefs) play an important role in shaping the personality of an individual.

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 It is the society from where the individual inculcates the cultural values and the social norms,
which helps him in shaping his personality and influences his behavior according to the external
situations.

Criticism of this theory

Socio-psychological theory offers to a great extent, the answer to the problems of emergence
of personality, particularly in terms of the influence of social factors in shaping personality. The
managers in the organization can take clue from this theory in shaping the behavior of their
employees. However, they cannot get a total picture of human behavior as determined by
personality

2.3 Trait Theory

A trait can be thought of as a relatively stable set of characteristics(s) that causes individuals to
behave in certain ways. The trait theory suggests that individual personalities are composed of
these characteristics

Thus, an individual personality can be known by identifying his traits. Personality test has
become quite common in the present context which measures possession or non-possession of
relevant traits. However. This theory is descriptive rather than analytical and is not a
comprehensive theory of personality

2.4 Self-Theory
Self-Theory, also termed as organismic or field theory emphasizes the totality and
interrelatedness of all the behaviors. This theory treats the organism as a whole to a greater
degree than to any of the other theories.

The Self Theory emphasizes on the set of perceptions an individual has for himself and the
perceptions of the relationships he has with others and the other aspects of life . It embodies
the answer to the question "Who am I?"Carl Rogers has contributed significantly towards the
self-theory. Self-Theory comprises of 4 factors that are explained below

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 1. Self-Image: Self-image means what an individual think about himself. For example,
person may feel he is not a good orator
2. Ideal-Self: The ideal-self means, the way an individual would like to be. It is very much
different from the self-image, as it shows the ideal position perceived by an individual,
whereas the self-image is the reality that an individual perceives. Thus, there could be a
gap between these two. For example, person may feel he wants to be good orator be
like Mr. Modi
3. Looking-Glass-Self: The looking-glass self means, an individual’s perception of how
others are perceiving his qualities or feeling about him. For example, person may get to
know from his friends that he is not that bad an orator, he speaks well
4. Real-Self: The real-self is what one really is. This is taken as feedback from the
environment that helps an individual to adjusts his self-image accordingly and be in line
with the cues he had received. For example, based on feedback he may realize that he
might not be best orator, but he is definitely a good one and better than many others

Relevance

In analyzing organizational behavior, the self-concept plays a significant role.

Whether a person develops a positive or negative self-concept depends on how he is treated

and how he perceives such treatment. Positive self-concept can lead to motivation, better
communication and overall a positive mindset. Negative self-concept can limit what one is
willing to try and can forestall opportunities for a growth and enjoyment. Employees should
be given tasks through which they are able to contribute to a positive self-concept.

3 Personality Development Stages

Human personality development is continuous process. Therefore, personality development
can be seen through different stages of age of an individual. At each stage, the individual
develops different aspects of personality. These stages have been described differently by
different personality theorists. These descriptions may be classified into

1. Freudian Stages
2. Non-Freudian Stages – Erikson’s Psychological stages

3.1 Freudian Stages

Freud was the first one who gave a meaningful stage theory of personality. As per Freud, these
stages can be classified into 5 categories.: Oral Stage, Anal Stage, Phallic Stage, latency stage
and Genital Stage. Freud believes that these stages are the main driving forces of personality
development

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 To move from one stage to another a person has to spend sexual energy. The more sexual
energy person spends in one stage the more of his personality will be as per characteristics of
that stage. This spending of more than required energy is called fixation which implies that
persons behaviour has been fixed to a certain extent in that stage.

1. Oral stage: Oral stage covers the period from birth to 18 months of age. The sexual energy
is concentrated in mouth. Oral sucking is from birth to 8 months in which child satisfies his
sexual instinct by sucking from mouth, lips, and tongue. The child in this period is in Id’s
effect and is totally driven by pleasure. If he is not breast fed properly, he satisfies by
sucking the thumb.

If child is not allowed to perform sucking and biting, then he would become frustrated
and spend more energy in this stage which may lead to fixation or if he is allowed to
overindulge then also it will lead to fixation. This fixation later in life would affect the
behaviour in adult life like adult would be indulged in oral activities such as drinking,
smoking, nail-biting and thumb sucking etc.

2. Anal stage: This stage is from 18 months to 3 years. During this stage, the sexual energy is
concentrated in Anal. Child gets satisfaction by doing potty.

Strict Potty training would lead to fixation as child would feel frustrated. This would result
in adults who hates mess, obsessively tidy and stubborn for cleanliness and strict
possession of cash. On the other hand, very, lenient potty training would also lead to
fixation as child would be too satisfied. This would result in adults who would like mess,
disorganized and rebellious.

3. Phallic Stage: This stage extends from 3 to 7 years. The sexual energy is concentrated in
genitals of self.

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 a. Child develops interests for opposite sex parent. Boys develop liking for the mother
and fear that their father may take their mother away from them. This is called
Oedipus Complex. Girls develop liking for their father and hate their mother. This is
called Electra Complex
b. Since the boys wants to get more closer to mother, they try to imitate, copy, and
exhibit masculine dad-type behaviours. This is called identification where in boy
starts adopting values, attitudes, and behaviours of male gender role

If the boy or girl child is stopped from acting/imitating like father and mother, then
fixation may occur, and child would never develop the values and attitudes of respective
gender roles

4. Latency Stage: This stage extends from 7 to 12 years. The sexual energy is dormant, and
child is more concentrated towards schoolwork, hobbies, learning activities and peer
relationships. If the children are stopped or overindulged in these activities, then fixation
may occur. The fixation would result in poor social and communication skills and low
self-confidence

5. Genital Stage: This stage extends from 12 to 20 years. The sexual energy is concentrated
in genitals of opposite sex. Boys start liking girls and girls start liking boys. Children start
daydreaming and may involve in homosexuality. If there was no fixation in previous
stages, then the person would be balanced otherwise his/her behaviour may be affected
by a particular fixation

Relevance of Freudian Theory

Freud theory helps explain that events in our childhood have a great influence on our adult
lives, shaping our personality. Hence, a great care shall be taken when child is growing so that
he shapes himself in a better personality

Criticism of Freudian Theory

The disagreement revolves around following points
1. The terms used for describing various stages in terms of sexual instincts
2. The theory is focused almost entirely on male development with little mention of female
psychosexual development

3.2 Non-Freudian Stages (Erikson’s Psychological Stages)

Erikson has identified 8 pycho-social stages of personality development. Each stage covers a
particular span of person’s life and in each stage, a particular type of crisis is experienced.

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 Stage of Age Crisis Pycho-Social Strength
Development Developed
Oral Sensory Stage 0-1 Trust Vs. Mistrust Hope
Muscular and anal 1-2 Autonomy Vs. Doubt Will Power
Stage
Locomotor Genital 3-5 Initiative Vs. Guilt Purpose
Stage
Latency Stage 6 – Puberty Industry Vs. Inferiority Competence
Puberty and 12-19 Identity Vs. Confusion Fidelity
Adolescence
Early Adulthood Early 20s Intimacy Vs. Isolation Love
Young and middle Late 20s Generativity Vs. Care
Adulthood Stagnation
Mature Adulthood 30s Integrity Vs. Despair Wisdom

Erikson assumes that a conflict occurs at each stage of development. If people successfully deal
with the conflict, they emerge from the stage with psychological strengths that will serve them
well for the rest of their life. If they fail to deal effectively with this conflict, they may not
develop the essential skills needed for a keen sense of identity and self

1. Oral Sensory Stage: During this stage, the infant is uncertain about the world in which they
live. To resolve these feelings of uncertainty the infant looks towards their primary caregiver
or parents for stability and consistency of care. If the care the infant receives is consistent,
predictable, and reliable, they will develop a sense of trust. If the care has been harsh then
the infant will develop a sense of mistrust and will not have confidence in the world around
them or in their abilities to influence events.
2. Muscular and Anal Stage: Erikson states it is critical that parents allow their children to explore
the limits of their abilities within an encouraging environment which is tolerant of failure. On
the other hand, if parents are not tolerant of failure, then children will not become
independent and would always have some doubt in his/her abilities
3. Locomotor Genital Stage: Around age three, children begin to plan activities, make up games,
and initiate activities with others. If given this opportunity, children develop a sense of
initiative, and feel secure in their ability to lead others and make decisions. This will instill
virtue of purpose (to do something in life). Conversely, if this tendency is not promoted, either
through criticism or control, children develop a sense of guilt.
4. Latency Stage: Children are at this stage will be learning to read and write to do sums, to do
things on their own. If children are encouraged and reinforced for their initiative, they begin to
feel industrious and feel confident in their ability to achieve goals. This will instill virtue of
Competence (Self-Confidence). If this initiative is not encouraged, then the child begins to feel
inferior.

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 5. Adolescence Stage: People in this stage are confused about their identity – Who are they?
What they want to become? Those who fail, face Role Confusion and do not know where their
life is going. Those who are successful will learn the virtue of fidelity. Fidelity is to adapt to the
needs and demands of the society.
6. Early Adulthood: During this period, we begin to share ourselves more intimately with others.
We explore relationships leading toward longer term commitments with someone other than a
family member. Successful completion of this stage can lead to comfortable relationships and a
sense of commitment, safety, and intimacy within a relationship. Success in this stage will lead
to the virtue of love. Avoiding intimacy, can lead to isolation, loneliness, and sometimes
depression
7. Young and Middle Adulthood: During this period, we establish our careers, settle down within
a relationship, begin our own families and develop a sense of being a part of the bigger picture.
We give back to society through raising our children, being productive at work, and becoming
involved in community activities and organizations. Success means you feel you are
contributing to the society. Those who are successful acquire virtue of Care. By failing to
achieve these objectives, we become stagnant and feel unproductive

8. Mature Adulthood: During this stage, we look back at our accomplishments in life. Those who
feel proud of their accomplishments will feel a sense of integrity. Those who are unsuccessful
during this stage will be left with feelings of bitterness and despair

Relevance

From organizational perspective, most relevant stage is that of young and middle adulthood as
the crisis people face at this stage is one of generativity vs. Stagnation. The best outcome for
personality fulfillment would be an attitude of being productive as it will give them lot of
satisfaction

Criticism
Erikson's theory has been criticized for focusing so heavily on stages and assuming that the
completion of one stage is prerequisite for the next crisis of development. His theory also
focuses on the social expectations that are found in certain cultures, but not in all

3.3 Argyris Immaturity and Maturity Continuum

This theory makes departure form the strict stage approach for personality development. This
theory proposes that personality, rather than going through precise stages, progresses along a
continuum of immaturity as an infant to maturity of an adult

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 Implications
He says that immaturity tends to exist in the individuals not because of their nature of laziness, but
because of organizations settings and management practices. When individuals join the
organizations, they are given little opportunity to control the environment; they are encouraged to
be passive, dependent, and subordinate and hence they behave immaturely. He Proposes a
programme of gradually phasing from the existing pyramidal organization structure to humanistic
system; from existing management system to more participative management. Such situations will
provide individuals the opportunity to grow and mature and keep them satisfy more than basic
needs.

4 Determinants of Personality
There are many factors which cause personality to develop or change
1. Biological Factors
2. Family and Social Factors
3. Cultural Factors
4. Situational Factors

Biological Factors
The study of biological contribution to personality can be divided into 3 major categories –
heredity, brain, and physical features
1. Heredity: A man inheriting patience, openness would have different personality than a man
inheriting impatience and shyness

2. Physical Features: A man inheriting good physical structure and health generally possesses an
attractive personality. A man inheriting poor health, pigmy size and ugly physical features
develops inferiority complex. But this is a very narrow perspective as personality is much more
than external appearance.

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 Family and Social Factors
Socialization is a process by which an individual acquires wide range of behaviors from society.
Socialization starts with initial contact between mother and her new infant.
Identification process occurs when a person tries to identify himself with some person whom he
feels ideal in the family. Generally, a child in the family tries to behave like his father or mother.

Socialization and identification process is influenced by home environment, family members and
social groups

Cultural Factors

Some people regard personality and culture as two sides of the same coin . Each culture produces
its special type or types of personality.

The personality of the Hindus in India differs greatly from that of Englishmen. Why? The answer
is ‘a different Hindu culture’. The Hindu culture lays emphasis not on material and worldly things,
but on things spiritual and religious. In every Hindu family there is a religious environment. The
mother gets up early in the morning, takes bath and spends an hour in meditation. When the
children get up, they go and touch the feet of their parents and bow before the family gods or
goddesses. The Hindu child from the very birth begins to acquire a religious and philosophical
personality built on the “inner life.”

Situational Factors

The situational factors also determine personality. For example, a worker whose personality
history suggests that he had need for power and achievement, may become frustrated and react
apathetically and aggressively if he is put in a bureaucratized work situation. Thus, he may
appear to be lazy and troublemaker though his personality history may suggest that he is
extremely hard working and striving to get ahead. Thus, personality changes because of changed
situation.

There are two theoretical frameworks which explains concept of situational factors in a better
way

1. Situation Strength Theory

2. Trait Activation Theory

Situation Strength Theory

Situation strength theory proposes that the way personality translates into behavior depends on
the strength of the situation. Strong situations show us what the right behavior is, pressure us to
exhibit it, and discourage the wrong behavior. In weak situations, conversely, “anything goes,” and

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 thus we are freer to express our personality in behavior. Thus, personality traits better predict
behavior in weak situations than in strong on

Researchers have analyzed situation strength in organizations in terms of four elements:

1. Clarity, Job is high in clarity produce strong situations because individuals can readily
determine what to do.
2. Consistency, Jobs with high consistency represent strong situations because all the cues point
toward the same desired behavior. The job of acute care nurse, for example, probably has
higher consistency than the job of manager.
3. Constraints, Jobs with many constraints represent strong situations because an individual has
limited individual discretion. Bank examiner, for example, is probably a job with stronger
constraints than forest ranger.
4. Consequences, Jobs with important consequences represent strong situations because the
environment is probably heavily structured to guard against mistakes. A surgeon’s job, for
example, has higher consequences than a foreign language teacher.

Some researchers have speculated organizations are, by definition, strong situations because
they impose rules, norms, and standards that govern behavior. These constraints are usually
appropriate. For example, we would not want an employee to feel free to engage in sexual
harassment, follow questionable accounting procedures, or come to work only when the mood
strikes. But on the other hand, tight rules and controls does not augur well for the organization
as it kills creativity, makes the job dull or demotivating

Trait Activation Theory

Another important theoretical framework toward understanding personality and situations is

trait activation theory (TAT). TAT predicts that some situations, events, or interventions
“activate” a trait more than others. For example, a recent study found people learning online
responded differently when their behavior was being electronically monitored. Those who had a
high fear of failure had higher apprehension from the monitoring than others and learned
significantly less. In this case, a feature of the environment (electronic monitoring) activated a
trait (fear of failing), and the combination of the two meant lowered job performance.

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 5 Types of Personality
The three most common type of personalities are: Jungian type, Friedman type and Holland
Type

5.1 Jung’s Classification of Personality

He classified psychological dimensions of people into four categories: sensing, intuition,
thinking and feeling. He called thinking and feeling (rational/judging functions) and sensation
and intuition (irrational or perceiving functions). Based on the combination of these
dimensions, Jung has classified personality into different types

Basis Personality Traits

Thinking and Sensing Rational, logical, empirical, objective, money
Personality oriented, risk avoider, short sighted.

Thinking and Intuitive Broad viewer, Imaginative, wider option, Risk

Personality taker, Long sighted
Feeling and Sensing Empirical, persona values, subjectivity, considering
Personality other’s views, risk taker, status conscious

Feeling and Intuitive Broad view of Intuition, people centred, subjective,

Personality venturesome

5.2 Friedman’s Classification of Personality

He classified personality in two types. Type A and Type B. Both types of personality are opposite
to each other

Type A Type B
Is always moving Is never in hurry
Is impatient Patient
Measures success by Play for fun, not for win
quantity
Is aggressive and Is mild mannered
competitive
Feels time pressure Has no pressing deadlines

People with type A personality run a higher risk of heart disease and high blood pressure than type
Bs. Type B would make better CEO’s whereas Type A would be better in Sales Target Oriented Job

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 5.3 Hollands Classification of Personality
According to John Holland's theory, most people are one of six personality types: Realistic,
Investigative, Artistic, Social, Enterprising, and Conventional.

6 Personality Traits Affecting Behavior

From organizational point of view, the following classification of personality traits is relevant

1. Big Five Personality Traits

2. Dark Triad
3. Other Personality Traits

6.1 Big Five Personality Traits

In recent times, research has identified five fundamental traits that are especially relevant to
organization. These five traits are called Big five personality traits. These five traits are as
follows which are also known by acronym (OCEAN)

Each of these five Personality traits has two extreme points-High and low

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 In general experts agree that personality traits closer to the left end of each dimension are
more positive in organizational setting, whereas traits closer to right are less positive. A brief
description of these traits is prescribed below

1. Agreeableness: This personality dimension includes attributes such as trust, altruism,

kindness, affection, and other prosocial behaviors. People who are high in agreeableness
tend to be more cooperative while those low in this trait tend to be more competitive and
sometimes even manipulative.
2. Conscientiousness: Standard features of this dimension include high levels of
thoughtfulness, good impulse control, and goal-directed behaviors. Highly conscientious
people tend to be organized and mindful of details. They plan ahead, think about how their
behavior affects others, and are mindful of deadlines. Research has showed that more
conscientious persons tend to be high performers than the less conscientious persons.
3. Emotional Stability (Neuroticism): Neuroticism is a trait characterized by sadness,
moodiness, and emotional instability. Individuals who are high in this trait tend to
experience mood swings, anxiety, irritability, and sadness. Those low in this trait tend to be
more stable and emotionally resilient. The stable people are seen as more reliable for an
organization
4. Extroversion: Extraversion (or extroversion) is characterized by excitability, sociability,
talkativeness, assertiveness, and high amounts of emotional expressiveness. People who
are high in extraversion are outgoing and tend to gain energy in social situations. Being
around other people helps them feel energized and excited. They are successful working in
the sales activities, publicity department, public relations unit. People who are low in
extraversion (or introverted) tend to be more reserved and have less energy to expend in
social settings.
5. Openness: This trait features characteristics such as imagination and insight. People who are
high in this trait also tend to have a broad range of interests. They are curious about the
world and other people and eager to learn new things and enjoy new experiences. People
who are high in this trait tend to be more adventurous and creative. People low in this trait
are often much more traditional and may struggle with abstract thinking . Generally, people
with more openness perform better due to their flexibility and likelihood is that they are
better accepted in the organization

Implications of Big 5 Personality Theory

Managers who can understand the framework and assess these traits in their employees
are in a good position to understand how and why they behave as they do. The below
table shows how big 5 personality traits affect Job Performance

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 Relevance Behavioural Outcome

Openness Enhanced creativity, better Innovation, more adaptable to

learning, flexibility change
Conscientiousness Better planning and execution, Persistent result achievement
hard work
Extroversion Better interpersonal skills, Enhanced Leadership
create social acceptance.
Agreeableness More compliance of Lower level of deviant behavior
organizational norms, least
conflict
Neuroticism Positive thinking, Behavioural Rational decision making,
Maturity better people interactions

1. Based on the needs of job, one can use this to identify people who can best perform that
Job.
2. Conscientiousness is the strongest predictor of all five traits for job perform. A high score of
conscientiousness has been shown to relate to high work performance across all dimensions.
3. The other traits have been shown to predict more specific aspects of job performance. For
instance, agreeableness and neuroticism predict better performance in jobs where
teamwork is involved. However, agreeableness is negatively related to individual proactivity.
4. Openness to experience is positively related to individual proactivity
5. Extraversion is a predictor of leadership, as well as success in sales and management
positions

Limitations of Big 5 Personality Theory

1. Cross Cultural Validity: Most of the research regarding Big 5 is done in US, so Indian
managers need to have caution about adopting Big 5 personality framework.

2. Is 5 Really the Magic Number: A common criticism of the Big Five is that each trait is too
broad. There are more than five traits are required to encompass the entirety of personality

6.2 Dark Triad

Researchers have found three other socially undesirable traits, which we all have in varying
degrees, are also relevant to organizational behavior: Machiavellianism, narcissism, and
psychopathy. Owing to their negative nature, researchers have labeled these the Dark Triad—
though they do not always occur together

Machiavellianism: An individual high in Machiavellianism is pragmatic, maintains emotional

distance, and believes ends can justify means. High-Mach employees, by manipulating others to

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 their advantage, win in the short term at a job, but they lose those gains in the long term
because they are not well liked.

Narcissism: In psychology, narcissism describes a person who has a grandiose sense of self-
importance, requires excessive admiration, and is arrogant. Narcissists commonly think they are
overqualified for their positions. When they receive feedback about their performance, they
often tune out information that conflicts with their positive self-perception, but they will work
harder if rewards are offered

Psychopathy: In the OB context, psychopathy is defined as a lack of concern for others, and a
lack of guilt or remorse when actions cause harm. Measures of psychopathy attempt to assess
the motivation to comply with social norms, impulsivity, willingness to use deceit to obtain
desired ends, and disregard, that is, lack of empathic concern for others.

The Dark Triad is a helpful framework for studying the three-dominant dark-side traits.
Researchers are exploring other negative traits as well. One emerging framework incorporates
five additional aberrant compound traits

1. First, antisocial people are indifferent and callous toward others. They use their
extraversion to charm people, but they may be prone to violent and risky decision making.
2. Second, borderline people have low self-esteem and high uncertainty. They are
unpredictable in their interactions at work, are inefficient, and may have low job
satisfaction. Their low self-esteem can lead to clinical depression.
3. Third, schizotypal individuals are eccentric and disorganized. In the workplace, they can be
highly creative, although they are susceptible to work stress.
4. Fourth, obsessive compulsive people are perfectionists and can be stubborn, yet they
attend to details, carry a strong work ethic, and may be motivated by achievement.
5. Fifth, avoidant individuals feel inadequate and hate criticism. They can function only in
environments requiring little interaction

6.3 Other Personality Traits

Besides Big 5 personality traits there are other traits that relevant to organizational behavior.
These are Grit, Cor Self-evaluation, Narcissism, Self-Monitoring, Proactivity, Machiavellianism,
locus of control, Tolerance for ambiguity, Type A and A, Work-ethic-Orientation and Risk
Propensity

1. Grit: In psychology, grit is a positive trait, based on an individual's passion for a particular
long-term goal or end state coupled with a powerful motivation to achieve the objectives.
Example would be Dhirubai Ambani who is famous for his grit

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 2. Core Self-Evaluation: Core Self-Evaluation refers to the degree to which an individual
considers himself as worthy and capable of performing the task. Core self-evaluation reveals
two aspects - self-concept and self-esteem. Self-concept is the way individuals define
themselves as to who they are and derive their sense of identity. Self-esteem denotes the
extent to which they consistently regard themselves as capable, successful, Important, and
worthy individuals. Person with positive core self-evaluation perform better than those
with negative core self-evaluation because the former set challenging goals for themselves
and put their utmost effort in achieving these.

3. Narcissism: Narcissists tend to treat others as inferior, have selfishness, and let others put
down, particularly to those who pose some kind of challenge to them. Very often, such
persons have much lower rating on behavioral pattern from those who work with them than
what they perceive about themselves. Example would be Saddam Hussain who ruled Iraq
for many years

4. Self-Monitoring: Self-monitoring refers to a person's ability to adjust with new state

factors. Persons with high self-monitoring have high adaptability to the new situation
while persons with low self-monitoring lack adaptability. For example, George W. Bush is
an example of leader high on self-monitoring. Even after receiving the news of attack on
World Trade Centre, he remained calm with the school students he was attending to at that
moment
5. Proactivity: Proactivity refers to the degree of anticipatory, change-oriented, and self-
initiating behaviour that a person displays. Proactive behaviour involves acting in advance of
a future situation rather than just reacting to the changed situation. Ratan Tata is an
example of proactive leader. He took many steps ahead of time which gave Tata Group
that edge due to which it is at an established position today

6. Machiavellianism: Machiavellianism refers to manipulation of others as a primary way of

achieving one's goals. Mach scale measures the extent to which an individual tends to be
Machiavellian. People with high score on mach scale, tend to be cool, logical in assessing the
system around them, willing to twist and turn facts to influence others, and try to gain
control of people, events, and situations by manipulating the system to their advantage. For
example, certain political leaders are good in Machiavellianism and they know how to make
the tide turn in their favor

7. Locus of Control: Those who have internal locus of control believe that they control and
shape the course of events in their life; those who have external locus of control believe that
events occur purely by chance or because of factors beyond their own control. Generally

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 good leaders and managers are required to have internal locus of control because if they
do not believe that they can make things work through their efforts, then they will never
be able to achieve organizational objectives

8. Tolerance for Ambiguity: Based on personality characteristics, some people can tolerate
high level of ambiguity without experiencing undue stress and still function effectively
while people who have a low tolerance for ambiguity may be effective in structured work
setting but it is almost impossible to operate effectively when things are rapidly changing
and much information about the future turn of events is not available. Generally, managers
have to work in an environment full of uncertainty because of rapid change; therefore,
they have to develop high level of tolerance for ambiguity. For example, Jack Welch is
famous for being extraordinarily successful in adapting to changing environment and he
took GE to new heights during his tenure

9. Type A and Type B: Type A people always feel a sense of time urgency, are highly
achievement-oriented, exhibit a competitive drive, and are impatient when their work is
slowed down for any reason. On the other hand, type B people are easy going, do not have
urgency for time, and do not experience the competitive drive. Type B would make better
CEO’s whereas Type A would be better in Sales Target Oriented Job

10. Work-Ethic Orientation: The extremely work ethic-oriented people get greatly involved in
the job and live up to being described as living, eating, and breathing the job. For effective
organizations, people with high work ethic orientation are necessary as compared to
extremely high or low work ethic orientation. Almost all great CEO’s like Jack Welch of GE,
Narayan Murhty of Infosys had great work-ethic orientation

11. Risk Propensity: Risk propensity is the degree to which a person is willing to take chances
and make risky decisions. A person with high-risk propensity experiments with new ideas. In
an organizational context, he may introduce new ideas, gamble on new products, and lead
the organization in new and different directions. For example, Warren Buffet, the famous
boxer Mohammad Ali were high on risk propensity and they had huge success. Mr. Narendra
Modi has also taken many bold steps which were procrastinated by previous leaders and
thus putting him in category of leaders with high propensity

Implication of Other Personality Traits

Based on above discussion, we can say that apart from Big 5 personality traits, there are other
traits which managers need to have to be effective. The people who possess these traits can

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 be termed as high-fliers and they have the potential to be effective future leaders. Apart from
Big 5 and Other personality Traits, high-fliers need to be good on following dimensions

Dimensions of High-Fliers
Must be sensitive to cultural Difference Takes Risks
Must have business knowledge Uses Feedback from the people
Must have courage to take a stand Is culturally adventurous
Brings out the best in the people Seeks Opportunities to learn
Acts with integrity Is Open to Critcism
Is Insightful Committed to success
Flexible Visionary and Inspiring

7 Applications of Personality
We shall discuss application of personality from the organization perspective and from the
perspective of the Individual

7.1 Organizational Applications of Personality

Understanding personality has number of implications for managers as it can help them
manage organization effectively. The implication can be found in particular areas
1. Matching Job and Personality: An organization can do well if it is able to match the jobs
and the individuals i.e., the personality of the job performer matches with the requirement
of the Job.
Another area which helps in matching jobs and individuals is training and development.

2. Designing Motivation System: Some people may be motivated by offering financial

incentives, some people may not react so favorably to such offers. Thus, motivation
system which considers the personality variables of the people in the organizations is
likely to be more reliable.

3. Designing Control System: In order to ensure people, contribute to the organization in

desired way, a control system is developed. Based on personality, different people react
differently to a particular type of control system. For example, Type A may like tight
control whereas Type B might want flexibility

4. Providing Right Environment: Agrysis proposes a programme of gradually phasing from the
existing pyramidal organization structure to humanistic system; from existing management
system to more participative management. Such situations will provide individuals the
opportunity to grow and mature and keep them satisfy more than basic needs

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 7.2 Applications of Personality at Individual Level
Since personality factors are quite important for personal effectiveness, one should identify his
personality and sharpen those personality factors which contribute to enhance personal
effectiveness.

1. Internal locus of Control: For enhancing personal effectiveness, the first basic thing is that
the person has internal locus of control. People with internal locus of control believe that
they control and shape the course of events in their life. This belief generates confidence in
the person to get the desired result.
2. Clarity: The person must have clarity on his weakness and strengths. The goals must be set
in line with his weakness and strengths
3. Conscientiousness: The person must apply the concept of conscientiousness in achieving
goals. The person may have several goals. Therefore, these goals should be arranged in
order of importance: from most important to least important. If there is clarity about the
goal to be achieved, the person puts his entire energy to achieve this goal
4. Determination: When he is determined, his latent (potential) energy comes on the surface
to help him achieve the goals
5. Creativity
6. Acting Differently
7. Managing Stress
8. Persistence

8 Personality Measurement

8.1 Projective Method

A projective test is a type of personality test in which you offer responses to ambiguous scenes,
words, or images.

There are a number of different types of projective tests. Some of the best-known examples
include

1. Rorschach Ink Blot Test: Developed by Swiss psychiatrist Hermann Rorschach in 1921, the
test consists of 10 different cards that depict an ambiguous inkblot. People are shown one
card at a time and asked to describe what they see in the image. When people answer
their interpretation of such images, their repressed feelings, desires, motives are
reflected in their answers

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 2. Thematic Appreciation Test: This was designed by Murray and Morgan. In the TAT test,
people are asked to look at a series of ambiguous scenes and then to tell a story describing
the scene. The test aims to reveal the needs, conflicts, and traits that underline the
behavior of the individuals

8.2 Personality Inventories

When personality inventories are used as measurement techniques, they take both external
and internal features of the individuals. Some of the major personality inventories are as
follows

1. Minnesota Multiphasic Personality Inventory (MMPI): It is developed by Hathway Makinly.

MMPI contains 550 items with each item having 3 alternative answers – true, false, and not
known. Scoring is done on the basis of answers provided by individuals. Based on scores,
personality features are measured

2. Sixteen Personality Questionnaire (16 PFQ): Developed by Cattel, this test measures sixteen
personality traits. The scores obtained are analyzed and personality traits are determined.

3. Myers-Brig Type Indicator: Myers-Briggs theory is an adaptation of the theory of

psychological types produced by Carl Gustav Jung. It is based on 16 personality types. It
differentiates people in terms of 4 dimensions

1. Extraversion Vs. Introversion: If you prefer to direct your energy to deal with people,
things, situations, or "the outer world", then your preference is for Extraversion. If you
prefer to direct your energy to deal with ideas, information, explanations, or beliefs, or
"the inner world", then your preference is for Introversion.

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 2. Sensing Vs. Intuition: If you prefer to deal with facts, what you know, to have clarity, or
to describe what you see, then your preference is for Sensing. If you prefer to deal with
ideas, look into the unknown or to anticipate what is not obvious, then your preference
is for Intuition.
3. Thinking Vs. Feeling: If you prefer to decide based on objective logic, using an analytic
and detached approach, then your preference is for Thinking. If you prefer to decide
using values - i.e., on the basis of what or who you believe is important - then your
preference is for Feeling
4. Judgement vs. Perception: If you prefer your life to be planned and well-structured then
your preference is for Judging. If you prefer to go with the flow, to maintain flexibility
and respond to things as they arise, then your preference is for Perception

8.3 Interview Method

Interview is a formal, in-depth conversation conducted to evaluate the personality
characteristics of persons. Interview is a better method of measuring personality as it provides
opportunity for face-to-face interaction between personality assessor and the individual whose
personality is being assessed. However, it requires highly skilled person to conduct the
interview

8.4 Case History Method

In this method, the personality appraiser appraises the personality characteristics of an
individual based on the information collected from different sources. These sources include
individual's personal letters, diaries, other documents, his family members and relatives,
friendship and work groups, institutions, etc. This method of personality assessment is used
generally by psychiatrists for the treatment of abnormal persons.

8.5 Observation Method

In the observation method of personality assessment, personality characteristics of an
individual are assessed by observing his behaviour in different situations. The basic idea behind
this method is that the behavioral pattern of any person reflects his personality, and the
assessment of this overt behavioral pattern will provide clue about his personality.

9 Perception
Many a times different people have different opinion on different issues. It is due to different
perceptions that we arrive at different conclusion.

9.1 Concept of Perception

There are two type of perception based on type of stimuli processed -> internal and external

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 1. Internal Perception: It tells us what is going on in our bodies. We can sense whether we are
hungry tired, or similar such phenomena
2. External Perception: It tells us about the environment beyond our bodies. By using our
senses of sight, bearing, touching etc., we perceive our environment. In organizational
behaviour, external perception is studied and only the term perception is used without
prefixing the world external with perception.

9.2 Sensation and Perception

Sensation is response to physical senses which are in form of vision, hearing, touch, smell and
taste. Example of sensation includes reaction of eye to color, ear to sound and so on.
Perception correlates, comprehends diverse sensation and a person identifies things, objects
etc. that are related to sensation. Thus, sensation is the action by which physiological organ
when it is stimulated, and perception is meaning given to the sensation

9.3 Importance of Perception

Perception affects the outcome of behavior. This is so because people act on the basis of what
they see. In organization perception is useful in various activities but there are 3 major areas
which require special attention. These are

1. Interpersonal Working Relationship: If the members of the organization do not have similar
or at least compatible perceptions, the problems of the organization are greater and will
require efforts to make perceptions more compatible. Misperceptions usually lead to
strained relations and may even result in open conflict among people
2. Selection of Employees: In many instances, and managers are subject to many of the
perceptual problems when they make the selection decisions. There may be strong
tendencies towards logical error and stereotyping specially during initial interviews
3. Performance Appraisal: The appraisal of a subordinate's performance is highly affected by
the accuracy of a manager's perceptions. Managers may have tendencies to positively
evaluate some employees because they are better liked, or are on favored tasks, or are
particularly noticeable
4. Impression Management: It is especially important for an individual to manage or to control
what others perceive about the individual. Identification of social image and self-concept are
some relevant factors that contribute to impression management
5. Delegation of Authority: Many a times authority is delegated based on perceptions of
subordinates. If these perceptions are wrong, then it can lead to wrong delegation of
authority

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 9.4 Perceptual Process

Perceptual Input
Stimuli may be in the form of objects, events, or people. The characteristics of stimuli are
important as these affect the extent to which the perceiver is attracted to these which further
impacts the selection of stimuli in the next step.

Perceptual Mechanism
1. Selection of stimuli: After receiving the stimuli from the environment, some are selected for
further processing while others are screened out. There are two types of factors which
affect selection of stimuli: external and internal. External factors are related to stimuli and
internal factors are related to the perceiver. We shall discuss this later in the chapter
2. Organization of stimuli: After the stimuli are received, these are organized in some form in
order to make sense out of that. The various forms of organizing stimuli are figure-ground,
grouping, simplification, and closure. We shall discuss the impact of these factors later
3. Interpretation of stimuli: People interpret the meaning of what they have selectively
perceived and organized in terms of their own assumptions of people, things, and situations.
Interpretation of stimuli depends on (i) characteristics of Stimuli (ii) Situation under which
perception takes place and (iii) characteristics of perceiver

Perceptual Outputs
The end result is development of attitudes, opinions, beliefs etc. These outputs along with
other factors affect human behavior may or may not result in overt behavior.

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 10 Perceptual Selectivity
We discussed that selection of stimuli is impacted by lot of external and internal factors. For
example, when we read newspaper, we do not read the entire newspaper but only that news
which interest us. This is known as perceptual selectivity.

10.1 External Factors

External factors may distinguish a particular stimulus form another stimulus of the same group.
Such characteristics may be in form of size, intensity, repetition, novelty and familiarity,
contrast, and motion

1. Size: For example, the letters of larger sizes in newspaper or books are selected for reading
2. Intensity: For example, commercials on televisions are slightly louder than the regular
programs so as to get attention from consumer
3. Repetition: For example, Advertisers while putting T.V. or radio advertisements repeat the
brand name they are advertising.
4. Novelty and familiarity: A novel object in the familiar situation or a familiar object in a
novel situation tend to attract attention. Job rotation is an example of this principle.
Recent research indicates that job rotation not only increased attention but also
employees' acquisition of new skills. Similarly, communication in familiar jargons attracts
more attention due to familiarity
5. Contrast: Plant safety signs, which have black lettering on a yellow background or white
lettering on a red background, are attentions getting.
6. Motion: It is because of this advantage that advertisers involve signs, which include
moving objects in their campaigns.

All these factors affect perceptual selectivity, their uses shall be made properly, otherwise
negative consequences may emerge. For example, the principle that the louder sound attracts
more attention and may make a supervisor in a factory to believe that if he speaks loudly to
his own workers, they will pay more attention. However, by speaking loudly, the supervisor
may actually be turning the workers off instead of getting their attention

10.2 Internal Factors

1. Self-Concept: The way a person views the world depends on the concept or image he has
about himself. For example, in a selection interview, an interviewer places more
emphasis on a candidate whose characteristics match with those of the interviewer
2. Beliefs: A person's beliefs have profound influence on his perception. The individual
normally censors stimulus inputs to avoid disturbance of his existing beliefs. This is referred
to as maintenance of cognitive consistency.
3. Expectations: Expectations are related with the state of anticipation of a particular
behaviour from a person. Thus, a technical manager may expect ignorance about the

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 technical features of a product from non-technical people. Such expectations may affect
the perception.
4. Inner Needs: The need is a feeling of tension or discomfort when one thinks he is missing
something or when he feels he has not quite closed a gap in his knowledge. When people
are not able to satisfy their needs, then daydreaming starts. In such cases, people will
perceive only those items which are consistent with their wishful thinking. For example,
poor people may be motivated by free food programs schemes or free housing schemes
rather than infrastructure development schemes
5. Response Disposition: It refers to a person's tendency to perceive familiar stimuli rather
than unfamiliar ones. In an experiment, persons having dominant religious value took
lesser time in recognizing such related words as 'priest', or 'minister' whereas they took
longer time in recognizing words related with economic value, such as 'cost' or 'price
6. Response Salience: Response salience is the set of dispositions which are determined not
by the familiarity of the stimulus situations, but by the person's own cognitive
predispositions. Thus, a particular problem in an organization may be viewed as a
marketing problem by marketing personnel, a control problem by accounting people, and
human relations problem by human resource people.

11 Perceptual Organization
While discussing the perceptual process, we discussed that stimuli received are organized in
some form or other to make sense out of that. There can be various forms of organizing a
stimulus such as figure ground, grouping, proximity, similarity, simplification, closure. Let us
discuss these one by one

1. Figure Ground: Figure-ground principle suggests that while organizing stimuli, people tend
to treat those stimuli as figure which are more Important and those stimuli as background
(simply known as ground) which are less important. In a similar way, a manager in the
organization may consider work performance as a figure in promotion while other
managers may treat it as ground
2. Proximity: The proximity or nearness principle of grouping states that a group of stimuli that
are close together will be perceived as a whole of parts or pattern of parts belonging
together. In organizational context, all employees working in a particular department may
be grouped together because of physical proximity and are perceived as such. Thus, if the
output of the department is unsatisfactory, all persons may be perceived as inefficient,
through some of them may be very efficient
3. Similarity: The principle of similarity states that the greater the similarity of the stimuli,
greater is the tendency to perceive them as a common group. In an organizational context,

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 the workers may be perceived to have the same opinions about the management because
they are grouped together on the basis of similarity
4. Simplification: Whenever people are overloaded with information, they try to simplify it to
make it more meaningful and understandable. In the process of simplification, the perceiver
subtracts less salient information and concentrates on important one. In an organizational
context, a cause of high attrition may be interpreted as lack of good HR policies by HR
whereas by manager as lack of challenging work
5. Closure: When faced with incomplete information, people fill up the gaps themselves to
make the information meaningful. This may be done on the basis of past experience, past
data, or hunches. For example, the below figure would be seen as closed complete figure
by many. In the organizational context, managers may not have all relevant information
about a matter on which they have to make decisions. In such a case, they make certain
assumptions about the information and decide accordingly.

12 Person Perception
Here we shall be discussing these factors in context of Person Perception. It is interpersonal
perception in which the perceiver perceives another person, and the latter becomes a stimulus
for perception. Person perception is a more complex process as compared to object perception
because of involvement of many factors

The factors which lead to distortion in perception may be grouped into 3 categories: Factors in
Perceiver, Factors in person perceived and Situational Factors

12.1 Factors in Perceiver

1. Personality: Personality can influence perception too. It is because of 2 reasons.
I. The first is that perceiver tries to project his personality traits in others which is also
called as projection.
II. Second the perceiver tends to find in a person what he expects to find. This is known a
self-fulling prophecy.

Due to this the perception of another person by first person might not be correct

2. Mental Set: A mental set is a tendency to only see solutions that have worked in the past.
This type of fixed thinking can make it difficult to come up with solutions and can impede the
problem-solving process. In an organizational setting people have tendency to perceive
about others on the basis of mental set which causes misconception. For example, who is in
habit of coming late, might come late one day due to genuine reason such as bad health but
manager will think that he is late due to his habit and will not believe in him

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 12.2 Factors in Person Perceived
There can be certain factors in the person being perceived which can cause distortion in
perception. Two such factors are

I. Status: For example, a wealthy person may be seen as intelligent also though he might not
be.
II. Visibility of Traits: Visibility of Traits also influence perception of perceiver. There are many
traits which are not visible on surface such as honesty, loyalty etc. In such case evaluation is
to be made on the basis of one’s own experience which may not be correct

12.3 Situational Factors

Situational factors also affect perception. For example, a person is likely to be perceived
differently if he meets in a five-star hotel as compared to an ordinary place

13 Distortion in Perception
There are many factors which can cause distortion in perception. These are

I. Selective Perception: For example, if some boy and girl are sitting ion park, a conservative
person from rural area might take them as boy fried and girl friend though they may just
be friends

II. First Impression: it is quite common that people evaluate others on the basis of first
impression. Manager may rate employee higher each year if he was really good during first 3
months
III. Halo Effect: The "halo effect" is when one trait of a person or thing is used to make an
overall judgment of that person or thing. For example, an employee who comes to the office
on time and is well-dressed may be taken as a professional one though he may not be
working at all in the office.
IV. Stereotyping: Stereotyping occurs when the perceiver judges or perceives a person on the
basis of characteristics of the group to which he belongs. For example, there are certain
stereotyping at international level such as that Americans are materialistic, Italians are
quick-tempered, and Japanese are hard working. But all people of one country are not like
this

V. Projection: It is the tendency of the perceiver to project his attributes in others. For
example, a dishonest person sees others as dishonest. Projection is particularly true
regarding undesirable traits which the perceiver possesses but fails to recognize in himself
VI. Perceptual Set: It is also known as mental set, means previously held beliefs. For example, a
manager may have formed the perception that workers are lazy, and they want to gain

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 whatever is possible from the organization. This mental set will influence his perception
when he meets workers
VII. Implicit Personality: Implicit personality is the pattern of associating one trait of an
individual with his other traits. For example, if a person is honest, he will be hard working.
VIII. Expectancy: Expectancy, also known as self-fulfilling prophecy, is a tendency to perceive
people on the basis of what the perceiver expects them to be in the first place. For example,
a wealthy person is supposed to be well-mannered, and he would always be perceived
from that angle

13.1 Implications for Distortion in Perception

People in organizations are always judging each other. Managers must appraise their
employees’ performances. We evaluate how much effort our coworkers are putting into their
jobs. Team members immediately “size up” a new person. In many cases, our judgments have
important consequences for the organization. Let us look at the most obvious applications .

Employment Interview: Few people are hired without an interview. But interviewers make
perceptual judgments that are often inaccurate and draw early impressions that quickly
become entrenchedAs a result, information elicited early in the interview carries greater weight
than does information elicited later. Our individual intuition about a job candidate is not
reliable in predicting job performance, so collecting input from multiple independent evaluators
can be predictive

Performance expectations: People attempt to validate their perceptions of reality even when
these perceptions are faulty. The terms self-fulfilling prophecy and Pygmalion effect describe
how an individual’s behavior is determined by others’ expectations. If a manager expects big
things from her people, they are not likely to let her down. Similarly, if she expects only minimal
performance, they will likely meet those low expectations. Expectations become reality. The
self-fulfilling prophecy has been found to affect the performance of students, soldiers, and even
accountants

Performance evaluations: An employee’s future is closely tied to his or her appraisal—

promotion, pay raises, and continuation of employment are among the outcomes. Although the
appraisal can be objective (for example, a salesperson is appraised on how many dollars of sales
he generates in his territory), many jobs are evaluated subjectively. Subjective evaluations,
though often necessary, are problematic because of the errors we have discussed—selective
perception, contrast effects, halo effects, and so on. Therefore, there needs to be a well though
of plan for the performance evaluation so that subjectivity does not hampers the credibility of
the process

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 14 Developing Perceptual Skills
It is especially important for people to have correct perception. The following things can be done to help
people have better projections

1. Perceiving Oneself Accurately: One of common causes of distortion in perception is that

people do not understand themselves accurately. A person should try to understand
himself
2. Enhancing Self-Concept: When self-concept is developed, they are apt to respect others
more and perceive them more accurately.
3. Having Positive Attitude: People who have positive attitude see things from positive angle.
Their perception is likely to be less distorted.
4. Being Empathic: Empathy means being able to see a situation as it is experienced by
others. When you think from other’s perspective, you get a much clear picture, and it helps
in having better perception of things
5. Communicating more openly: Lot of misconception arises in organization because of lack
of communication or one-way communication. Therefore, managers should take steps for
making communication effective so as to ensure that right message reaches at the right
place and at right time.
6. Avoiding common perceptual Distortions: Managers in organization shall try to avoid
common distortions like halo effect, stereotyping etc. by guarding them against common
biases

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 Summary Sheet
Emotional Intelligence and Interpersonal
Behavior
Important Points

1. This Summary Sheet shall only be used for Quick Revision after you have read the
Complete Notes
2. For Building Concepts along with examples/concept checks you should rely only on
Complete Notes
3. It would be useful to go through this Summary sheet just before the exam or before
any Mock Test
4. Questions in the exam are concept based and reading only summary sheets shall not
be sufficient to answer all the questions

1 Concept of Emotions and Moods

In our analysis, we will need three terms that are closely intertwined: affect, emotions, and
moods. Affect is a generic term that covers a broad range of feelings, including both
emotions and moods. Emotions are intense feelings directed at someone or something
Moods are less intense feelings than emotions and often arise without a specific event
acting as a stimulus

1. A person may express his emotions while he cannot express his mood. For example, if a
person gets angry (emotion), he expresses that emotion towards someone. If a person is
in sad mood, he cannot express it to others
2. Emotion may last only for the time being whereas mood may last for a long period
3. Emotion is more intense than a mood

Basic Emotions: It is unlikely psychologists or philosophers will ever completely agree on a

set of basic emotions, or even on whether there is such a thing. Still, many researchers
agree on six universal emotions—anger, fear, sadness, happiness, disgust, and surprise.

Moral Emotions: Researchers have been studying what are called moral emotions; that is,
emotions that have moral implications because of our instant judgment of the situation that
evokes them. Examples of moral emotions include sympathy for the suffering of others,

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 guilt about our own immoral behavior, anger about injustice done to others, and contempt
for those who behave unethically.

1.1 Emotions – Ethics and Rationality

Do Emotions make us Irrational: Many people think rationality and emotion are in conflict,
and by exhibiting emotion, you are acting irrationally. However, this is wrong? Our emotions
actually make our thinking more rational. Why? Because our emotions provide important
information about how we understand the world around us and they help guide our
behaviors.

Do emotions make us ethical? It was previously believed that, like decision making in
general, most ethical decision making was based on higher-order cognitive processes, but
the research on moral emotions increasingly questions this perspective. Numerous studies
suggest that moral judgments are largely based on feelings rather than on cognition.

1.2 Source of Emotions and Moods

1. Personality: Moods and emotions have a personality trait component, meaning that
some people have built-in tendencies to experience certain moods and emotions more
frequently than others do.
2. Time of the day: Levels of positive affect tend to peak in the late morning (10 a.m.–
noon) and then remain at that level until early evening (around 7 p.m.). Starting about
12 hours after waking, positive affect begins to drop until midnight.
3. Day of the week: In most cultures that is true—for example, U.S. adults tend to
experience their highest positive affect on Friday, Saturday, and Sunday, and their
lowest on Monday.
4. Weather: Some people tend to feel better when weather is pleasant
5. Stress: Stressful events at work (a nasty e-mail, impending deadline, loss of a big sale,
reprimand from the boss, etc.) negatively affect you
6. Sleep: Poor or reduced sleep also makes it difficult to control emotions. Even one bad
night’s sleep makes us angrier and risk prone.
7. Exercise: Research consistently shows exercise enhances peoples’ positive moods
8. Sex: Evidence does confirm women experience emotions more intensely, tend to “hold
onto” emotions longer than men, and display more frequent expressions of both
positive and negative emotions

1.3 Emotional Labor

Every employee expends physical and mental labor by putting body and mind, respectively, into
the job. But jobs also require emotional labor, an employee’s expression of organizationally
desired emotions during interpersonal transactions at work. We expect flight attendants to be

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 cheerful, funeral directors to be sad, and doctors emotionally neutral. At the least, your
managers expect you to be courteous, not hostile, in your interactions with coworkers

The way we experience an emotion is obviously not always the same as the way we show it. To
analyze emotional labor, we divide emotions into felt or displayed emotions. Felt emotions are
our actual emotions. In contrast, displayed emotions are those the organization requires
workers to show and considers appropriate in a given job. They are not innate; they are
learned, and they may or may not coincide with felt emotions

When employees have to project one emotion while feeling another, this disparity is called
emotional dissonance.

1.4 Affective Events Theory

Affective events theory (AET) is a model developed by organizational psychologists Howard M.
Weiss (Georgia Institute of Technology) and Russell Cropanzano (University of Colorado) to
explain how emotions and moods influence job performance and job satisfaction

Affective events theory (AET) proposes that

1. Employees react emotionally to things that happen to them at work, and this reaction
influences their job performance and satisfaction.
2. Emotions influence a number of performance and satisfaction variables such as
organizational commitment, level of effort, intention to quit, and workplace deviance

Implications of Affective Events Theory

1. Emotions provide valuable insights into how workplace events influence employee
performance and satisfaction
2. Second, employees and managers should not ignore emotions or the events that cause
them, even when they appear minor, because they accumulate

2 What is Emotional Intelligence?

Emotional intelligence (EI) refers to the ability to perceive, control, and evaluate emotions.

The ability to understand when a friend is feeling sad or when a co-worker is angry is
emotional intelligence. The ability to express or control one’s own emotions is also
emotional intelligence

2.1 Levels of Emotional Intelligence?

There are four different levels of emotional intelligence including emotional perception, the
ability to reason using emotions, the ability to understand emotions, and the ability to manage
emotions.

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 1. Perceiving emotions:
2. Reasoning with emotions:
3. Understanding emotions:
4. Managing emotions:

2.2 Components of Emotional Intelligence?

Five components of emotional intelligence are

1. Self-Awareness: Ability to recognize, understand one’s mood, emotions, and drives, as

well as their effects on others
2. Self-Regulation: Ability to control or redirect disruptive impulses and moods and
propensity to suspend judgement – to think before acting
3. Social Skills: Proficiency in managing relationships and building networks and ability to
find common ground and build rapport
4. Empathy: Ability to understand the emotional make up of others and skill to treat
people according to their emotional reactions
5. Self-Motivation: Passion to work for reasons that go beyond money or status and
propensity to pursue goals with energy and persistence

2.3 IQ and EQ?

Mental Intellignece is mental ability of a person and is determined by structure of one’s
brain whereas Emotional intelligence is related to managing emotions

Mental Intelligence is measured in terms of IQ whereas Emotional Intelligence is measured

in EQ.

Mental intelligence has following 8 components

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 1. Linguistic Intelligence: People with good linguistic intelligence are good at reading,
writing, storytelling etc.
2. Logical-Mathematical Intelligence: These are good at analyzing patterns and are
interested in mathematics, strategy games, experiments etc.
3. Bodily-kinesthetic Intelligence: Persons having bodily-kinesthetic intelligence are good
in processing knowledge through bodily sensations, are good athletes, dancers or good
in crafts such as sewing, woodwork etc.
4. Spatial Intelligence: They think in terms of images and pictures. They may be fascinated
by mazes, puzzles etc.
5. Musical Intelligence: They remain busy in singing or humming to themselves
6. Interpersonal Intelligence: Person with Inter-personal intelligence interacts with others
in socially meaningful way and often become leaders among peers
7. Intra-personal Intelligence: These people are good at understanding their own
feelings. They are less sociable, more shy and are self-motivated
8. Naturalist: They connect with nature. They enjoy exploration of living things and nature
around them

2.4 Importance of Emotional Intelligence in Daily Life?

One may have high IQ, but it is not sufficient to succeed in life. Apart from that high
Emotional Intelligence is also required. Golman suggests IQ contributes only 20% to a
person success, rest it depends on EQ.

High Emotional Intelligence leads to happiness and rationality in behavior. A person with
high EQ can fulfill social objectives by being accepted in the society rather than a person
with low EQ who can over-react on being overpowered by emotions

2.5 Some Myths about Emotional Intelligence

1. Emotional intelligence is sometimes treated as being nice to others which is not true. In
many situations, being nice to others is not a rational behaviour because the other
person does not expect such a nicety.
2. There is a myth that men have higher emotional intelligence than women. It is not true.
Various researchers have shown that emotional intelligence has nothing to do with
gender
3. There is a myth that emotional intelligence is fixed genetically and develops on in early
childhood. This is not true. While IQ does not change much after adolescence,
emotional intelligence changes over a period.

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 2.6 Applying Emotional Intelligence in Organizations
Emotional benefits can lead to increased productivity, developing leadership skills, stimulating
creativity, encouraging innovative thinking, reducing stress level etc.

Emotional Intelligence can be applied in following Areas

1. Filling Organizational Positions: The level of emotional intelligence required for jobs at
various levels can be matched with EQ of the individuals applying for the job, to get the
best fit
2. Decision Making: Positive emotions and moods seem to help people make sound
decisions. Positive emotions also enhance problem-solving skills, so positive people find
better solutions
3. Credibility of Managers: Since emotional intelligence stimulates consistency in persons
behavior, it leads to integrity and honesty which creates trust in the managers
4. Leadership Effectiveness: Research indicates an extraordinarily strong link between
emotional intelligence of leaders and performance of organizations. A leader with high
emotional intelligence has following characteristics
a. Ability to Regulate Emotions:
b. Ability to Analyze Emotions:
c. Emotional Facilitation of Thinking:
d. Ability to Express Emotions:
5. Effective Communication: Emotional Intelligence helps in avoiding distortion in
communication, thereby making it effective
6. Negotiation: Several studies suggest that a negotiator who feigns anger has an
advantage over an opponent. Why? Because when a negotiator shows anger, the
opponent concludes the negotiator has conceded all he or she can and so gives in.
However, anger should be used selectively in negotiation: angry negotiators who have
less information or less power than their opponents have significantly worse outcomes
7. Stress Management: Emotional Intelligence helps in managing stress as stress largely
depends on how you react to a particular condition.
8. Conflict Resolution: Emotional Intelligence helps people to understand the others point
of view, why they are taking a particular stand and hence it not only helps resolve
conflict, but it also prevents conflicts in first place
9. Creativity: Creativity is influenced by emotions and moods. Much research suggests that
people in good moods tend to be more creative than people in bad moods.
10. Motivation: Several studies have highlighted the importance of moods and emotions on
motivation. The positive mood increases the motivation.
11. Customer Service: Workers’ emotional states influence the level of customer service
they give, which in turn influences levels of repeat business and customer satisfaction.

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 This result is primarily due to emotional contagion—the “catching” of emotions from
others.
12. Safety and Injury at Work: Research relating negative affectivity to increased injuries at
work suggests employers might improve health and safety (and reduce costs) by
ensuring workers are not engaged in potentially dangerous activities when they are in a
bad mood

2.7 Developing Emotional Intelligence

The consortium for research on emotional intelligence in organisations, USA, has provided the
following phases for developing emotional intelligence (also called as emotional competences
or emotional skills)

1. Preparation for change

2. Training
3. Transfer and maintenance
4. Evaluation of change

2.7.1 Preparation for Change

This phase is basically related to assessing organisational and individual needs for developing
emotional intelligence and motivating the organisational personal for developing emotional
intelligence. Usually, this phase consists of following steps

1. Assessing the Organisation’s Needs: The organisation must assess whether it is

personnel need training for developing emotional intelligence and, if yes, what type of
training is required. Employees performing different types of jobs require different
types of emotional competence.
2. Assessing personal strengths and weaknesses. There is need for assessing personal
strengths and weaknesses so that required training can be given
3. Providing feedback. People are eager to get feedback about any assessment of them.
Feedback must be provided in a constructive manner to make sure that employees take
negative feedback also with positive frame of mind. Also, feedback shall be provided
from somebody who has good credentials and is trusted by the employees.
4. Encouraging participation. Employees are more likely to participate if their immediate
superiors support it.
5. Linking learning goals to personal values. if employees feel that developing emotional
intelligence is directly beneficial to them, they will be motivated to develop emotional
intelligence.
6. Recognising readiness to change. After completing the above steps to preparation, it is
desirable to measure readiness of employees no change. Only when the employees are
ready to change, the training for emotional development process shall be started

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 2.7.2 Training
At the second phase of development of emotional intelligence, training is provided to all the
participants. However, while providing such training, the following steps should be observed

1. Forging Positive Relationship with Participants

2. Setting Clear Goals
3. Breaking goals into manageable steps.
4. Maximising opportunities for practise
5. Relying on experiential methods
6. Providing frequent feedback.
7. Preventing relapse.

2.7.3 Transfer and Maintenance

After finishing training, the learners returned to their normal jobs with old prevailing work
environment. In such an environment, the learners may tend to get back to old behaviour.
Thus, Transfer and maintenance of new behaviour become really a challenging task for the
organisation. An organisation can take 2 steps for transfer and maintenance of learning in its
employees: encouraging the use of skills on the job and supportive organisational culture

1. Encouraging use of Skills

2. Supportive Organizational Culture

2.7.4 Evaluation
In this way is it shall be ensured that the efforts made are proceeding in right direction and
these are achieving the results stipulated. The term evaluation refers to a process that focuses
on continuous improvement in behaviour due to development of emotional intelligence.

2.8 Managing Emotions

Managing Emotions at workplace is essential for success. There are critical emotions like anger,
feat etc. which must be controlled. Some prominent methods of managing emotions are

1. Understanding desired emotional skills

a. Self-Awareness
b. Empathy
c. Resolving Conflicts
d. Emotional Suppression: One technique of emotion regulation is emotional
suppression or suppressing initial emotional responses to situations

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 e. Cognitive Reappraisal: Cognitive reappraisal, or reframing our outlook on an
emotional situation, is one way to effectively regulate emotions
f. Social Sharing: Open expression of emotions can help individuals to regulate
their emotions. Social sharing can reduce anger reactions when people can talk
about the facts of a bad situation, their feelings about the situation, or any
positive aspects of the situation
2. Developing higher -self esteem
3. Dealing with emotional upsets
4. Coping with anger
5. Practicing emotional quality management

2.9 Implications for Managers

1. Recognize that emotions are a natural part of the workplace and good management does
not mean creating an emotion-free environment.
2. To foster effective decision making, creativity, and motivation in employees, model positive
emotions and moods as much as is authentically possible.
3. Provide positive feedback to increase the positivity of employees. Of course, it also helps to
hire people who are predisposed to positive moods.
4. In the service sector, encourage positive displays of emotion, which make customers feel
more positive and thus improve customer service interactions and negotiations.
5. Understand the role of emotions and moods to significantly improve your ability to explain
and predict your coworkers’ and others’ behavior.

3 Interpersonal Behavior
The various dimensions of interpersonal behavior such as personality, perception, emotional
intelligence, and motivation shape an individual’s behavior. These dimensions change to some
extent when an individual come in contact with others in the organizations

3.1 Types of Interpersonal Behavior

Interpersonal behavior can be of following types

1. Aggressive behavior
2. Non-Assertive behavior
3. Assertive behavior

Aggressive behavior is that type of interpersonal behavior in which a person stands up for their
own rights in such a way that the rights of others are also violated. Aggressive behavior
humiliates, dominates, or puts the person down rather than simply expressing one’s own

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 emotions or thoughts. Outcome of aggressive behavior is often getting what one wants at
expense of others

Non-Assertive behavior is that type of interpersonal behavior, which enables the person’s rights
to be violated by another. A non-assertive person inhibits her/his honest, spontaneous reactions
and typically feels hurt, anxious and sometimes angry because of being non-assertive in a
situation. Outcome of non-assertive behavior is not getting what the non-assertive person wants
and anger builds up

Assertive behavior is that type of interpersonal behavior in which a person stands up for their
legitimate rights in such a way that the rights of others are not violated. Assertive behavior is an
honest, direct, and appropriate expression of one’s feelings, beliefs, and opinions. Outcome of
Assertive behavior is good feeling, respect by others, improved self-confidence, and
relationships

3.2 Outcomes of Interpersonal Behavior

When people interact with one another, the resulting outcome will be either cooperative or
conflicting.

When interaction between two people in mutually gratifying, it is cooperative in nature. It is

not necessary that interaction will always be cooperative, it can be conflicting also. Reasons for
conflicting interpersonal behavior can be attributed to different personality, perceptions, value
system between two individuals

Conflicting outcome is not beneficial for organization and thus attempts must be made to
replace conflicting interpersonal behavior by cooperative interpersonal behavior. This can be
done by helping people develop interpersonal skills

Skills for Interpersonal behavior

1. Positive Thinking
2. Mutual Trust
3. Empathy
4. Courtesy
5. Avoidance of Ego problem.

4 Transactional Analysis
Transactional analysis refers to method of analyzing and understanding interpersonal behavior.
TA was developed by Eric berne. Later, this was polularized by Harris and Jongeward.
Transactional analysis involves analysis of following factors

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 1. Self-Awareness
2. Ego states
3. Analysis of Transactions
4. Script Analysis
5. Psychological Games
6. Study of Life Positions
7. Stroking

Let us discuss all these factors one by one

4.1 Self-Awareness
It implies knowing about ourselves. To what extent, a person is aware of himself affects his
interpersonal transactions. Johari Window is a useful framework to analyze self-awareness.
Joseph Luft and Harrington Ingham have developed a diagram that gives to look at what one is
conscious in one’s social exchanges and what one is not. The concept of Johari Window is
shown in the following figure

1. Open-Self: Open Self is known as Public area. This quadrant indicates information
about self is known to oneself and to others. The individual behaves in a straightforward
manner and is sharing. In an organizational setting, because of the openness of the
individual the chances of conflict are reduced to minimum.

2. Blind-Self: This quadrant is related to information which is not known to self but known
to others. Other people know what is happening to him, but he is not aware of it. This
situation is likely to create an unpleasant atmosphere in the organization. Individual

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 therefore should reduce blind area and increase public area. This will reduce conflict
situations to a great extent in interpersonal behavior

3. Hidden Self: The hidden quadrant refers to states about the individual known to him but
not known to others. The hidden self is within the vision of the individual, but he does
not want to share with others. The area is also called Private Area

4. Unknown Self: The unknown quadrant refers to states that neither the individual nor
other people know about him. The unknown self is mysterious in nature. Sometimes
feelings and motivation go so deep that no one including the person concerned knows
about them. People experience unknown parts of life in dreams or deep-rooted fears or
compulsions.

The important idea behind the Johari Window is that it can help us better understand more
about ourselves, which ultimately creates another level of self-awareness. It is used to improve
interpersonal communications and teamwork. It helps in better communication in following
ways

1. Good Listening: With increasing self-awareness and awareness of others, a person becomes
a good listener which is especially important for becoming a good communicator.
2. Empathy: Empathy involves putting one’s legs in another's shoes. Thus, the communication
should be according to listeners level of understanding, needs views etc. Increase in self-
awareness and awareness of others helps a person to become more empathetic
3. Confidence: While communicating with others it is important that communicator has
confidence about his subject matter. When a person is having high self-awareness and
awareness of others, he becomes more confident about himself
4. Open mindedness: The communicator shall have open mind so that he can assess
viewpoints of listeners from their own point of view. Increased awareness about others can
help become a person more open minded
5. Mutual Respect: During the communication process, parties involved should have respects
for each other. Increased self-awareness leads to better understanding and respect among
people
6. Appropriate Medium: Communication media may be in form of oral/ written words,
gestures, graphs, charts etc. Increased awareness about others helps in choosing
appropriate medium for communication

4.2 Ego States

Berne defines 3 ego states that exist with in people – Parent Ego, Adult Ego and Child Ego.
These have nothing to do with the chronological age of the persons, rather, they are related

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 with the behavioural aspects of age. Thus, a person of any age may have these ego states in
varying degrees.

Parent Ego

Parent: The parent ego state is a result of the messages (conditioning) people receive from
their parents, elders, teachers, and others during childhood. These messages help in regulating
one’s behavior by telling what is right, what is wrong. Characteristic of person interacting with
parent ego state include being Overprotective, Dogmatic, and indispensable, Reference to rules
and laws

There are two kinds of parent ego

a. Nurturing Parent: Nurturing Parent is part of person which is understanding and caring
b. Critical Parent: Critical parent criticizes others for their behavior

Examples where we can say that is the Parent Ego which is involved in Transaction
• “Never talk to strangers”
• “Always chew with your mouth closed”
• “Look both ways before you cross the street”

Adult Ego

This state evokes behavior that could be described as logical, reasonable, and rational. Behavior
from adult ego state is characterized by problem solving, analytical and rationale decision
making. One of the key functions of the Adult is to validate data in the parent.

Example where we can say that is the Adult Ego which is involved in Transaction:

“Wow. It really is true that pot handles should always be made of wood” said Sally as she saw
her brother burn himself when he grabbed a pot handle.

Child Ego

The child ego state is associated with behavior that appears when a person is responding
emotionally. A person’s child ego contains natural impulses and attitudes learned from
experiences in early childhood. Characteristic of person interacting with Adult ego state include
Signs of silent compliance, attention seeking, giggling, Tantrums

Examples where we can say that is the Child Ego which is involved in Transaction
• When a person says, “I need to buy Mercedes car immediately now” (Impulsive Action)

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 Associated Characteristic with each Ego State:

The below table presents behavioural responses in different ego states

Parent Ego Adult Ego Child Ego

Rules and laws Rationality Seeing, hearing, touching
Do’s and Don’ts Estimation Experience Joy/Frustration
Truths Evaluation Creating
How to Sorting Data Wishing/Fantasizing
Tradition Figuring out Feeling Internally
Teaching Exploring Impulsive
Demonstrating Testing Spontaneous

4.3 Analyzing Transactions

When people transact, they involve in transaction with each other.

For example, when you ask your friend, ‘how are you friend’ and your friend replies, ‘I am fine’
is a transaction between you and your friend. In this the stimulus is ‘how are you friend’ and
the response is ‘I am fine’

TA is a technique for examining the nature of interpersonal communication between the two
individuals and to analyze its effectiveness.

Depending upon the ego states of persons involved in transactions, there may be three types
of transactions – complementary, crossed, and ulterior. Let us discuss these one by one

Complementary Transactions

A transaction is complementary when the stimulus and response patterns from one ego state
to another are parallel. Thus, the message by a person gets the predicted response from other
person. In all, there can be nine complementary transactions. These are adult-adult, parent-
child, child-parent etc. These complementary transactions are elaborated as follows

1. Adult-adult Transaction: Both individuals are transacting from adult ego state. The stimulus
and response are based on logical thinking and rationale. This type of communication is
considered most ideal in any organization. There is least chance of conflict among the
workers

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 Example:
Superior: how is you work proceeding
Subordinate: It is proceeding in the right direction sir

This shows that the communication between the superior and the subordinate is complete,
and both are satisfied in this interaction

2. Adult-Child Transaction: Adult-child interaction can be effective when the manager is aware
of the ego state of the employee. In such a case, the manager can allow the employee in the
child ego to be creative. But there may be problem in this interaction when the employee
acts irrationally because of his child ego.

Example
Manager: Have you worked up the creative theme of the advertisement
Employee: I need to get into painting mode to have the creative ideas
Manager: Ok, then go for it.

3. Parent-Child Transaction: This transaction is workable in the organization where the

manager will get the work done from subordinates by advising, guiding, and by assigning
rewards for good work and punishment for non-performance. The subordinates (Child ego)
will listen to manager and look forward for advice, guidance. For example, a supervisor
communicates in the parent-to-child ego when he reprimands an employee for being late. If
the employee responds by apologizing and saying it will not happen again, the employee is in
the child-to-parent ego state and the result is a complementary transaction

In the above three transactions we have seen that when stimulus and response is parallel,
the transactions are complementary or satisfying for the participants

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 There can be 6 other complementary transactions such as Adult-Parent, Parent-Parent,
Parent-Adult, Child-Parent, Child-Adult and Child-Child. But we shall not go into detail in
explaining these transactions

Non- Complementary Transactions (Crossed Transactions)

Non-Complimentary or crossed transactions are those transactions in which a sender sends the
message based on his ego state, but the response is from an incompatible ego state on the part
of receiver. Such behaviour occur when stimulus and response is not parallel.

Another example for Non-Complementary Transaction would be

Manager: I find that your work is very dirty
Employee: I do not mind if my performance is better than Rohit and Samit

Ulterior Transactions

Ulterior transactions are most complex transactions because if involves more than two egos
states working at the same time with double meaning in the stimulus. This type of transaction is
quite common i.e., diplomatic circles when you say something but mean the other.

Example:

Subordinate: How is my work performance sir

Superior: it is wonderful

Relevance of Ego States and Analyzing Transactions

The concept of ego states help explain how we are made up, and how we relate to other. They
categorize the ways we think, feel, and behave and are called Parent, Adult, and Child.

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 Transactional analysis is a technique which helps to understand the behaviour of other person
so that communication becomes effective.

4.4 Script Analysis

In a layman’s view, a script is the text of a play, motion picture or radio or TV programme. In TA,
a person’s life is compared to a play and the script is the text of that play. When confronted
with a situation, a person acts according to his script which is based on what he expects or how
he views his life position.

Relevance

Script analysis is the method of uncovering the "early decisions, made unconsciously, as to how
life shall be lived”. It helps know us about how out thoughts have been influence by certain
experiences

4.5 Life Positions

Thomas Harris called the combination of assumptions about self and the other person, a LIFE
POSITION. They into four categories as shown in figure below:

1. I am Ok, you are Ok: This is an ideal life position. People feel happy and life is worth
living. Individual with this life position expresses confidence in his subordinates, work
with high level of delegation of authority, and believes in give and take.
2. I am OK, you are not OK: This is distrustful psychological life position taken by individual
who feel that others are wrong. They blame others for their failure.
3. I am not Ok you are Ok: This position is common to persons who feel powerlessness in
comparison to others. Persons with this life position always grumble for one thing or the
other.

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 4. I am not Ok you are not Ok: This is a desperate life position. This position is taken by
those people who lose interest in living. They feel that life is not worthy living at all.

One of these positions dominate person’s life. The desirable position is one which provides
adult-adult transaction i.e. I am ok you are ok. Other life positions are less mature and effective

4.6 Stroking
Stroking is an important aspect of transactional analysis. Stroking is an act of implying
recognition to other person. Stroking is recognition that a person gives to his subordinates for
good work done or even bad work done. Lack of stroking has an adverse psychological and
physiological effect on individual. Stroking is a basic unit of motivation that can be seen from
the following

1. The quantity and the quality of strokes serve as either positive or negative motivation for
employees
2. Good share of psychological satisfaction we get from work is from strokes available from
other persons.
3. We get strokes from the work itself

4.7 Psychological Games

Psychological games are played by individuals to fill up time or to provoke attention. For
example, if a manager feels he is not getting respect from other people then he might start
calling people for meetings and start finding unnecessary mistakes

Drama Triangle Scripts

Karpman has developed drama triangle scripts. He has suggested there are 3 roles that people
take when they play psychological games persecutor, victim, or rescuer

1. Persecutors are characterized by such people who make unrealistic rules, enforce rules
in cruel ways, and pick on little guys rather than people of their own size. Life position of
persecutor sis ‘I am Ok, you are not Ok’
2. Victims are people who provoke others to put them down, use them, and to hurt them;
send them helpless messages, forget conveniently, and act confused. Life position of
victim is ‘I am not ok, you are ok’
3. Rescuers are characterized by people who offer helpfulness to keep others dependent
on them, do not really help others and may dislike helping, and work to maintain the
victim role so that they can continue to play rescuer.

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 4.8 Benefits and Uses of Transactional Analysis
Transactional analysis is an approach toward understanding human behavior. Following are
some of the specific areas where transactional analysis can be applied

1. Develop Positive Thinking: TA is applied to bring positive actions from people because TA
brings positive approach towards life and hence positive actions.
2. Better Interpersonal Relationship: With the help of TA people can understand their own
personalities. It can help them understand why people sometimes respond as they do. With
the help of TA, a manager can understand when a cross communication occurs, and he can
immediately take steps to convert into complementary communication.
3. Motivation: Transactional analysis is basically applied to improve motivation of employees.
When applied, it satisfies the human needs. It helps to change management style from
theory X to Theory Y whose transformation takes place from parent – Child relationship to
transaction involving adult – adult relationship, from “I am Okay, you are not okay to I am
Okay – You are okay life positions
4. Organizational Development: TA can help in Organisation development process. Jongeward
has identified the role of TA in six areas of organisation development:
1. To maintain adult-adult transactions
2. To give an OK to the natural child meaning ignore the childish tendencies if they
perform well
3. To identify and untangle quickly crossed transactions
4. To minimize destructive game playing
5. To maximise encounters (intimacy)
6. To develop supportive systems, policies, and work environment.

TA can be compared with managerial grid of Blake and Mounton (discussed earlier in
course), a technique for adopting appropriate leadership styles and organisation
development. Various leadership styles may be described in terms of life positions, ego
states, and transactions.

For example, the 9—1 manager uses parent-child transaction, the 1-9 manager acts from
child ego state, the 9—9 manager acts from adult ego and effectively makes use of parent
and child ego states. In the managerial grid, 9—9 style is the most desirable which
corresponds with adult-adult transaction which is best according to TA.

5 FIRO-B
According to William Schutz, who has coined the term FIRO – B (Fundamental Interpersonal
Relationship Orientation – Behavior), all human beings share some basic similarities which are
as follows

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 All People want to feel Significant Competent Likeable
All people have fear of Ignored Humiliated Rejected
being
All people have Inclusion Control Openness
behavior preferences
about

FIRO-B States when people interact with others, they look for satisfying three types of
interpersonal needs: inclusion, control, and openness. These needs are common to all through
their intensity may differ from person to person. These needs are follows

1. Inclusion
2. Control
3. Openness

Relevance of FIRO-B

1. Interpersonal Effectiveness: to develop skills which help people to attend mutual

relationships
2. Team Building: to help members overcome barriers and progress to higher levels of
performance
3. Relationship building: to ensure that employees get most out of working relationship by
helping them understand how to meet the interpersonal needs of customers and
stakeholders
4. Conflict Management: to help improve skills for assessing different types of conflict and
applying emotionally intelligent strategies

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 Summary Sheet
Conflict
Important Points

1. This Summary Sheet shall only be used for Quick Revision after you have read the
Complete Notes
2. For Building Concepts along with examples/concept checks you should rely only on
Complete Notes
3. It would be useful to go through this Summary sheet just before the exam or before
any Mock Test
4. Questions in the exam are concept based and reading only summary sheets shall not
be sufficient to answer all the questions

1.1 What is Conflict?

Organizational Conflict or otherwise known as workplace conflict, is described as the state of
disagreement, or misunderstanding, resulting from the actual or perceived dissent of needs,
beliefs, resources, and relationship between the members of the organization.

1.2 Reasons/Factors for Organizational Conflict

1. Unclear Responsibility
2. Interpersonal Relationship
3. Scarcity of Resources
4. Conflict of Interest
5. Managerial Expectations
6. Communication Disruption
7. Misunderstanding
8. Structure: The structure of the organization is also responsible for conflict. Two friendly
people put into different departments which compete for resources will result into person
competing with each other

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 9. Personal Variables: Our last category of potential sources of conflict is personal variables,
which include personality, emotions, and values.

1.3 Positive and Negative Aspects of Conflict

1. Traditionally, it was considered something which will have adverse impact on the
organization. Conflicts shall be avoided
2. Human relations view of conflict also believed that conflict is harmful. But it believed that
conflict is natural occurrence in all the organizations. Conflicts must be resolved amicably
3. Interactionist View of Conflict: This approach encourages conflict as it helps in better
decision making, creativity and innovation

In line with above views, we may lay down both positive and negative views of the conflict

1.3.1 Positive Aspects of Conflict

1. Creates Change: Conflict accelerates change in an organization, especially in small
businesses, where it is easy to formulate and implement new policies.
2. Innovation: Conflict that results in healthy competition cultivates innovation and
inventiveness among employees
3. Cohesiveness: Conflict brings cohesiveness in group when conflicts are between 2 groups
4. Relieving mental tension: Conflicts may be used as a device to overcome many frustrations
and tensions. People may express their frustration and tension by means of conflicts.
5. Overcoming shortcomings: Conflicts indicate shortcomings in the existing system of
organizational setting and functioning. Management is made aware of such shortcomings
through conflict
6. Effective Decision Making: Conflict serves to “discourage premature group decision
making,” forcing participants in the decision-making process to explore the issues and
interests at stake

Real Life Example

Google is known to have a culture where employees are encouraged to challenge the existing
views of anyone, even their superiors. This not only makes employee satisfy with their work but
also encourages innovation and creativity at google which makes it a great organization

1.3.2 Negative Aspects of Conflict

1. Waste of time and Resources:
2. Conflict as Cost to Organization: Many managers in organizations tend to create confusion
as a cover for the expansion of their empire. He creates dissent and competition
deliberately among employees to ensure that he will be bought as an arbiter at critical time.
However, this may become cost on the part of the organization
3. High tension among employees leading to low productivity

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 4. Discontent among employees leading to high attrition
5. Goal displacement: The goals initially set are not pursued and instead some other goals
which are not in the interest of the organization are pursued

Real Life Example

The conflict between Mukesh Ambani and Anil Ambani resulted in loss of wealth for
shareholders. Many of their subsidiaries like reliance telecom went bankrupt due to conflict
between the brothers

2 Types of Conflict – Based on Locus of Conflict

In any organization conflict is very much visible and it is part and parcel of being part of a team.
One way to categorize conflict is based up on the Locus of conflict. Based on locus, conflict is
classified into Individual level, Group Level and Organizational Level

2.1 Individual level Conflict

The individual level conflict is categorized into following types

1. Intrapersonal Conflict or Intra-individual conflict

2. Interpersonal conflict or inter-individual

2.1.1 Intrapersonal Conflict

Intrapersonal conflict occurs within an individual. The experience takes place in the person’s
mind. Hence, it is a type of conflict that is psychological involving the individual’s thoughts, values,
principles, and emotions. It leads to restlessness and uneasiness or can even cause depression. For
example, sometimes we are not sure what career path we should follow leading to conflict with in
us

Intrapersonal conflict arises due to Role Conflict or Goal Conflict

Goal Conflict

Incompatible or competing goals also lead to intrapersonal conflict. Incompatible goals or

competing are of following types

1. Approach-Approach Conflict: Such a conflict arises when a person must choose from two or
more equally attractive goals. He can choose only one goal at the cost of another.

2. Avoidance-Avoidance Conflict: Such a conflict occurs when a person must choose between
two alternatives each with negative aspects. Both the alternatives are equally unattractive.

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 3. Approach-Avoidance Conflict: In this type of conflict, an individual is faced with an alternative
that has both positive and negative consequences.

The general approach of the management should be to resolve goal conflicts by building
compatibility between personal and organizational settings

Role Conflict

Role conflict occurs when a person in a role is not able to respond the expectations of other
persons. For instance, a supervisor is caught between the conflicting expectations of
management and the workers and might not be able to perform his duties.

Role conflict in an individual occurs in following situations

1. When a person in a role is not able to respond the expectations of other persons. It has been
discussed in above paragraph
2. When the individual occupies a role, which is not consistent with the images, needs and
expectations. For example, a manager in an organization wants a work profile which
involves logical and rational thinking but all he is given is a plain coordination work
3. Another reason for role conflict is role overload. In role overload, the managers may delegate
too much work but the time to that is less. This leads to role conflict in the subordinates

Effect of Role Conflict: Role conflict can lead to organizational inefficiency. The management
must try to make sure that role conflict must be avoided

2.1.2 Interpersonal Conflict

Interpersonal conflict refers to a conflict between two individuals. This occurs typically due to
how people are different from one another. We have varied personalities which usually results
to incompatible choices and opinions. Interpersonal conflict is of 2 types

I. Vertical Conflict, also known as hierarchical conflict, arises between superior and
subordinates.
II. Horizontal conflicts involve a disagreement between two people at the same level in the
same department or different department.

Causes of Interpersonal Conflict

There are two major reasons for interpersonal conflict in an organization: Personal and
situational

1. Nature of person: Following factors are important in this context

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 a. Ego states: Ego states are person’s way of thinking, feeling, and behaving at any time.
If ego states are nor complementary, then conflicting situation will arise. Ego states
are discussed in chapter “Emotional Intelligence”
b. Value system: People having different dominant value systems may develop conflict
in their interaction.
c. Socio-cultural factors: People coming with socio-cultural backgrounds may develop
conflict among themselves.

2. Situational Variables: There may be several situational factors which also generate
interpersonal conflict.
a. Interest conflict: People always look for their self-interest in different situations.
Due to this self-interest opposing views come into picture
b. Role ambiguity: Role ambiguity can also lead to inter-role conflict if the interactions
between various roles is not defined. Thus, organization structure itself may be
responsible for such types of conflicts

2.2 Group level Conflict

Conflict may be at group level. A group constitutes two or more persons who interact in such a
way that each person is influenced by others. Group level conflict may be of two types

1. Intragroup conflict
2. Intergroup conflict

2.2.1 Intra group Conflict (Infighting)

Intragroup conflict is a type of conflict that happens among individuals within a team. It arises
from interpersonal disagreements (e.g., team members have different personalities which may
lead to tension) or differences in views and ideas. Such differences impact the choice of goals
or methods of achieving goals

2.2.2 Inter group Conflict

Intergroup conflict takes place when a misunderstanding arises among different teams within
an organization. It may happen between two groups or departments. Reasons for intergroup
conflict are

1. Goal Incompatibility
2. Resource Sharing:
3. Task Relationship: The relationships between different teams can be dependent or
interdependent. A dependent relationship may result into one group having the ability to

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 dictate or unilaterally determine the outcome of the interaction. The conflicts arise in such
situation because one group exceeds its authority.
4. Absorption of uncertainty: Every organization faces uncertainty. In order to manage
uncertainty, organizations assign certain groups or individuals to deal with it. These groups
will have the power to frame rules or to take decisions for other groups. For example,
accounting department may prescribe the rules for travelling expenses to be incurred by
the marketing department. The rules framed by accounts department may not meet the
expectations of people in marketing department. Thus, conditions for conflict arise
5. Attitudinal sets: The set of attitudes that members of various groups hold towards each
other can be cause and a consequence of the nature of their relationship.

2.3 Organizational level Conflict

The conflict and individual and group level take place within the organizations. The conflict at
organization level can be of 2 types

1. Intra-Organizations: The intra organizational conflict is the one which takes place within
the organizations. The conflicts at individual level and group level discussed earlier are
examples of Intra-Organization conflict
2. Inter-Organizational: The inter organizational conflict is between two organizations but
this is not in scope of our discussion. The example would be conflict between Jio, and
Airtel related to various aspects when Jio introduced low rates to acquire airtel
customers

3 Other Types of Conflict – Based on Effects and Type of Disagreement

We discussed that based on locus, the conflict can be categorized into Individual level conflict,
Group level conflict and Organizational Level Conflict. There are other ways to categorize
conflict

3.1 Based on Effects

Contemporary perspectives differentiate types of conflict based on their effects – Functional
and Dysfunctional Conflict. Functional Conflict: Functional conflict supports the goals of the
group, improves its performance, and is thus a constructive form of conflict. Dysfunctional
Conflict: Conflict that hinders group performance is destructive or dysfunctional conflict. A
highly personal struggle for control in a team that distracts from the task at hand is
dysfunctional

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 3.2 Based on Type of Disagreement
One means of understanding conflict is to identify the type of disagreement, or what the
conflict is about. Although each conflict is unique, researchers have classified conflicts into
three categories: task, relationship, or process

1. Task conflict relates to the content and goals of the work.

2. Relationship conflict focuses on interpersonal relationships.
3. Process conflict is about how the work gets done.

4 Stages of Conflict
There can be 5 stages in conflict:

Latent conflict: Each conflict begins with latent conflict. This is the stage in which the conflict has
not taken a shape, therefore it is not apparent. It may occur in subconscious mind.

Perceived Conflict: Conflicts may sometimes arise even if no conditions of latent conflict exist.
This is the stage when one party perceives the other to be likely to thwart or frustrate his or her
goals.

Felt Conflict: Felt conflict is the stage when the conflict is not only perceived but actually felt and
recognized.

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 Manisfest Conflict: Manifest conflict is the stage when the two parties engage in behaviors
which evoke responses from each other.

Conflict Aftermath: If the conflict is genuinely resolved to the satisfaction of all participants, the
basis for a more cooperative relationship may be laid. If the conflict is merely suppressed, the
latent conditions for conflict may be aggravated and conflict may again arise in more serious
form

5 Process of Conflict
Another way to look process of conflict is like the way shown below. This is almost similar to
stages of conflict discussed earlier

5.1 Stage I: Potential opposition or Incompatibility

The first stage of conflict is the appearance of conditions—causes or sources— that create
opportunities for it to arise. These conditions need not lead directly to conflict, but one of them
is necessary if it is to surface. We group the conditions into three general categories:
communication, structure, and personal variables.

5.2 Stage II: Cognition and Personalization

If the conditions cited in Stage I negatively affect something one party cares about, then the
potential for opposition or incompatibility becomes actualized in the second stage.

People may perceive conflict, or they may ger personal about conflict leading to felt conflict

5.3 Stage III - Intentions

Intentions intervene between people’s perceptions and emotions, and their overt behavior.
Many conflicts escalate simply because one party attributes the wrong intentions to the other.
There are 5 conflict handling intentions which we have already discussed earlier

1. Competing
2. Collaborating
3. Avoiding
4. Accommodating
5. Compromising

5.4 Stage IV – Behaviors

Stage IV is a dynamic process of interaction. For example, you make a demand on me, I respond
by arguing, you threaten me, I threaten you back, and so on.

Intentions that are brought into a conflict are eventually translated into behaviors.

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 1. Competing brings out active attempts to contend with team members, and more
individual effort to achieve ends without working together.
2. Collaborating creates investigation of multiple solutions with other members of the
team and trying to find a solution that satisfies all parties as much as possible.
3. Avoidance is seen in behavior like refusals to discuss issues and reductions in effort
toward group goals.
4. People who accommodate put their relationships ahead of the issues in the conflict,
deferring to others’ opinions and sometimes acting as a subgroup with them.
5. Finally, when people compromise, they both expect to (and do) sacrifice parts of their
interests, hoping that if everyone does the same, an agreement will sift out

5.5 Stage V – Outcome

The action–reaction interplay between conflicting parties creates consequences. These
outcomes may be functional if the conflict improves the group’s performance, or dysfunctional
if it hinders performance

Functional Outcome: Low or moderate level of Conflict is constructive when it improves the
quality of decisions, stimulates creativity and innovation, encourages interest and curiosity

Dysfunctional outcomes: The destructive consequences of conflict on the performance of a

group or an organization are generally well known: Among the undesirable consequences are
poor communication, reductions in group cohesiveness, and subordination of group goals to
the primacy of infighting among members

6 Managing Conflict
The management within an organization should function in such a way to minimize conflict. There
may be two measures to minimize conflict. These are Preventive Measures and Curative Measure

6.1 Preventive Measures for Managing Conflict

In the preventive measures, management tries to create an environment so as to minimize conflict.
Following preventive measures can be taken

1. Development of Effective Leadership:

2. Participative Decision making:
3. Effective two-way communication:
4. Improvement in Interpersonal relationship:
5. Establishing Common Goals:
6. Changing Structural Arrangement: The same is discussed in next section

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 6.1.1 Preventive Measures for Managing Conflict – Changing Structural Arrangement
In some cases, the change in organization structure or some part of it can reduce conflict in the
organization. The following structural arrangement may lead to reduced occasions for emergence of
conflict

1. Reduction in Interdependence: The basic reason for conflict is interdependence among groups or
people. Less such interdependence less will be the amount of conflict among them.
2. Reduction in shared resources
3. Exchange of Personnel: Personnel of conflicting groups may be exchanged for a specified period can
also help in reducing conflict. In a research, it was found that exchange of people reduces conflict
because when positions are exchanged it helps in greater understanding of others perspective
4. Creation of Special Integrators: To resolve conflict, organization may create provisions for special
integrators who may manage interdependence of various groups so that unresolved matters can be
solved through them.
5. Reference to superior’s authority: If the issue cannot be resolved through organizational members,
then they may take the issue to a common superior who resolves the conflict by deciding.

6.2 Curative Measures (Conflict Resolution)

Kenneth Thomas and Ralph Kilmann developed five conflict resolution strategies that people
use to handle conflict. They differ based on degree of cooperativeness and assertiveness as
shown in above figure.

1. Avoiding or Repression of Conflicts: Avoiding is when people just ignore or withdraw from
the conflict. While this might seem easy to accommodate for the facilitator, people are not
really contributing anything of value to the conversation and may be withholding
worthwhile ideas. When conflict is avoided, nothing is resolved.

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 2. Competing (Confrontation): Competing is used by people who go into a conflict planning to
win. They are assertive and not cooperative. This method is characterized by the
assumption that one side wins and everyone else lose.

3. Accommodating: Accommodating is a strategy where one party gives in to the wishes or

demands of another. They are being cooperative but not assertive. This may appear to be a
gracious way to give in when one figures out s/he has been wrong about an argument. It is
less helpful when one party accommodates another merely to preserve harmony or to
avoid disruption.

4. Collaborating (Smoothing or Defusion of Conflict): A group may learn to allow each

participant to contribute with the possibility of co-creating a shared solution that everyone
can support. Differences are suppressed and similarities are accentuated.

5. Compromising or Containment of Conflict: Another strategy is compromising, where

participants are partially assertive and cooperative. The concept is that everyone gives up a
little bit of what they want, and no one gets everything they want. Compromise is reached
through bargaining or through mediation and arbitration. This is the best strategy to
resolve conflict between management and workers

Outcomes of Conflict Resolution

A basic issue which needs to be understood is the outcome of conflict resolution. Out of the 4
possible outcomes of conflict resolution, win-win situation is ideal as both the parties feel
satisfied. In lose-lose outcome, both the parties feel cheated. In other two alternatives, only
one party wins at the cost of other, and the conflict becomes a zero-sim game. Such a situation
may generate more conflicts in future.

1. Collaboration is a win-win situation

2. Avoiding is a lose-lose situation
3. Accommodating is lose for one party and win for another party
4. Competing is win for one party and loss for another party

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 5. Compromise is mini win and min lose for both the parties

6.3 Conflict Stimulation

Sometimes even the conflict needs to be stimulated because conflict has some positive aspects
too. The techniques for conflict stimulation are

1. Communication: Using ambiguous or threatening messages to increase conflict levels.

2. Bringing in outsiders: Adding employees to a group whose backgrounds, values,
attitudes, or managerial styles differ from those of present members.
3. Restructuring the organization: Realigning work groups, altering rules and regulations,
increasing interdependence, and making similar structural changes to disrupt the status
quo.
4. Appointing a devil’s advocate: Designating a critic to purposely argue against the
majority positions held by the group.
5. Many other techniques such as establishing incompatible goals, increase in shared
resources, delegating responsibility without authority etc. will also stimulate conflic

7 Negotiation
Negotiation is a process in which 2 or more parties attempt to reach agreement on issues on
which they have differences. In negotiation 2 types of bargaining is possible

1) Distributive Bargaining
2) Integrative Bargaining

7.1 Distributive Bargaining

Distributive bargaining is a competitive bargaining strategy in which one party gains only if the
other party loses something. It is used as a negotiation strategy to distribute fixed resources
such as money, resources, assets, etc. between both the parties. Distributive bargaining is also
known as zero-sum negotiations because the assets or the resources which need to be
distributed are fixed.

Each party has a target point in terms of what it wants to achieve. Each party also has a
resistance (walkaway) point which marks the lowest outcome that is acceptable

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 7.2 Integrative Bargaining
Integrative bargaining (also called "interest-based bargaining," "win-win bargaining") is
a negotiation strategy in which parties collaborate to find a "win-win" solution to their dispute.
In terms of organizational behavior, integrative bargaining is preferable to distributive
bargaining because the former builds long term relationship and facilitates working together in
the future.

Difference between Distributive and Integrative Bargaining

7.3 Other Bargaining Strategies

Productivity bargaining involves both parties negotiating around productivity and pay.

Composite bargaining refers to a negotiation that focuses on several elements that are not
related to pay. They are generally related to employee welfare and job security.

Concessionary bargaining is based on unions giving back previous benefits to the employer. For
instance, trade unions may agree to lower wages in return for job security. This may come
during an economic decline when job security is more important

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 7.4 Integration of Two Bargaining Strategies Within a Negotiation Process

8 Negotiation Process
While there are many approaches to negotiation tactics, there are five common steps that most
effective negotiations follow to achieve a successful outcome:

1. Prepare and Planning: Negotiation preparation is easy to ignore, but it is a vital first stage of
the negotiating process. To prepare, research both sides of the discussion, identify any
possible trade-offs, determine your most-desired and least-desired possible outcome.
Prepare your BATNA (“best alternative to a negotiated agreement”).
2. Definition of Ground Rules: You are ready to define with the other party the ground rules
and procedures of the negotiation itself. Who will do the negotiating? Where will it take
place? What time constraints, if any, will apply? To what issues will negotiation be limited
3. Clarification and Justification: When you have exchanged initial positions, you and the other
party will explain, amplify, clarify, bolster, and justify your original demands.
4. Bargain and problem-solve: This step is the meat of the process of negotiation, during which
both sides begin a give-and-take. After the initial first offer, each negotiating party should
propose different counteroffers for the problem, all the while making and managing their
concessions.
5. Conclude and implement: Once an acceptable solution has been agreed upon, both sides
should thank each other for the discussion, no matter the outcome of the negotiation;
successful negotiations are all about creating and maintaining good long-term relationships.
Then they should outline the expectations of each party and ensure that the compromise
will be implemented effectively. This step often includes a written contract and a follow-up
to confirm the implementation is going smoothly.

8.1 Individual Differences in Negotiation Effectiveness

Are some people better negotiators than others? The answer is complex. Four factors influence
how effectively individuals negotiate: personality, mood/ emotions, culture, and gender.

1. Personality Traits in Negotiations: Most research has focused on the Big Five trait of
agreeableness and extraverted. Agreeable individuals reacted more positively and felt
less stress in integrative negotiations than in distributive ones. Similarly, in distributive
negotiations, where giving away information leads to a disadvantage, extraverted
negotiators do less well because they tend to share more information than they should

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 2. Moods/emotions in negotiations: Do moods and emotions influence negotiation? They
do, but the way they work depends on the emotion as well as the context. A negotiator
who shows anger can induce concessions, for instance, because the other negotiator
believes no further concessions from the angry party are possible. Anxiety also appears
to have an impact on negotiation as anxious negotiators expect lower outcomes,
respond to offers more quickly.
3. Culture in Negotiations: Culture also impacts the Negotiations. It appears that people
generally negotiate more effectively within cultures than between them.
4. Gender Differences in Negotiation: It seems fairly clear that men and women negotiate
differently, men and women are treated differently by negotiation partners, and these
differences affect outcomes.

8.2 Negotiating in Social Context

We have mostly been discussing negotiations that occur among parties that meet only once,
and in isolation from other individuals. However, in organizations, many negotiations are open-
ended and public. When you are trying to figure out who in a work group should do a tedious
task, negotiating with your boss to get a chance to travel internationally, there is a social
component to the negotiation. To really understand negotiations in practice, then, we must
consider the social factors of reputation and relationships.

1. Reputation: When it comes to negotiation, having a reputation for being trustworthy

matters. In short, trust in a negotiation process opens the door to many forms of
integrative negotiation strategies that benefit both parties
2. Relationships: There is more to repeated negotiations than just reputation. The social,
interpersonal component of relationships with repeated negotiations means that
individuals go beyond valuing what is simply good for themselves and instead start to
think about what is best for the other party and the relationship as a whole

8.3 Third Party Negotiations

Occasionally, individuals or group representatives reach a stalemate and are unable to resolve
their differences through direct negotiations. In such cases, they may turn to a third party to
help them find a solution. There are three basic third-party roles: mediator, arbitrator, and
conciliator.

1. A mediator is a neutral third party who facilitates a negotiated solution by using

reasoning and persuasion, suggesting alternatives, and the like.
2. An arbitrator is a third party with the authority to dictate an agreement. Arbitration can
be voluntary (requested by the parties) or compulsory (forced on the parties by law or
contract). The big plus of arbitration over mediation is that it always results in a
settlement. Whether there is a downside depends on how heavy handed the arbitrator

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 appears. If one party is left feeling overwhelmingly defeated, that party is certain to be
dissatisfied and the conflict may resurface at a later time.
3. A conciliator is a trusted third party who provides an informal communication link
between the negotiator and the opponent. Though conciliators in literal sense just have
the responsibility to act as communication link but in practice, conciliators typically act
as more than mere communication conduits. They also engage in fact-finding, interpret
messages, and persuade disputants to develop agreements

9 Implications for Managers

1. Distributive bargaining can resolve disputes, but it often reduces the satisfaction of one or
more negotiators. Integrative bargaining, in contrast, tends to provide outcomes that satisfy
all parties and build lasting relationship
2. You can build trust by accommodating others when you find you are wrong, when you need
to demonstrate reasonableness, when other positions need to be heard.
3. Consider compromising when goals are important but not worth potential disruption, when
opponents with equal power are committed to mutually exclusive goals, and when you need
temporary settlements to complex issues.
4. Do not ever avoid conflict
5. Compete when something large is at stake, other party is not compromising, and you seem
to have equal power to take the fight till the end

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 Summary Sheet
Organizational Change
Important Points

1. This Summary Sheet shall only be used for Quick Revision after you have read the
Complete Notes
2. For Building Concepts along with examples/concept checks you should rely only on
Complete Notes
3. It would be useful to go through this Summary sheet just before the exam or before
any Mock Test
4. Questions in the exam are concept based and reading only summary sheets shall not
be sufficient to answer all the questions

1 Introduction to Organizational Change

In an organization, the changes keep on happening. So, it becomes important for an
organization to know how to cope up with the change or how to incorporate change to achieve
its organizational objectives

1.1 Nature of Organizational Change

The term change refers to alteration in a system whether physical, biological, or social.
Organisation change is defined as “any alteration in one or more elements of the
organisation”

Organizational change has following features

1. When change occurs in the organization, it disturbs the old equilibrium necessitating the
development of new equilibrium. The type of new equilibrium depends on the degree of
change and impact on the organization
2. A change may impact the whole organization, some parts of the organization may be
affected more, others less; some parts are affected directly, others indirectly
3. Organizational change is a continuous process. However, some changes which are minor
type, may be absorbed by the existing equilibrium, others, which are major ones, may
require special change efforts

2 Factors Affecting Organizational Change

The factors which result in organizational change are grouped into external and internal factors

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 2.1 External Factors
External forces for change derive from the organisation’s general and task environments.
Following are the external factors affecting organizational change

1. Technological Changes: When an organization adopts a new technology, its work structure
is affected, and a new equilibrium has to be established as technology has impact on
organization structure and processes.

2. Changes in Market conditions: Every organization has to face competition in the market.
There may be two types of forces which may affect the competitive position of an
organization – competitors and buyers. Any change in these forces may require suitable
changes in the organization. For example, Nokia which was market leader in mobile
phones lost its market share because it could not shift to changed consumer preference
for smart android-based phones

3. Social Changes: Social changes take place because of several forces like education,
urbanization, feeling of autonomy etc. Social changes impact the people’s aspirations, their
needs, and their way of thinking. Therefore, there is a need for making adjustment in the
organization working so that it matched with the people. The aspirations and thinking of
customers are also changing. Example could be increasing awareness of being
environmentally friendly. Now people are increasingly looking for green products

4. Social Media Trends: Consumers who are otherwise strangers now meet and share
product information in chat rooms and blogs. Organizations must therefore continually
adjust product and marketing strategies to be sensitive to changing social trends

5. Political and Legal Changes: Any change in political and legal factors may affect the
organizational operation. Government regulations on health, safety, and the conduct of
business affect an organisation.

2.2 Internal Factors

Besides external factors, any change in organization’s internal factors may also necessitate
change. Such a change is required because of two reasons – Change in managerial personnel
and deficiency in existing organizational practices

1. Change in Management Personnel: Changes in managerial personnel takes place very

often. Each new manager brings his own ideas and way of working in the organization. The
relationships, more particularly informal ones, change because of change in managerial

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 personnel. Moreover, attitudes of existing personnel change over the period of time. The
result is that organization has to change accordingly.

2. Deficiency in existing organizational structure: Sometimes change is necessary because of

deficiency in present organizational practices. These deficiencies may be in form of
a. lack of uniformity in policy decisions
b. undesirable span of management
c. large number of managerial levels
d. lack of coordination between various departments
e. obstacles in communication
f. lack of cooperation between line and staff and so on

2.3 Change Effect of Change

Quiet often, a change touches a sequence of related and supported changes. This is called
domino effect. To adjust to the change, organization has to modify many aspects of the
organization since all the aspects are interrelated. This is what system approach to
organizational change also suggests. For example, of an organization is not able to face
competition in the market because of its old technique of production, the only alternative to
the organization is to change itself according to the needs of the hour. In this process

I. the organization will acquire suitable technology.

II. When this technology is put into operation, it will change the job content, old jobs being
replaced by new jobs.
III. This requires change in people skills because they need to be trained on new machines.
IV. The new job content will also change the organization structure.
V. The organization structure will impact the inter-relationship between people

So, you can see, how the whole system has changed due to this change

2.4 Reactive and Proactive Change

A reactive change is undertaken when it is pressed by some factors, either external or internal
to the organization. Most of the organizations which believe in traditional pattern of working
often go for reactive change. Proactive change is brought out of the anticipation of the likely
behavior of the forces having impact on the organization. Such organizations are known as
prospectors which constantly interact with the environment to identify new opportunities and
threats. up

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 3 Planned Change
Planned change involves preparing the total organization or a major portion of it, to adapt to
significant changes in the organization’s goals and way of its working. In such changes, alterations
are made in structure, technology, task, and people of the organization.

1. Technology related changes refers to inventions and techniques which affect the way of
doing work, that is, designing, producing, and distributing products.
2. Task Related changes: Tasks may be designed in number of ways ranging from job
simplification to job enrichment.
3. Structure-related changes: Refers to changes in structure do the organization like
i. Changing number of hierarchy levels
ii. Changing span of management
iii. Changing Organization structure e.g., from functional to matrix structure
iv. Changing line-staff and functional authority

When structural changes are affected, these may affect the formal reporting relationships,
formal interaction pattern and consequently informal relations

4. People-Related Changes: Change in any type as pointed out above need change in the
people of the organization in terms of skill and behaviour. For example, if method of
production is changes from manual to automated then it will require change in the skills of
people to use automated technology.

3.1 Objectives of Planned Change

Objectives for such change may be as given below

1) Environmental Adaptation: One of the objectives of planned change is to adapt to changes

in environment. Simply because of this reason, every organization has adaptive subsystem,
such as research and development department, marketing research department etc.

2) Individual Adaptation: The organization cannot achieve the objective of environmental

adaptation unless some basic internal adaptation is achieved. These internal factors may be
individuals, organization structure, technology, and task. Individuals are the first in this
context. Such changes may be required in their attitudes, communication system, way of
behaving, leadership, work styles etc.

3) Structural Adaptation: Organization structure of pattern of relationships among various

positions and among various position holders. Structural adaptation involves changing the
internal structure of the organization.

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 4) Technological Adaptation: In order to cope with changed environment which may include
technological factor as well, the organization has to incorporate new technology.

5) Task Adaptation: Since there may be many new types of jobs, the existing job performing
techniques may not be suitable. Moreover, there may be new job load because of job
enlargement. In such a case, a new equilibrium has to be found which matches people with
jobs. Tasks may be redefined through simplification, job enlargement or job enrichment

3.2 Process of Planned Change

A major organizational change requires considerable planning. The change is successful it is
taken in planned way which proceeds in a sequential form as shown below

1. Identifying need for change: The first basic step is need for identifying need for change. For
example, the entry of new competitor may trigger the need for changed.
2. Elements to be changed: This step will further analyse the problem and try to come up with
elements that need to be changed. By elements here we mean – Structure, task, people, and
technology.
3. Planning the change: Planning for change basically means deciding on who will bring the
change, when to bring the change and how to bring the change.
4. Assessing change forces: In an organization there would always be some forces in favour of
the change and some forces opposing the change to maintain equilibrium. This has been
referred to as ‘field of forces’ by Kurt Lewin. Field of forces states that in any situation, there
are both driving and restraining forces which influence any change that may occur. Driving
forces are those which affect a situation by pushing it in a particular direction; they tend to
initiate a change and keep it going. Restraining forces act to restraint change or to decrease

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 the driving forces. Equilibrium is reached when some of driving forces equals sum of
restringing forces as shown in below figure

Management must push the driving forces or convert restraining forces into driving forces

5. Actions for Change: For explaining the process of organizational change, Lewin used the
analogy of how an ice block changes its shape to transform into a cone of ice through the
process of unfreezing

i. Unfreezing: This stage is about people shed their old mindset or their old behaviour
to accept the change.
ii. Changing: In this stage the individuals learn new behaviour. This stage can also be
regarded as the stage of Transition or the stage of actual implementation of change.
iii. Refreezing: During this stage, the people move from the stage of transition (change)
to a much more stable state which we can regard as the state of equilibrium. The

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 stage of Refreezing is the ultimate stage in which people accept or internalize the
new ways of working.

6. Feedback: Management of change requires feedback and follow up actions to ensure

that change programme is progressing in right direction without producing any
dysfunctional effect.

4 Human Response to Change

There are 3 possible alternatives of human response to change

1. Resistance: People Resist the change when they feel change will affect them unfavourably.
2. Indifference: Indifference means people do not react to the change either in positive or
negative way. The reason may be that either they are unable to understand the change, or
they feel that the change has nothing to do with them.
3. Acceptance: People accept the change when they feel change will affect them favourably.

4.1 Resistance to Change

Various factors responsible for resistance to change can be identified in the context of
individual and organizational factors

Individual Factors

1. Problem of Adjustment: When equilibrium is disturbed, we react negatively. Change

makes us leave our comfort zone and therefore it presents various difficulties due to which
we react negatively to change
2. Economic Reasons: People resist change if they feel it would hit them economically like
reduced salary, delayed promotion etc.
3. Obsolescence of Skills: Due to change some skills might become obsolete, therefore
triggering a fear of job loss. Thus, people who possess old skills will resist such change.
4. Emotional Factors: Sometimes people react emotionally to change because of their
feelings, emotions, and attitudes.
5. Group Norms: People also resist change because the group to which they belong resists it.
Though each person interprets change differently, but often he expressed it through group.
He follows group norms.

Organizational Factors

Major organizational factors for resistance to change are as follows

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 1. Threat to power and Influence: When people at the top consider change as potential threat
to their position and influence, they resist it.
2. Resource Constraints: Sometimes change is resisted because of lack of resources. Each
change requires some additional resources, so if organization is less on resources, it will not
be inclined to go for the change
3. Sunk Costs: Organization may also resist change because they have invested in fixed assets.
When change is incorporated, these assets become useless. Organization might not be ready
to discard such high-value assets.

4.2 Overcoming Resistance to Change

Since resistance to change emerges both at individual and group levels, efforts for overcoming
resistance to change should be made at both these levels.

Efforts at Individual Level

1. Education and Communication: One of the easiest techniques to overcome resistance to

change is to educate people, train them adopt change, counsel them, and communicate then
the various stages of change.
2. Participation and Involvement
3. Commitment: If there is strong resistance by a few members of the organization,
commitment to take part in change program may be taken in private from each member.
4. Leadership: Leadership is the process of influencing and supporting others to work willingly
to bring intended results He shall create a climate where people not only accept change, but
they are willing to propose changes

Efforts at Group Level

Efforts at group level for overcoming resistance to change are in two forms: Group contact and
group dynamics training for change

1. Group Contact: For overcoming resistance to change, a group itself should be point of
contact. Since all members of group cannot be contacted at the same time, some
representative member of the group can be contacted. During this contact, many issues of
change can be made clear like reasons for change, its benefits and how these benefits can be
shared by the organizational members.

2. Group Dynamics Training for Change: Group Dynamics for change provides help to get
acceptance for the change and its implementation. Such Training may be in form of role
playing, sensitivity training etc.

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 5 Change through Organizational Development
We earlier discussed how planned change is more suitable for the organization rather than a
haphazard change. In this section we shall discuss that how change through organizational
development helps in organizational improvement in planned manner

In organizational change, there is tendency of solving immediate problems being faced by the
organization through change efforts without taking care of how people will work in the changed
conditions. As a result, there is lack of diffusion of change in the organization. In order to
overcome this problem, a new approach to organizational change has emerged in the form of
organizational development which is systematic approach to launching and diffusing change in
the organization. Organization development has been defined as follows:

The main features of Organizational development are

1. Organizational Development is basically a planned change effort for overall Organizational

improvement.
2. The concept of comprehensive change is based on systems approach which suggests that
a change in any part of the organization has impact on other parts of the organization.
Therefore, these parts shall be changed simultaneously
3. It is a long-term change effort
4. Though Organizational development involves technological and structural changes, it
focusses is on changing people and nature and quality of their interpersonal relationship
5. It uses variety of techniques, known as OD interventions, to bring the desired change in
the organization.

5.1 Role of Organizational Development

Organizational Development, as long-term effort for organizational change, plays key role in
organizational change. It can be utilized to achieve the following results in the organization

1. To place emphasis on Humanistic value s and goals consistent with these values
2. Treat each human being as a complex person with complex set of needs important in his
work and personal life
3. To increase the level of trust and mutual emotional support among all organizational
members
4. To increase the level of enthusiasm and personal satisfaction at all levels of the
organization

5.2 Organizational Development Interventions

In organizational development, various types of interventions/techniques known as
organization development (OD) interventions are used. These techniques are relevant for

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 changing organizational members as individuals as well as group members, intergroup
relations, and total organization in terms of its culture and working philosophy. Let us discuss
these techniques

1. Sensitivity Training: Sensitivity training (also known as T-group, T stands for Training) is a
small group interaction process in the unstructured form which requires people to become
sensitive to other feelings in order to develop reasonable group activity.

2. Survey Feedback: Survey feedback is a method that proceeds with sequential activities
involving data collection, feedback of information, developing action plans based on
feedback and follow up. Survey feedback contributes in following manner. It generates great
amount of information efficiently and quickly which can be used in solving problems faced
by the organization and its members

3. Process Consultation: The basic content of process consultation is that the consultant works
with individuals and groups in the organization to help them learn about human and social
processes and to solve problems that stem from the process events.

4. Team Building: Team building refers to the various activities undertaken to motivate the
team members and increase the overall performance of the team.

5. Intergroup development: Intergroup development seeks to change the attitudes

stereotypes, and perceptions that groups have of each other. In intergroup development,
the focus is on intergroup behavior and relations.

6. Appreciative Enquiry: The AI process consists of four steps—discovery, dreaming, design,

and destiny—often played out in a large-group meeting over 2 to 3 days and overseen by a
trained change agent
a) Discovery sets out to identify what people think are the organization’s strengths.
Employees recount times they felt the organization worked best or when they
specifically felt most satisfied with their job
b) In dreaming, employees use information from the discovery phase to speculate on
possible futures, such as what the organization will be like in 5 year
c) In design, participants find a common vision of how the organization will look in the
future and agree on its unique qualities.
d) In design, participants find a common vision of how the organization will look in the
future and agree on its unique qualities

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 5.3 Change Agents
Any planned change need change agents. These are the persons who initiate change in the
organization. The change agents are of two types – external and internal

External Change Agents: The external change agent is not affected by organizational norms and
thus he is likely to introduce change on some rational basis. An external change agent may act
as catalyst sparking change within the system while remaining somewhat independent of it

Internal Change Agent: The internal change agents are more likely to act as agents for
implementing the change. The internal change agents may be of two types: Chief Executive and
other managements who act as change advisers

i. Chief Executive sponsors the change and provides leadership and support for its
success. His role as change agent is important during initially phase of the change
process when things are not clear.
ii. Change Advisors: A change adviser is responsible for bringing the change, these are the
people drawn from the organization to work as change agents on whole-time basis for a
specific period. They work in close harmony with the consultant.

6 Theories of Planned Change

Experts in organizational development and change often refer to three well-established models
of Planned Changed Development. These are:

1. Kurt Lewin’s Change Management Model

2. Action Research Model
3. Positive Model

Let us discuss these models as given below

6.1 Kurt Lewin’s Change Management Model: The Planned Approach to

Organizational Change
We have earlier discussed this in brief, we shall not discuss this model in detail.

Kurt Lewin’s Three Stages model or the Planned Approach to Organizational Change is one of
the cornerstone models which is relevant in the present scenar io. For explaining the process of
organizational change, he used the analogy of how an ice block changes its shape to transform
into a cone of ice through the process of unfreezing, changing, and Freezing. We have already
discussed this model earlier in this document

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 :

6.2 Action Research Model

The Action Research Model (ARM) was introduced by Kurt Lewin in the late 1930’s. As a social
scientist, his approach involved the researcher (OD practitioner /External change Agent) as a
social change expert who helps the client by supporting and conducting research to help
organizations bring about positive, sustainable change.

Action Research is a useful method for facilitating organizational change by collaborating and
involving the client in the entire process of diagnostic, problem identification, experiential
learning, and problem-solving process.

6.2.1 Advantages of Action Research Model

1. A Systematic Approach to Problem Resolution and Dealing with the Challenges of Business
2. Helps in Analysis of Issues and Developing the Interventions Accordingly
3. Facilitates a Learning Culture

4. Key Involvement of Senior Leaders and Various Stakeholders

5. Facilitates Collaboration
6. Results in Performance Improvement in all areas

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 6.3 Positive Model
The positive model focuses on what the organization is doing right. It helps members
understand their organization when it is working at its best and builds off those capabilities to
achieve even better results

5 Stages of Positive Model are:

Initiate the Inquiry

This first phase determines the subject of change. It emphasizes member involvement to
identify the organizational issue they have the most energy to address.
For example, members can choose to look for successful male-female collaboration (as
opposed to sexual discrimination), instances of customer satisfaction (as opposed to customer
dissatisfaction)

Inquire into Best Practices

This phase involves gathering information about the “best of what is” in the organization.
For example, If the topic is organizational innovation, then members help to develop an
interview protocol that collects stories of new ideas that were developed and implemented in
the organization. The interviews are conducted by organization members; the interview each
other and tell stories of innovation in which they have personally been involved.

Discover the Themes

In this third phase, members examine the stories, both large and small, to identify a set of
themes representing the common dimensions of people’s experiences.
For example, the stories of innovation may contain themes about how managers gave people
the freedom to explore a new idea, the support organization members received from their co-
workers, or how the exposure to customers sparked creative thinking.

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 Envision a Preferred Future
Members then examine the identified themes, challenge the status quo, and describe a
compelling future. Based on the organization’s successful past, members collectively visualize
the organization’s future and develop “possibility propositions”—statements that bridge the
organization’s current best practices with ideal possibilities for future organizing.

Design and Deliver Ways to Create the Future

The final phase involves the design and delivery of ways to create the future. It describes the
activities and creates the plans necessary to bring about the vision. It proceeds to action and
assessment phases like those of action research described previously.

6.4 Comparison Between These Models

1. According to Cummings and Worley (1997), all three models describe the phases by which
planned change occurs within organizations. However, there is an overlap in their emphasis
with regards to action used implement planned change being preceded by an initial stage
and succeeded by a concluding stage
2. All three approaches emphasize the application of behavioural science knowledge, involve
organization members in the change process to varying degrees, and recognize that any
interaction between a consultant and an organization constitutes an intervention that may
affect the organization
3. Lewin’s change model differs from the other two in that it focuses on the general process of
planned change, rather than on specific OD activities

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 4. The Lewin change model has attracted major criticisms. The main ones being that it: is top-
down and management-driven; is only fit for small-scale change projects
5. The action research model, unlike the Lewin model, is a closed-loop system; this means that
recycling through the process is the next stage after evaluation. This makes the action
research model favourable as a continuous planned change model. However, a cyclic process
such as this may present continuous costs to the organization and cause the organization not
to want to repeat the process. Action research is not a “quick fix” or a “patch up” for ailing
organizations in dire need of change.
6. The positive model is often orientated towards the future, and is not only concerned with
what is, but also what it should be, involving also judging and sanctioning proposed
solutions. Therefore, the positive model has the unique advantage of being future-oriented
and longer-term focused, rather than present-oriented like the other two models.

7 Other Theories of Change Management

In this section we shall discuss various other models related to change management apart from
discussed in above section. We are going to discuss about

1. McKinsey 7S Change Model

2. Kotter’s 8 step Model of Change
3. ADKAR Model of Change Management

7.1.1 McKinsey 7S Change Model

McKinsey 7S model was developed by Robert Waterman and Tom Peters. The model is a
powerful tool for assessing and analysing the changes in the internal situation of an
organization. The McKinsey 7 S model refers to the seven key interrelated or integrated
elements of an organization which are subdivided into hard and soft elements:

The Hard elements are within the direct control of the management: 1. Strategy. 2. Structure
3. Systems.

The Soft elements are less tangible and are difficult to be defined and identified: 4. Shared
Values 5. Style 6. Staff 7. Skills

As per the below diagram, the shared values located at the centre of the model influence all the
other elements of the model which are interconnected and interrelated.

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 Advantages of 7S Model:
• This model offers ways and methods to understand an organization and get a deep
insight into the way it works.
• This model integrates both the emotional as well as the practical components of change
to create ways to enable employees deal with transition easily.
Disadvantages of 7S Model:
• Since all the factors are interrelated and interdependent on one another, the failing of
one-part means failing of all and this is the greatest disadvantage of this model.

7.1.2 Kotter’s 8 step Model of Change

John Kotter (1996), in his book “Leading Change”, introduced 8 Step Model of Change on the
basis of research of 100 organizations which were going through a process of change. 8 Stages
of Change are as follow:

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 1. Create urgency – This step involves creating a sense of urgency among the people

2. Form a powerful coalition –Getting right people on the team by selecting a mix of skills,
knowledge.

3. Create a vision for change – This stage is related to creating the correct vision

4. Communicate the vision – Communication with people regarding change and its need.

5. Get things moving (Empower Action) – In order to get things moving or empower action, one
needs to get support, remove the roadblocks, and implement feedback in a constructive way.

6. Create Quick Wins (Focus on short term goals) – Focusing on short term goals.

7. Build on the Change (Do not give up) –not to give up while the process of change management
is going on.

8. Make it Stick (Incorporate change) – Besides managing change effectively, it is important to

reinforce it.

Advantages of Kotter’s Model:

• It is an easy step by step model which provides a clear description and guidance on the entire
process of change and is relatively easy for being implemented.

Disadvantages of Kotter’s Model:

• Since it is a step-by-step model, skipping even a single step might result in serious problems. The
process is quite time consuming.

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 7.1.3 ADKAR Model of Change

Former engineer and change manager, Jeff Hiatt developed the ADKAR Model. The primary
purpose of this model is not to focus on a set of steps, instead a group of goals that leaders
should try to hit.

The ADKAR model is popular for its people-focused approach to change management. It
helps facilitate change on an individual level since change is often less about the changes
themselves and more about people’s reactions to them. ADKAR is an acronym for:
• Awareness: Awareness of the need to change:
• Desire: Desire to participate in and support the change:
• Knowledge: Knowledge of how to change: Tell employees what they need to know.
• Ability: Ability to implement the change
• Reinforcement: Reinforcement to sustain the change

Limitations of ADKAR Model: This model is built for incremental change and has a narrow
focus. If leaders wanted to make a macro-level change or were not exactly sure of how deep
they needed to go with transitions, this method would probably not get the job done

Advantages of ADKAR Model

• The model offers the capability of Identification and evaluation of the reasons why
changes made are not working and why desired results are not being obtained.
• The model makes it possible for one to break the changes into different parts and then
figure out the point where change may not be as effective as planned.

8 Strategies for Change Management

Most efforts toward organizational change fail. Not many, but most

Specifically, according to Torben Rick an experienced senior executive,

with strong track record in change management and culture change

• 70% of change efforts fail to meet target impact

• 33% of change efforts fail because management behavior does not

support the change

• 39% of efforts fail because employees are resistant to change

• 14% of efforts fail because of a lack of adequate funds or resources

• 14% of efforts fail for “other” reasons

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 Following strategies shall be kept in mind for change management

1. Start at the Top

2. Ask for Feedback even before you begin
3. Define Exactly What the Change Is
4. Simplify, Simplify, simplify
5. Change Should not Just Be Bottom-Line Numbers
6. Focus on skill development
7. Implement Formal Recognition Program
8. Never Stop Communicating

9 Creating a Culture of Change Management

Recently, some OB scholars have focused on a more proactive approach—how organizations
can embrace change by transforming their cultures. In this section, we review two approaches:
managing paradox, stimulating an innovative culture.

9.1 Managing Paradox

In a paradox situation, there is a constant process of finding a balancing point, a dynamic
equilibrium, among shifting priorities over time. Think of riding a bicycle: you must maintain
forward momentum, or you will fall over. From this perspective, there is no such thing as a
separate discipline of “change management” because all management is dealing with constant
change and adaptation. Why is it called a Paradox? The answer lies in that we are going through
a change to become stable but there is no stability as change is assumed to be continuous

9.2 Stimulating Culture of Innovation

Innovation, a specialized kind of change, is applied to initiating or improving a product, process,
or service, a better solution. Innovations can range from incremental improvements, such as
tablets, to radical breakthroughs, such as Nissan’s electric Leaf car. Following can be the
sources of innovation in the company

1. Organic structures positively influence innovation.

2. Long tenure in management is associated with innovation.
3. Innovation is nurtured when there are slack resources:
4. Interunit communication is high in innovative organizations:

10 Concept of Reinforcement
Human being has greater capacity for adaptation to changed survival conditions in comparison
to animals. This is because of their learning capacity

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 Learning Depends on Reinforcement. Without reinforcement, no measurable modification
occurs in behavior. Out of various responses made to same situation, the one which are
accompanies by satisfaction (positive reinforcement) will be more likely to be repeated. For
example, a child who works hard to secure first rank in class, gets a bicycle after coming first, is
more likely to work hard for the next cycle of exams also.

10.1 What is Reinforcement

Reinforcement can be defined as anything that increases the strength of response and tends to
induce repetitions of the behavior that preceded the reinforcement. Let us discuss types of
reinforcement from which the concept of reinforcement will become more clear

10.2 Types of Reinforcement

There are various type of reinforcement that are used in learning. These may be either positive
or negative, extrinsic, or intrinsic, primary, or secondary

10.2.1 Positive and Negative Reinforcement

1. Positive Reinforcement: This implies giving a positive response when an individual show
positive and required behavior. For example - Immediately praising an employee for coming
early for job. This will increase probability of outstanding behavior occurring again. Positive
reinforcement stimulates occurrence of a behavior. It must be noted that more
spontaneous is the giving of reward, the greater reinforcement value it has.

2. Negative Reinforcement: This implies rewarding an employee by removing negative /

undesirable consequences. Both positive and negative reinforcement can be used for
increasing desirable / required behavior. For example, a company has policy of transferring
the employees every 2 years and employees do not like being transferred. If such a
company gives the option to top performers of not being transferred, then such a thing
would act as negative reinforcer where negative consequence is decreased and hence
behavior is reinforced. These can be of two types.

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 First one is escape where people engage into behavior to remove the bad outcome. For
example, you come to know that you are about to be fired but you go and present some
gifts to your boss making him happy and as a result you are not fired. So, you have taken an
action that has helped you escape the situation

Second one is Active Avoidance where in you engage into a behavior to avoid bad outcome.
Suppose you study for the exam to avoid bad grades is an example of Active Avoidance

The difference between escape and active avoidance is that escape is when due to your bad
habits you are about to face the negative outcome, but you make a last-minute escape.
Active avoidance is when you are actively working to avoid negative outcome right from the
start

3. Punishment: Punishment attempts to decrease the probability of specific behaviors being

exhibited by punishing those behaviors. Punishment is one of the more commonly used
reinforcement-theory strategies, but many learning experts suggest that it should be used
only if positive and negative reinforcement cannot be used or have previously failed,
because of the potentially negative side effects of punishment. An example of punishment
might be demoting an employee who does not meet performance goals or suspending an
employee without pay for violating work rules. These can be of two types

First One is Positive Punishment where in you give punishment after the unruly behavior of
the child like spanking a child after he failed

Second one is Negative Punishment where in you remove something good after the unruly
behavior like taking the video game away from the child

4. Extinction: It implies absence of reinforcements. In other words, extinction implies lowering

the probability of undesired behavior by removing reward for that kind of behavior. For
instance - if an employee no longer receives praise and admiration for his decent work, he
may feel that his behavior is generating no fruitful consequence. Extinction may
unintentionally lower desirable behavior

10.2.2 Extrinsic and Intrinsic Reinforcement

Positive Reinforcement can be further classified as extrinsic and intrinsic one. An extrinsic
reinforcement has not directed relationship with behavior itself. It is often artificial, such as
payment to employees for new ideas. Intrinsic rewards, on the other hand are natural
consequences of behavior. They create a psychologically expected relationship to behavior

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 itself, such as acquisition of new skill, work performance to the capacity, assuming more
responsibility etc.

10.2.3 Primary and Secondary Reinforcement

Primary reinforcement is one which reduces primary needs such as food, sex etc. Secondary
reinforcement is one which satisfies higher order needs like praise, recognition, advancement
etc. Regardless of whether the positive re-inforcement is primary or secondary in nature, once
it has been determined that the consequence has reward value to employees, it can be used to
increase their performance

10.3 Administering Reinforcement

Since Reinforcement is necessary for learning, a manager must administer in such a way that it
has maximum effects. If reinforcement is administered properly, it will increase the strength of
desired organizational behavior and probability of its being repeated. The following aspects
must be considered in administering reinforcement

1. Selection of Reinforcement: The reinforcement selected shall be of value to the user. Thus,
managers shall look for reward system which has maximum reinforcing consequences to the
group they are supervising
2. Contingent Design of Reinforcement: Reinforcement should be designed in such a way that
reinforcing events are made contingent upon the desired behavior. Rewards must result
from performance, and greater the degree of performance of employee, greater should be
his reward.
3. Reinforcement scheduling: The effectiveness of reinforcement varies as a result of the
schedule of its administration. We shall discuss about reinforcement schedule in the coming
part of this document

10.3.1 Administering Positive Reinforcement

There are two types of schedules of Reinforcement – Continuous and Partial (Intermittent
Reinforcement)

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 1. Continuous Reinforcement: In continuous reinforcement, the desired behavior is
reinforced every single time it occurs. This schedule is best used during the initial stages of
learning to create a strong association between the behavior and the response. Once the
response if attached, reinforcement is usually switched to a partial reinforcement schedule.
For example, Child is given a toy every time he gets good marks in the starting (continuous
reinforcement). In continuous reinforcement the response may be quick but once the
reinforcement is withdrawn person may stop the response. For example, the child will study
to get good marks till the time he is given toy every time he gets good marks. But when you
stop giving toys then the child may also stop studying. This happens because the response
(studying by child) is so strongly associated with toy in case of continuous reinforcement that
withdrawal of reinforcement (toy) would lead to stopping of response (study). Therefore,
continuous reinforcement must be combined with partial reinforcement.

2. Partial Reinforcement (Also called Intermittent Reinforcement): In partial reinforcement,

the response is reinforced only part of the time. Learned behaviors are acquired more slowly
with partial reinforcement, but the response is more resistant to extinction. For example, a
child is given toy only certain time when he gets good marks. In this case the response
(studying) for a reinforcement (toy) may get some time to become a habit but once formed
it would be difficult for this response (studying habit) to die even when no toy is given.
Partial reinforcement is further of 4 types.

a. Fixed Ratio Schedule: A fixed-ratio schedule is a schedule of reinforcement where a

response is reinforced only after a specified number of responses.

Example1: Imagine that you are training a lab rat to press a button to receive a piece of
bread. To receive the piece of bread, the rat must engage in the operant response
(pressing the button) 15 times before it will receive the piece of bread. The schedule is
fixed, so the rat will consistently receive the bread every 15 times it presses the button

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 Characteristics of Fixed Ratio Schedule

• Results in high response rate i.e., learn quickly until the reinforcement is
delivered. But the response disappears quickly when the reinforcement is
withdrawn. For example, rat will exhibit the response (pressing the button) till he
gets food after pressing button every 15 times, but the response will extinct
quickly after the reinforcement (food) is not given to rat after button is pressed
15 times. This happens because rat has made an association that food is given
after pressing 15 times and when food is not given after pressing button 15 times
then rat thinks that food will not come now again. He might try pressing button
15 times again for next 6-7 days but when again food is not given the rat will stop
responding

• Best used when learning a new behavior.

• Leads to a brief response pause after reinforcement but responding quickly

resumes. For example, if the rat gets food after every 15 times, he presses the
button then once he gets the food, he will take a pause before he starts pressing
the button again because he knows that food will be given only after pressing
the button 15 times and not earlier

b. Variable Ratio Schedule: In operant conditioning, a variable-ratio schedule is a schedule

of reinforcement where a response is reinforced after an unpredictable number of
responses.

Example1: Imagine that you are training a lab rat to press a button to receive a piece of
bread. To receive the piece of bread, the rat must engage in the response (pressing the
button) variable number of times before it will receive the piece of bread. The schedule
is variable, so the rat will receive the bread sometimes after pressing button 3 times,
sometimes after 5 times or sometimes after 7 times

Characteristics of Variable Ratio Schedule

• Results in exceedingly high response rate i.e., learn very quickly as compared to
Fixed-Ratio schedule. The response disappears slowly when the reinforcement is
withdrawn. For example, rat may slowly learn to press the button to get food but
once he learns that he gets food after pressing lever (sometimes after 5 times or
sometimes after 7 times) then the response will disappear slowly even if the
food is not given on pressing the lever. This happens because rat has made an
association that food is given after pressing button unpredictable times and
when food is not given after pressing button certain times then rat thinks that

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 food might come after the next pressing of button. So, the rat will keep pressing
button for longer time even when no food is given

• Leads to an extraordinarily little response pause after reinforcement. For

example, if the rat gets food after certain unpredictable times, he presses the
button then once he gets the food, he will take a small pause because he thinks
that next time the food may be given just after 2 times pressing the button again

c. Fixed Interval Schedule: In operant conditioning, a fixed-interval schedule is a schedule

of reinforcement where the first response is rewarded only after a specified amount of
time has elapsed.

Example1: In a Lab Setting: Imagine that you are training a rat to press a button, but you
only reinforce (give food) the first response after a ten-minute interval. The rat does not
press the bar much during the first 5 minutes after reinforcement, but begins to press
the lever more and more often the closer you get to the ten-minute mark

Characteristics of Fixed Interval Schedule

• Results in a significant post-reinforcement pause in responding. After getting food,

the rat would not do anything for next 5-6 minutes as food will be given only after 10
minutes.
• Responses tend to increase gradually as the reinforcement time draws close. For
example, as the 10 minutes time approach closer the rat will start pressing the button
more frequently.

• Response decreases amazingly fast if the reinforcement is not given.

d. Variable Interval Schedule: In operant conditioning, a variable-interval schedule is

a schedule of reinforcement where a response is rewarded after an unpredictable
amount of time has passed.

Example1: In a Lab Setting: Imagine that you are training a rat to press a button, but you
only reinforce (give food) the response after an unpredictable time – sometimes after
ten-minute interval or sometimes after 5 minutes or sometimes after 20 minutes.

Characteristics of Variable Interval Schedule

• The rate of response is slow that is learning occurs slowly.

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 • The response decreases slowly when the reinforcement is not given. For
example, if the rat is not given food for 30 minutes then also, he will keep
pressing the button thinking that food would be given anytime

• The pause is exceedingly small after the reinforcement is given. For example,
when the food is given after say 5th minute then even after food is given the rat
will keep clicking thinking that food might be given anytime

10.3.2 Administering Punishment

Administering of punishment is overly complex. Kendler has observed the following nature of
punishment. Punishment must be administered with extreme care so that it does not become
reward for undesirable behavior. The termination of punishment is reinforcing just as the
termination of reinforcement is punishing.

11 Organizational behavior Modification

Behavior modification, popularly known as OB MOD makes use of various reinforcements to
influence the behaviors of individuals. OB Mod is derived and developed from the work of B.F.
Skinner. The main aim of this model is to change Behavior by managing its antecedents and
consequences as is shown in the following diagram. Antecedents are the events preceding the
behavior. Consequences i.e., the events that follow a particular behavior. These variables put
together makes A-B-C model (A for Antecedent, B for behavior, C for Consequence)

11.1 Steps in OB Mod

The steps given by them in applying the OB Mod are summarized in the following figure:

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 1. Identification: The first step in the OB Mod is identification of performance related
behaviors. First of all, the behavior should be identified as desirable or undesirable from the
point of view of the organization. Then in the next stage, critical behaviors, that have
significant impact on the employees’ performance, should be given due attention. If such
behaviors are modified, good results could be expected.
2. Measurement: After the critical behaviors of the employees have been identified, the next
step for the manager is to measure the frequency of the critical behavior over time. The
measurement can be done by observation and by extraction of information from records. If
the frequency is within the acceptable limit, it will require no action, but if it exceeds the
acceptable limit, it will need immediate attention
3. Analysis: This analysis will determine what circumstances lead to a particular type of
behavior, what are the consequences of such behavior etc.
4. Intervention: Once the critical behaviors have been identified and the circumstances which
cause such behaviors have been determined, the next step will be to develop an effective
intervention strategy. There are several strategies that can be used at this stage. These
include positive or negative reinforcement, extinction, or punishment.
5. Evaluation: Evaluation will reveal whether the undesirable behaviors have been substituted
by desirable behavior or not. If there has been a change in behavior, whether it is permanent
or just temporary.

11.2 Utilities of OB Mod

OB Mod has been applied successfully in many organizations, service as well as manufacturing,
to improve organizational effectiveness and understand human behavior in organizations. It is
an important technique of human resource management.

1. Can be Put to Testing: OB Mod concentrates on a person’s external behavior and this allows
a manager to realistically observe and deal with outward manifestations of behavior. Since it
deals with observed behavior it can be put to testing.

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 2. OB Mod presents a set of tools by which people can learn new behaviors and skills and
thereby replacing undesirable behaviors

3. OB Mod provides various tools to the managers for effectively controlling and influencing
the behavior of employees in the organization. Most behavior in the organization are
learned, controlled, and changed by the consequences

4. The understanding of OB Mod techniques is comparatively easy. Managers can use these
without many problems

11.3 Criticism of OB Mod

The main objections raised against OB Mod are as follows:

1. The basic criticism against OB Mod is that it was developed after a series of experiments
with white rats. The critics suggest that this technique is an applied rat morphism and tends
to equate human beings with rats, but organizations are more complex than Skinner’s boxes
(it was skinner who tested with rats)

2. They ignore the individuality of person and constitute a threat to the concept of personal
autonomy. These techniques are employed by managers to manipulate and control the
human beings into another person’s concept of ideal person

3. OB Mod techniques restrict freedom of choice of behavior. This works against the basic
concept of creativity and innovation, which are required for successful working of the
organizations

4. OB Mod assumes that individual behavior is a function or is controlled by his environment

and that forces internal to the individual have little effect on behavior. However, empirical
evidence suggests that behavior is also a function of certain cognitive and affective variables
residing in the individual. It does not take care of people’s perception, beliefs, needs and
expectations.

5. The idea of changing employees’ behavior through reinforcement under OB Mod is in

conformity with the traditional thinking that people need to be directed to get the work
done. In the modern world, where the people are enlightened, and self-motivated, this view
cannot be accepted

6. External awards under OB Mod amounts to bribery as some rewards are presented when
the person shows the behavior according to the wishes of the changing agent.

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 Summary Sheet

Corporate Governance
Important Points

1. This Summary Sheet shall only be used for Quick Revision after you have read the
Complete Notes
2. For Building Concepts along with examples/concept checks you should rely only on
Complete Notes
3. It would be useful to go through this Summary sheet just before the exam or before any
Mock Test
4. Questions in the exam are concept based and reading only summary sheets shall not be
sufficient to answer all the questions

1. What is Corporate Governance

Corporate governance has also been defined as "Is the act of externally directing, controlling and
evaluating a corporation"

According to SEBI the definition is

1. Acceptance by management of the rights of the shareholders as the true owners

2. Acceptance by management that managers are the trustees on behalf of shareholders
3. Management’s Commitment to values, ethical conduct and making distinction between
personal and company’s interest

1.1. Difference between Corporate Governance and Management

Governance and Corporate Governance are different from management because governance
must be EXTERNAL to the object being governed. Governing agents do not have personal control
over and are not part of the object that they govern.

Corporate Management Corporate Governance

Corporate Management implements the order Corporate Governance gives the order
It is more esoteric (intended for or likely to be It is more exoteric (intended for or likely to be
understood by only a small number of people understood by the general public.)
with a specialized knowledge or interest)
Power is delegated Board is empowered in corporate Governance
Corporate Management is static concept Dynamic Concept
Works in close ended system Works in open -ended system
Corporate management is job performer Corporate Governance is job designer
It decides “how to go” It decides “Where to go”
It is about to do things right To do right things
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 2. Historical Background of Corporate Governance
The term corporate Governance came into picture after a series of unfortunate events in Japan,
UK, USA, and Asia. An organized movement started to formulate certain principles and Policies to
put the corporate world on sound footing.

1. The Cadbury committee in England provided some principles for corporate governance in
1992
2. Organization for Economic cooperation and Development (1999) also formulated certain
principles for improvement of corporate governance.
3. In India attempt to introduce corporate governance was made in 1997 when CII prepared
a code for corporate governance. Subsequently, the Kumar Manglam Birla Committee
(1999) set up by SEBI introduced standard listing agreement to be followed by all listed
companies under the clause 49. We shall discuss this in detail later
4. Sarbanes -Oxley Act, 2002 that laid down some principles for the strict compliance of
corporate sector in America

3. Why it is Important
In contemporary business corporations, the main external stakeholder groups are shareholders,
debtholders, trade creditors and suppliers, customers, and communities affected by the
corporation's activities. Internal stakeholders are the board of directors, executives, and other
employees.

Corporate Governance is important for equal distribution of rights and responsibilities among
different participants in the corporation and making the rules and procedures for making
decisions in corporate affairs

Primary and Secondary Stakeholders

A primary stakeholder group for a company is a group that is essential for the continuation of the
company as a going concern. Secondary stakeholders are those that the organization does not
solely rely on for its continued survival, at least in the short term.

Stakeholder Internal or External Primary or Secondary

Customers External Primary
Suppliers External Primary
Creditors External Primary
Media External Secondary
Communities External Secondary
Investors/Shareholders External Primary
Trade Unions External Secondary
Government Agencies External Secondary
Competitors External Secondary
Owners Internal Primary
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 Employees Internal Primary
Board of Directors Internal Primary

3.1. Principal Agent Problem

The owners are the people who are the promoters or the shareholders whereas the management
refers to the managers running the company. The management is supposed to help in running
the busines efficiently as they are expert in that field. The Owners are called the Principal and the
management is called the Agent. The upper management may have different interests than the
Owners which leads to Principal-Agent issue/conflict. These can be in following ways

1. Agency Cost: The objectives of principal may be different from the agent. The agent may like
to increase his own pay and may encourage nepotism. This may increase cost which is known
as Agency Cost. T
2. Rent-Seeking: Given the fixed pay, the agent may practice rent-seeking (to earn extra bucks
by unethical and illegal means)

3.2. Areas where Corporate Governance Contribute

1. Sustained Economic growth: Accountability and Transparency is encouraged by corporate
governance which is essential for capital market development. If a country has good corporate
governance models, then more investors from foreign countries will invest money in the
country which will lead to economic growth.
2. Corporate Governance ensures economic growth with social justice and development:
3. Reduce Financial Turmoil: Disciplines and controlled corporate governance can reduce
financial turmoil and can ensure financial stability.
4. Reduce Frauds and Scandals: Good corporate governance helps in reducing frauds and
scandals which leads to public confidence and national prestige. For example, Infosys is such a
brand in the world. Imagine if Infosys is hit by any big scandal then would it have the same
brand image?
5. Successful International Business:
6. Social Development and Social Welfare: Many companies with good corporate governance
give back to the society in one way or the other. Tata group has a trust which does lot of
social work
7. Environmental Protection and Sustainable Development: Growth cannot be sustained if it as
the cost of environment and health. Nike is keen to highlight the value of green initiatives
through its advertising in addition to putting the great ideas into practice. Its line of
sustainable products is made using environmentally preferred materials like recycled
polyester.

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 8. Interest of All stakeholders: A good corporate governance considers interest of all the
stakeholders and thereby ensures justice and fairness to all concerned. This point has already
been discussed in detail in the earlier section
9. Mitigation of Principal Agent Problem: Already discussed in the earlier section
10. Improve gender equity and diversity:
11. Improves information flow between management and boards for an efficient functioning

4. Principles of Corporate Governance

1. Rights and equitable treatment of shareholders: Organizations should respect the rights of
shareholders and help shareholders to exercise those rights.
2. Role and responsibilities of the board: The board needs sufficient relevant skills and
understanding to review and challenge management performance. It also needs adequate
size and appropriate levels of independence and commitment.
3. Integrity and ethical behavior
4. Disclosure and transparency:
5. Environment-Friendly Policies:
6. Trade-off between Profit and Social Welfare: Though every organization has profit as one of
its motive, but profit shall not be the only motive. Organization shall give back to the society
from where it is reaping the profits
7. Free from Political Interference: Organization shall be free from any political interference
8. Independent External Auditors: External auditors must be independent in the sense that they
shall not be in any way related to the company.
9. Clear Dividend Policy: A company shall have clear dividend policy so that investors are aware
about the logic on which dividends are being declared
10. Accountability and Responsibility: There shall be proper accountability and responsibility for
everyone. Proper punishment must be there for every type of aberration

5. Executive and Non-Executive Directors

The board of directors of most corporations includes both “insiders” and “outsiders”.

An “insider” is as a person who is either employed by the corporation (an executive, manager or
employee) or who has significant personal or business relationships with corporate management.

An “outsider” is a person or institution which has no direct relationship with the corporation or
corporate management.

A synonym for insider is executive director; a synonym for outsider is non-executive director or
independent director

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 6. Models of Corporate Governance

6.1. Anglo – US Model

The so-called "Anglo-American model" of corporate governance emphasizes the interests of
shareholders. It relies on a single-tiered Board of Directors that is normally dominated by
non-executive directors elected by shareholders. Because of this, it is also known as "the
unitary system" or “Single Tier”

Within this system, many boards include some executives from the company (who are ex
officio members of the board). These are also called executive Directors. Non-executive
directors are expected to outnumber executive directors and hold key posts, including audit
and compensation committees.

The three major players in Anglo-US Model are management, directors and shareholders.
They form what is commonly referred to as the "corporate governance triangle." The
interests and interaction of these players may be diagrammed as follows:

The Anglo-US model, developed within the context of the free market economy, assumes the
separation of ownership and control in most publicly held corporations.

6.2. Japanese Model

The Key Players in Japanese Model are given below

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 The board of directors of Japanese corporations is composed almost completely of insiders, that
is, executive managers, usually the heads of major divisions of the company and its central
administrative body. If a company’s profits fall over an extended period, the main bank and
members of the keiretsu may remove directors and appoint their own candidates to the
company’s board. Another practice common in Japan is the appointment of retiring government
bureaucrats to corporate boards; for example, the Ministry of Finance may appoint a retiring
official to a bank’s board

6.3. Continental European Model

Some continental European countries, including Germany, Austria, and the Netherlands,
require a two-tiered Board of Directors as a means of improving corporate governance .In the
two-tiered board, the Executive Board, made up of company executives, generally runs day-to-
day operations while the supervisory board, made up entirely of non-executive directors who
represent shareholders and employees, hires and fires the members of the executive board,
determines their compensation, and reviews major business decisions.

7. Theories of Corporate Governance

1. Agency Theory: Shareholders are looked upon as the owners (principals), the managers and
board of directors are considered as the agents of the company. There is, thus, a separation
of ownership from the management. However, in such a case, there is the problem of conflict
of interests. While the managers are interested in maximizing their utility functions that
include pay, power and perks, the owners are interested in getting a high return on their
investment. Thus, there is an obvious principal-agent problem
2. Stewardship Theory: It posits that the duty of a steward is to protect and maximize the stock
of wealth of the shareholders, and by doing so they get their own rewards. In fact, the utility
function of a steward is maximized only through the maximization of the shareholders’
interest. Thus, there is no contradiction or conflict; rather, the two utility functions have the
same point of convergence. In a corporate set-up, managers and executives are stewards.
3. Stakeholders’ Theory: This theory is based on the perception that the basic purpose of any
corporate organization is to create wealth not only for the owners but also for the
stakeholders. This theory focuses on managerial decision-making for the benefit of all the
parties concerned.
4. Transaction Cost Theory: The transaction theory suggests that by varying the size of the firm,
its production structure, technique, and resources allocation methods, a firm can change the
transaction cost. The theory implies that managers are opportunists and arrange transactions
in their favor through many methods and manipulations. However, this does not imply that
they have to be selfish, or they alone enjoy the benefits of a reduced transaction cost. The
theory makes an important point that it is the basic purpose of corporate governance to make

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 the cost the lowest, reap the economies of scale and make the company highly competitive
and contestable. The increased profits will benefit all the parties
5. Dependency Theory: The dependency theory looks at the possibilities of development and
growth of a company. In this context, the role of board of directors can hardly be
exaggerated. The directors always try to invent innovative ways and means to access new
resources and make the firm more and more self-sufficient and competitive. In this context,
the outside directors can impart valuable advice that may reduce the transaction cost. The
directors can be business specialists, experts, economists, politicians, social workers,
teachers, and so forth. The theory suggests that whatever be the nature of directorship
(insider or outsider), it is the duty of these directors to gather newer and newer resources for
the betterment of the company. The dependency is about the procurement of resources
6. Political Theory: It explains the involvement of government in the governance of
corporations. The government in countries and in many situations participates or directs
corporate decision-making, and in such a situation, the allocation of corporate power, profit
and privileges are all determined by government rules, regulations and favors. In many
countries of our times, some governments exert strong pressure, power, and influence in
corporate governance. Perhaps the best example is the corporate governance in China. An
authoritarian government is more powerful than a democratic government in the matter of
corporate governance
7. Ethical Theory of Corporate Governance: Theory, as the name suggests, is concerned with
that type of governance which is ethically justified and is based upon fairness and justice for
all the parties. Ethical corporate governance distinguishes between right and wrong and
concentrates on the right type of governance without hate and harm.

8. Corporate Governance Outside India – A brief

7.1. Cadbury Committee

The main recommendations were

1. Separating the roles of CEO and chairman:

2. Having a minimum of three non-executive directors on the board
3. Formulation of Audit committees with Independent Members
4. Board of Directors should play an important Role for an Effective Corporate Governance

7.2. OECD Principles:

Organization for Economic Co-operation and Development (OECD) principles in summary
include the following elements.

1. The rights of shareholders being important

2. Equitable treatment of shareholders whether majority or minority

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 3. Important Role of stakeholders in corporate governance
4. Disclosure and Transparency of Financial reports and other areas
5. Responsibilities of the board ensuring and protecting rights of Stakeholders
6. Non-Biased Auditing of the Company

7.3. Sarbanes- Oxley Act, 2002:

The Sarbanes-Oxley Act of 2002 was enacted in the wake of a series of high-profile
corporate scandals. The important provisions in the SOX Act are briefly given below.

1. Establishment of Public Company Accounting Oversight Board (PCAOB): SOX

creates a new board consisting of five members of whom two will be certified
public accountants. All accounting firms have to get registered with the board. The
board will make regular inspection of firms.
2. Audit Committee: The SOX provides for new improved audit committee. The
committee is responsible for appointment, fixing fees and oversight of the work of
independent auditors.
3. Audit Partner Rotation: The act provides for mandatory rotation of lead audit or
coordinating partner and the partner reviewing audit once every 5 years
4. Improper influence on conduct of Audits: According to act, it is unlawful for any
executive or director of the firm to take any action to fraudulently influence, coerce
or manipulate an audit
5. Prohibition of non-audit services: Under SOX act, auditors are prohibited from
providing non-audit services concurrently with audit financial review services
6. CEOs and CFOs are required to affirm the Financials: CEOs and CFOs are required
to certify the reports filed with the Securities and Exchange Commission (SEC). This
point is very important because now CEO’s and CFO’s cannot say in case of fraud
that they were not aware of what was published in financial reports

9. Evolution of Corporate Governance in India - Various Committees in India

Established for Corporate Governance
The corporate governance in India has evolved over a period of time. The various developments
in area of corporate governance are discussed below

8.1. CII code for Corporate Governance

It released guidelines ‘Desirable Corporate Governance’ in 1998. It was not mandatory but
voluntary and emphasized on transparency and disclosure by companies.

This is not important for the exam.

Note: CII stands for Confederation of Indian Industry

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 8.2. Kumar Mangalam Committee and Clause 49:
1. Early 2000, the recommendations made by the committee were incorporated into
Clause 49 of the Listing Agreement of the Stock Exchanges
2. Recommendations:
a. Role of Board of Directors: Board should direct and control the management
of the company and is accountable to the shareholders
3. Composition of Board of Directors: Optimum combination of executive and non-
executive directors. Non-executive directors not less than 50%. Number of
independent directors depends whether Chairman is non-executive (1/3rd board
independent directors) and executive(1/2 board independent directors
4. Audit Committee: Minimum 3 members, all non-executive directors and majorly
independent with at least 1 director having finance and accounting knowledge.
Chairman of committee should be independent director and present in AGM.
Committee should meet thrice a year with gap no more than 6 months. Quorum → 2
members or 1/3rd of audit committee whichever higher and minimum 2 independent
directors
5. Functions of Audit Committee: To check credibility and righteousness of financial
statements, appointment and removal of external auditor and reviewing financial
statements with management before submitting to the board
6. Remuneration Committee: At least 3 directors, all non-executive and majorly
independent. Chairman of the committee should be independent director and present
in the AGM
7. Board Meetings: At least 4 times a year with maximum gap of 4 months between any
2 meetings. Director shall not be member in more than 10 committees and Chairman
not more than 5 committees serving as director
8. Corporate Governance: Annual report should contain separate section on Corporate
Governance with detailed compliance report
9. Shareholders: Under the chairmanship of non-executive director committee to
address shareholders and investors’ concerns. Delegation of power of share transfer
to registrar or agents

8.3. Naresh Chandra Committee

Set up by the Department of Company Affairs (DCA) under the Ministry of Finance and
Company Affairs

Recommendations:

i. Auditors: Audit firm should not have financial interest, received loans/guarantees form
the company, not dependent for more than 25% of revenues and key officers of the firm
cannot join the audited company before 2 years of last audit. Audit firm must not be
involved in non-audit services and at least 50 % of personnel auditing the company
rotated every 5 years

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 ii. Audit Committee: Directors of the committee must be independent and certify financial
statements by CEO & CFO and oversee the auditor appointment process
iii. Composition of Board of Directors: Minimum 50 % of independent directors and
minimum board size = 7. Independent directors must be given training and not held
criminally liable for any mismanagement by any employee
iv. Remuneration: Limit on the salary of non-executive directors and decided by board and
shareholders together

8.4. Narayan Murthy Committee

Recommendations made by this committee also incorporated into Clause 49 of the Listing
agreement of the Stock Exchanges
Recommendations:
a. Audit Committee: Members of the committee should be financially literate and at
least one member should have accounting or financial management expertise
b. Related Party Transactions: Denotes any transactions between two parties having
financial interest in the company. Statement regarding this should be submitted to
audit committee for approval
c. Risk Management: Management should form and place the report on risk assessment
and minimization procedures to the Board every quarter and get it approved from the
board
d. Training of Board Members: Board members must be trained in business model and
risk profile of business parameters of the company to know their responsibilities
e. Disclosure on money raised through IPO: Application of funds raised through IPO
should be submitted to the Audit Committee every quarter
f. Nominee Directors: Denotes the ones who have been appointed by a party which is
the largest shareholder of the company or has interest in the working of the
company. No nominee directors on board and if required then through shareholder’s
decision
g. Remuneration: Compensation paid to the non-executive directors must be decided
by board and shareholder in the general meeting
h. Whistle Blower Policy: Any wrongdoing observed by anyone should be informed to
the audit committee and protection of harassment given to the informant
i. Evaluation of Board Performance: This to be done by peer groups of the board of
directors of non-executive director’s performance

8.5. JJ Irani Committee

This committee was formed in 2004 by Ministry of Corporate Affairs (MCA) to offer advice
on the new company bill. MCA wanted to come up with new company bill as the
companies Act, 1956 did not seem to be relevant in the current scenario. The
recommendations by JJ Irani Committee were used in formulation of Companies bill. The
companies bill is explained later in this document

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 8.6. Uday Kotak Committee
The Securities and Exchange Board of India (Sebi) had set up a committee in June 2017 under
the chairmanship of Uday Kotak, executive vice chairman and managing director of Kotak
Mahindra Bank Ltd, to advise it on issues relating to corporate governance in Indian firms.

The committee was a 21-member panel includes representatives from other companies, stock
exchanges, professional bodies, investor groups, law firms, academicians, research
professionals and Sebi officials

The committee was supposed to advise the markets regulator on areas such as

1. Ensuring the active participation of independent directors in the functioning of companies

2. Improving safeguards and disclosures pertaining to related-party transactions
3. Issues in accounting and auditing practices by listed firms
4. Improving effectiveness of board evaluation practices
5. Addressing issues faced by investors on voting and participation in general meetings
6. Improving on disclosure- and transparency-related issues.
7. Listed public sector enterprises are now keen that the minimum number of independent
directors in their boards be reduced from the current 50 per cent norm and, they be
exempted from evaluation of directors. They are also seeking exemption from succession
planning. The committee will also consider this issue

The committee advised the markets regulator on areas such as

Related Party Transactions: A listed entity has to submit within 30 days of publication of its
standalone and consolidated financial results for the half year, disclosures of RPTs on a
consolidated basis.

Separation of the office of the chairperson (i.e., the leader of the board) and CEO/MD (i.e.
the leader of the management) : The top 500 listed entities (by market capitalization) having a
public shareholding of 40 per cent or more, have to separate the office of CEO/MD and
Chairperson with effect from April 1, 2020.

Capping max number of Directorship: No person will be allowed to hold the office of director
in more than eight listed entities at the same time (of which independent directorships are
capped at seven) with effect from April 1, 2019. Further, with effect from April 1, 2020, such
number will be capped at seven.

Independent Directors: It was suggested that independent directors shall be between 33% to
50% of the board members. No person who is a part of the promoter group can be appointed
as an Independent Director.

Enhanced Role of Committees

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 (i) Audit Committee - The Audit Committee will have to review the utilization of loans
and/or advances from/investment by the holding company in the subsidiary exceeding Rs
100 crore or 10 percent of the asset size of the subsidiary, whichever is lower.

(ii) Nomination and Remuneration Committee– The Nomination and Remuneration

Committee shall now have to identify and recommend to the board, the appointment and
removal of persons one level below the chief executive officer specifically including the
position of the company secretary and the chief financial officer. Such positions/offices
will now be considered to be a part of the ‘senior management’. Further, it shall now be the
duty of the Nomination and Remuneration Committee specifically to recommend to the
board, all remuneration, in whatever form, payable to members of the senior management.

(iii) Risk Management Committee - The functions of the Risk Management Committee shall
now specifically cover cyber security.

Strengthening the Regulator

1. Strengthening the role of market regulator to improve the governance practices

2. SEBI should have powers to act against auditors if the need arises
3. SEBI to develop capabilities to be able to regulate listed entities more effectively and
protect the interest of the small shareholders

Other Reforms

1. For government companies, it is recommended that board have final say on the
appointment of independent directors and not the nodal ministry
2. It seeks to address the issue faced by minority shareholders on voting and participation in
annual general meeting

8.7. Role of SEBI in Corporate Governance Reforms

SEBI was established on April 12, 1988, which became fully autonomous in 1992. SEBI is the main
regulator of the financial markets. In 1992, the BSE witnessed one of the largest scams of the
decade, the Harshad Mehta scam. It was an eye opener of its kind. As a result, government of
India enacted SEBI Act, 1992 and through this act gave SEBI the special powers to deal with
defaulters with iron-hand. SEBI since then had incorporated various committees to improve the
corporate governance in India. These committees are given below and have already been
discussed in the earlier sections

1. Kumar Manglam Birla Committee

2. Narayan Murthy Committee
3. Uday Kotal Committee

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 The recommendations given by Kumar Mangalam Birla Committee and Narayan Murthy
Committee were incorporated into clause 49 of the listing agreement and all the entities listing on
stock exchange had to comply with clause 49 of listing agreement. Later listing agreement was
replaced by LODR regulations

10.Structure and Processes of Corporate Governance

From the above diagram, it can be clearly seen that major pillars of corporate governance are

1. Shareholders
2. Board of Directors
3. Management
4. Financial Markets (Capital markets)
5. Society
6. Government + Regulators such as SEBI

Let us try to discuss these critical pillars of the corporate governance

10.1. Role of Board of Directors

The Board of Directors having following responsibilities (All these points are very general so just
skim through them and make a general view in your head)

• Review and guide corporate strategy, objective setting, major plans of action, risk policy,
capital plans, and annual budgets.
• Oversee major acquisitions and divestitures.
• Select, compensate, monitor, and replace key executives and oversee succession planning.
• Align key executive and board remuneration (pay) with the longer-term interests of the
company and its shareholders.
• Ensure a formal and transparent board member nomination and election process. Board is
the ones who appoints independent directors.
• The board appoints various critical committees such as Audit Committee, Nomination
Committee etc. and functions through them. Board has to take care that where committees
of the board are established, their mandate, composition and working procedures should be
well-defined and disclosed. We shall be discussing about these committees in detail in the
upcoming part of this document
So, Board of Directors act as Agent while Shareholders are the principal

10.2. Rights and Protection given to Shareholders

Apart from the role played by the board of directors, the rights and protection given to the
shareholders also helps in implementing good corporate governance

Shareholders must have the right to

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 1. Participate and be informed about fundamental changes in the organization such as sale of
corporation, divesting into new business etc.
2. Voting rights in general meeting of the company
3. Electing board members/directors and removing them in case their performance is not in line
with the interest of the company

Shareholder’s Interest must be Protected in following ways

a. Information Asymmetry:
b. Strict Disclosers:
c. Agency Cost:

10.3. Management
Prevention of fraud in any organization is successful when there is a proper, preexisting “tone at
the top” in an organization. The importance of setting an example of ethical behavior within an
organization is a responsibility of executive management

10.4. Financial Markets/Capital Markets

Financial markets act as a place companies with bad corporate governance can be overtaken by
better companies. This results in replacement of bad managers. So, in this way bad corporate
governance is punished.

10.5. Role of Society

Good corporate governance is about ‘intellectual honesty’ and not just sticking to rules and
regulations. In many cases it is observed that it is wrong value system and unethical standards
which leads to biggest scam Therefore, it becomes especially important that the society aims
towards better value system, high ethical standards.

10.6. Government
The role of government and other regulatory bodies in framing rules and regulations becomes
important. Many of the regulations have been framed by Government (Company Law) and SEBI
(LODR regulations) which aim towards effective corporate governance. Apart from these rules
and regulations various other steps have been taken by government which are listed below

1. The government is ensuring widespread investors education programs to ensure that they
know their rights and duties and contribute to ethical development of corporations
2. The importance of whistleblowing has been formally recognized and whistle blowers are
being given legal protections
3. As important step in this direction is right to information at all the levels. This eliminates
information asymmetry which is main cause of corporate scams and scandals

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 11.Factors Affecting Corporate Governance
1. Ownership Structure: If the Ownership is concentrated in few hands, then dominant
shareholders would be able to take decisions at their will. In PSU’s, the government is major
shareholder and takes decision which might not be good for shareholders.
2. Financial Structure: If company is more equity than debt, then all the decisions would have
to be taken by consulting shareholders which is good. But in case of large debt and low equity
it might be possible for board to take decisions in their interest and debtors might not like
those decisions
3. Extent of Development of Financial Markets: Financial markets act as a place companies with
bad corporate governance can be overtaken by better companies. Investors can refuse to
subscribe to the capital of a company in the primary market and in the secondary market;
they can sell their shares, thus depressing the share prices. In the same context, investor
education becomes especially important. The more developed the capital markets are and
the more educated the investor is, the better will be the corporate governance
4. Policies and Law of the Country: The legal environment in which the company is operating
has a vast amount of influence on the Corporate Governance. For example, the extent to
which shareholders can control the management depends on their voting right as defined in
the Company Law, the extent to which creditors will be able to exercise financial claims on a
bankrupt unit will depend on bankruptcy laws and procedures etc.
5. Competency of Board of Directors: If board of directors does not understand the business
then they will not be able to fulfill their duties to the extent required. In such a case
management would be able to take decisions in their own interest rather than in the interest
of the shareholders
6. Independent Directors on Board: The more independent the independent directors are and
larger the number of independent directors is, the better is the corporate governance
7. Directors Remuneration: The remuneration needs to be designed very smarty so that it acts
as a motivation to perform better but at the same time should not prevent them form sharing
any information which can impact the performance of the company
8. Effective Audit Committee and Independent Auditors: The more qualified, experienced, and
ethical the audit committee is, the better will be the corporate governance. On the same
lines, the more qualified, experienced, and independent the auditors appointed by the
company, the better will be the corporate governance
9. Addressing Grievances of Shareholders: If company has a well determined process to look
into the grievances of shareholders and there is proper accountability for the same, then it
will lead to better governance
10. Transparency
11. Whistleblower Policy: The more protection the whistleblowers are given against harassment
and the more detailed policy is there with respect to whistleblowing, the more it will
encourage people to raise issues and hence better the corporate governance would be.

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 12. Political Interference: Any type of political interference can help company reap benefits in
short-term but in longer term it will damage the reputation of the company.
13. Proactiveness from Government in framing rules and Regulations: The more proactive the
government is in making rules and regulations and updating them from time to time, the laws
will be better equipped to handle the prevailing situations.
14. Strength and Training of Enforcement Agencies
15. Extent of Commitment towards Social Welfare and CSR: The extent to which company is
committed towards social welfare determines the effectiveness of corporate governance
16. Media and Society Pressure:
17. Extent of Competition in Market: Competition from other firms force the companies to
innovate and follow best practices. The more the competition is, the better will be the
chances of corporate governance.

12.Mechanisms of Corporate Governance

There are internal and external mechanisms of corporate governance. While discussing these
mechanisms of corporate governance, we shall discuss about the relevant clauses in Companies
Act, 2013 and SEBI LODR Regulations which help us implement corporate governance. The
companies act, 2013 and SEBI LODR Regulations are the main acts/regulations in India which
help us implement Corporate Governance in India

Internal Mechanisms are:

1. Balanced Ownership Concentration: If large number of shares are owned by institutional

investors or individual investors then they can vote against or question any decision made
by the company. A company having large institutional investors will always be challenged on
their wrong decisions.

Companies Act, 2013

Appointment of Nominee Directors

a. As per Section 163 of the Companies Act, the company may authorize the board of
directors to appoint any person as a director nominated by any institution as a nominee
Director. Nominee Directors are normally appointed by large shareholding institutions like
Investment bank to act as their representative

SEBI LODR Regulations

a. SEBI LODR regulations under rights to shareholder mentions about exercise of ownership
rights by all shareholders, including financial institutions

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 2. Voice to Small Shareholders: Many a times majority shareholders take decisions which are in
their interest though it may be at the cost of small shareholders. To counter this, small
shareholders shall also have their representative in the board of directors to represent them

Companies Act,2013
As per section 151 of the companies Act, a listed company may have one director elected by such small
shareholders. Small shareholders” means a shareholder holding shares of nominal value (face value) of
not more than twenty thousand rupees
SEBI LODR Regulations
a. SEBI LODR regulations under rights to shareholder mentions about protection of minority
shareholders from any abusive action
b. It mentions about equitable treatment to all the shareholders. Exercise of voting rights even by
foreign shareholders is promoted
c. It also mentions that process of casting vote shall be easy and inexpensive. The listed entity shall
provide the facility of remote e-voting facility to its shareholders

3. Efficient Discharge of Roles and Responsibilities by the Board: Since board of directors play
an important role in the governance of the company, so it becomes really important that only
people who are qualified for the post are appointed. Moreover, the board shall meet
regularly, and decisions shall be taken in the presence of minimum number of members.
Otherwise, there is grave risk that decisions taken may not be in the interest of the company
and other stakeholders

Companies Act, 2013

a. As per Section 164 of the companies Act, any person of unsound mind, an insolvent person or
who has been convicted of the offence dealing with related party transaction at any time during
the last preceding five years cannot be appointed as director
b. As per Section 164 of the companies Act, any person who has been convicted by a court of any
offence and has been sentenced to imprisonment for not less than six months cannot be
appointed as director
c. As per Section 178 of the companies Act, every Listed Public Company and non-listed
companies having paid capital >= 10 crore or Turnover >= 100 Crore, or outstanding loans,
debentures and deposits >= 50 crore shall constitute a Nomination and Remuneration
Committee. This committee shall
a. Shall formulate the criteria for determining qualifications and independence of a director
b. Shall identify persons who are qualified to become directors and recommend to the
board for appointment

The above two points ensure that person appointed as directors shall not be someone who is
not capable of discharging his duty. He/she is selected after following the due process of
selection

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 d. As per section 165 of the companies act, person can be a director in maximum of 20 companies
subject to that he can be a director in maximum of 10 Public companies. This ensures that
person is able to manage time for his duties and responsibilities because if he/she is director in
say 50 companies, then he will not get time to do justice to his role in all the companies
e. As per section 173 of the companies act, every company shall hold the first meeting of the
Board of Directors within thirty days of the date of its incorporation. After the first meeting
Board of directors shall hold a minimum number of four meetings every year in such a manner
that not more than one hundred and twenty days shall intervene between two consecutive
meetings of the Board. This ensures that Board meets at regular intervals to discuss the
relevant matters
f. As per section 149 of the companies act, At least one director should stay in India for a total
period of >= than 182 days during the financial year. This ensures that directors are not there
just for the namesake and they should be discharging their duties by being present in India
g. As per section 174 of the companies act, the quorum for a meeting of the Board of Directors of
a company shall be 1/3rd of its total strength or two directors, whichever is higher. This ensures
that a certain minimum number is present in meeting when any decisions are taken

b.
SEBI LODR Regulations
SEBI LODR Regulations mentions following points with respect to functions of board
a. Board must ensure a transparent nomination process to the board of directors with the
diversity of thought, experience, knowledge, perspective, and gender in the board of
directors. This ensures that board is diversified and qualified to handle any problem
b. Board must Review and guide corporate strategy, major plans of action, risk policy, annual
budgets and business plans, setting performance objectives, monitoring implementation and
corporate performance, and overseeing major capital expenditures, acquisitions, and
divestments. This ensures board is responsible for major areas of functioning
c. Board shall meet at least four times a year, with a maximum time gap of one hundred and
twenty days between any two meetings. This ensures that Board meets at regular intervals to
discuss the relevant matters

4. Decent Representation of Independent Directors in Board of Directors: The board with right
mix of independent and non-independent directors can effectively monitor and advice the
organization.

Companies Act, 2013

a. As per section 149 (4) of the companies Act, each listed company shall have at least 1/3rd of its
directors as independent directors. Moreover, all public companies having capital >= 10 crore
or Turnover >= 100 Crore, or outstanding loans, debentures and deposits >= 50 crore must have
at least 2 independent directors

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 SEBI LODR Regulations

SEBI LODR Regulations mentions that

a. If Chairman is Non-Executive, then Minimum of 1/3rd directors shall be independent
b. If Chairman is Executive, then Minimum of 1/2 i.e., 50% directors shall be independent

Since executive directors are the one which are involved in day-to-day functioning, so when
executive director is the chairman of board there is more risk that decisions taken are not in the best
interest of minority shareholders or other stakeholders because executive director would be more
focused towards profit. Hence when chairman is executive director the number of independent
directors has been mandated at 50%. This ensures independent directors have decent
representation

5. Independence of Independent Directors: The selection procedure shall be such that people
appointed as independent directors shall not have monetary or any other kind of relationship
with the company which can make them act in biased way

Companies Act, 2013

a. As per section 149 (6), the Companies Act, 2013 states that independent directors should
not have any material pecuniary relationship with the company, its promoters, directors,
and subsidiaries which can affect the independence of the director either in the current
financial year or immediately preceding two years
b. Section 149 (6) also states that none of relatives of independent director shall be holding
security of more than 50 lakh or 2% of the paid-up capital of the company, whichever is
higher
c. Section 149 (6) also states that none of relatives of independent director shall be indebted
more than 50 lakhs to the company

The above three points ensure that independent directors are not subject to any bias

d. The independent directors of the company shall hold at least one meeting in a financial year
without the attendance of non-independent directors and members of management. This
makes sure that independent directors get space to discuss the issued without the influence
of other directors

SEBI LODR Regulations

SEBI LODR Regulations mention that Independent directors shall not be entitled to any stock
option. This ensures ensure that independent directors are not subject to any bias

A person shall not serve as an independent director in more than seven listed entities. Moreover,
any person who is serving as a whole-time director in any listed entity shall serve as an
independent director in not more than three listed entities. The logic behind this is that if you are
involved at too many places then conflict of interest will arise at one place or the other.

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 SEBI LODR Regulations mention that Independent directors shall not be entitled to any stock
option. This ensures ensure that independent directors are not subject to any bias

A person shall not serve as an independent director in more than seven listed entities.
Moreover, any person who is serving as a whole-time director in any listed entity shall serve as
an independent director in not more than three listed entities. The logic behind this is that if you
are involved at too many places then conflict of interest will arise at one place or the other.

The Securities Exchange Board of India (SEBI) in June 2021 approved amendments for listed
companies. As per the new rules, appointment, removal of independent directors will be through
a “special resolution” approved by shareholders. All the new rules will be applicable post January
2022

The regulations for appointment Independent Directors (IDs) include:

• Appointment/Re-appointment and Removal of IDs shall be through a special resolution of
shareholders for all listed entities.

• A cooling off period of three years has been introduced for Key Managerial Personnel

• Shareholder approval for appointment of all directors including IDs shall be taken at the next
general meeting, or within three months of the appointment on the Board, whichever is
earlier.

The regulations for resignation Independent Directors (IDs) include:

• The entire resignation letter of an ID shall be disclosed along with a list of her/his present
directorships and membership in board committees.

• A cooling-off period of one year has been introduced for an ID transitioning to a whole-time
director in the same company/ holding/ subsidiary/ associate company or any company
belonging to the promoter group.

6. Internal control procedures and internal auditors: Internal control procedures are policies
implemented by an entity's board of directors, audit committee, management, and other
personnel to provide reasonable assurance of the entity achieving its objectives related to
reliable financial reporting, operating efficiency, and compliance with laws and regulations.
Internal auditors are personnel within an organization who test the design and
implementation of the entity's internal control procedures and the reliability of its financial
reporting.

Both companies Act and SEBI LODR regulations talk about timely and accurate disclosure on
all material matters including the financial Position, performance, ownership etc.

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 7. Timely, Honest and Detailed Audits and Independence of Audit Committee: Auditing is
especially important for effective corporate governance. Detailed Auditing improves the
quality of financial reporting by reviewing the financial statements, creating a climate of
discipline, and reducing the opportunity for fraud. Every company must have timely, honest,
and detailed audits. Qualified and Independent audit committee is central to good corporate
governance as it is the audit committee which recommend appointment of auditors, review
the performance of auditors, and approve related party transactions.

Companies Act, 2013

As per section 177 of the companies Act
a. Every Listed Public Company and non-listed companies having paid capital >= 10 crore
or Turnover >= 100 crore, or outstanding loans, debentures and deposits >= 50 crore
shall constitute an Audit Committee. This ensures that Audit committee is formed in
listed and big size companies
b. The Audit Committee shall consist of a minimum of three directors and Majority of
Members of Audit Committee shall be Independent Directors. This presence of
majority members at independent directors ensure that it works in rational and non-
biased manner
c. Majority of members of Audit Committee including its Chairperson shall be persons
with ability to read and understand, the financial statement. This ensures that
members are qualified to discharge their duty
d. The Audit Committee shall have authority to investigate into any matter in relation to
the financial reports of the company
SEBI LODR Regulations
a. All shall be financially Literate and at least one member should be expert in finance or
accounting. This ensures that members are qualified to discharge their duty
b. There shall be min. of 3 members in Audit committee and at least 2/3rd members shall
be independent directors. all related party transactions shall be approved by only
Independent Directors on the Audit Committee. This ensures that Audit Committee is
answerable to independent directors
c. Audit committee shall meet at least four times in a year and not more than one
hundred and twenty days shall elapse between two meetings. This ensures that Audit
Committee is constantly working towards its goal
d. Audit committee has been given powers to investigate any activity, seek information
from any employee or obtain outside legal advice

8. Balance of power: The simplest balance of power is quite common; require that the President
be a different person from the Treasurer. Similarly, in an organization, the CEO and Chairman
shall be different. There must be check on the powers of the board also, so they do not have
GOD like status in the company

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 a. As per section 180 of the Companies Act, 2013, The Board of Directors of a company shall
exercise the following powers only with the consent of the company by passing a special
resolution. This ensures check on the power of the board of directors
i. to sell, lease or otherwise dispose of the whole or large part of the undertaking(s) of
the company
ii. to borrow money, where the money to be borrowed, together with the money
already borrowed by the company will exceed aggregate of its paid-up share capital,
free reserves, and securities premium.
iii. To give time for repayment of any debt due from a director

9. Remuneration of Executives/Directors: Performance-based remuneration is designed to

relate some proportion of salary to individual performance. It may be in the form of cash or
non-cash payments such as shares and share options, superannuation or other benefits. Such
incentive schemes, however, can be negative in the sense that they provide no mechanism for
preventing mistakes or opportunistic behavior, and can elicit myopic behavior. The
remuneration of executives should be such that they do not have any incentive to go against
the interests of the company and shareholders.

Companies Act, 2013

As per section 178 of the companies act
a. Every Listed Public Company and non-listed companies having paid capital >= 10 crore or
Turnover >= 100 crore, or outstanding loans, debentures and deposits >= 50 crore shall
constitute a Nomination & Remuneration Committee. This Committee should have
responsibility for determining the remuneration for all executive directors and senior
management members to ensure that the individuals remain motivated but at the same
time they do not have any incentive to go against the interests of the company and
shareholders by withholding some information
b. This committee shall have 3 or more Non-Executive Directors. Among non-executive
directors at least ½ should be independent directors. This ensures that the senior
management who is running day to day affairs is not able to make remuneration policy
which is to their advantage. Moreover, the decent representation of independent
directors prevents any harm to the interest of small shareholders

SEBI LODR Regulations

a. SEBI LODR Regulations makes in mandatory to constitute a Nomination &
Remuneration Committee. This Committee should have responsibility for determining
the remuneration for all executive directors and senior management members

b. Nomination & Remuneration Committee shall consist of min of 3 members, and it

should include 2/3rd of Independent Directors (IDs) instead of existing requirement of
majority of IDs. This ensures that the senior management who is running day to day
affairs is not able to make remuneration policy which is to their advantage.

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 10. Redressal of Shareholder/Stakeholder Grievance: Company must have well determined
process to look into the grievances of shareholders and there shall be proper accountability for
the same.

Companies Act, 2013

As per section 178 of the companies act,
a. company which consists of more than one thousand shareholders, debenture-holders,
deposit-holders, and any other security holders at any time during a financial year, the
Board of Directors of a company shall constitute a Stakeholders Relationship Committee
b. The chairperson shall be non-executive director and it shall consist of some other
members as decided by the board
c. The Stakeholders Relationship Committee shall consider and resolve the grievances of
security holders of the company such as dividend not received, Rights issue subscription
problem, Transfer of shares and other related areas
SEBI LODR Regulations
a. SEBI LODR Regulations under rights of shareholders mentions that there shall be adequate
mechanism to address the grievances of the shareholders

b. The listed entity shall ensure that it is registered on the SCORES platform or such other
electronic platform. SCORE platform is maintained by SEBI which facilitates you to lodge
your complaint online with SEBI and subsequently view its status.

c. The listed entity shall file with the recognized stock exchange(s) on a quarterly basis,
within twenty-one days from the end of each quarter, a statement giving the
I. Number of investor complaints pending at the beginning of the quarter
II. New received during the quarter
III. Disposed of during the quarter
IV. Those remaining unresolved at the end of the quarter.

d. The listed entities shall have Stakeholder relationship Committee which shall address
grievances of shareholders/security holders of the listed entity including complaints
related to transfer of shares, non-receipt of dividends etc.

11. Risk Management: It is very essential to manage risk for effective governance. There shall be
proper monitoring and management of risk in every company at branch level and corporate
level.

Companies Act, 2013

a. Section 134(3)(n) of companies act, 2013 states that the Board’s Annual Report shall
contain a statement indicating development and implementation of a risk management
policy for the company including identification therein of elements of risk, if any, which in
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 the opinion of the Board may threaten the existence of the company.

SEBI LODR Regulations

As per SEBI LODR Regulations, board is responsible for Framing, implementing, and monitoring
the risk management plan for the listed entity.

1-Initially first 100 companies by market capitalization are mandated for setting up of Risk
Management Committee. This committee can have members form outside also but the
Majority of members of Risk Management Committee shall consist of members of the board
of director
2-In 2020, Sebi proposed extending the risk management committee requirement to the top
1,000 listed companies.

12. Effective Implementation of Whistleblower Policy: Whistleblower shall be given protection

against harassment

Companies Act, 2013

a. As per section 177 of the companies act, the Companies which accept deposits from
the public or the Companies which have borrowed money from banks and public
financial institutions in excess of fifty crore rupees shall establish a vigil mechanism
(whistleblowing framework) for directors and employees to report genuine concerns

SEBI LODR Regulations

SEBI LODR regulations mentions that every listed entity shall devise effective whistle blower
mechanism enabling stakeholders to raise their concerns

13. Mechanism for Evaluation of Board Performance: There must be some mechanism for
evaluation of performance of the board so that non-performers are not given extension or are
removed from the board.

Companies Act,2013
a. As per section 134 of the companies Act, In the Board’s Report a statement has to be given
indicating the manner in which formal annual evaluation has been made by the Board of its own
performance and that of its committees and individual directors
b. As per section 169(1) of the companies act, 2013, a company can remove a director By Passing an
ordinary Resolution before the expiry of his term after giving him an opportunity to present his
case. This can be used in case director is not able to discharge his duties
c. As per section 178 of the companies act, every Listed Public Company and non-listed companies
having paid capital >= 10 crore or Turnover >= 100 crore or outstanding loans, debentures and
deposits >= 50 crore shall constitute a Nomination and Remuneration Committee. This committee
shall
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 i. Shall specify criteria for evaluation of directors and various committees and its
independent directors
ii. Recommendation regarding removal of directors
SEBI LODR Regulations
SEBI LODR regulations mentions the following which ensures that there is ownership of performance by
directors
a. Board shall Monitor Evaluation of Board of Directors
b. Board shall review and replace directors if they are not able to discharge their duties
c. Performance evaluation of independent directors shall be done by the entire board of directors
except those being evaluated

14. Keep a check on Political Interference: There must be some mechanism to ensure that
companies are answerable for their political affiliations and contributions to a political party.

As per section 182 of the companies act, 2013

a. A government company and company which has been in existence for less than three
financial years cannot make political contributions
b. Eligible companies may contribute any amount directly or indirectly to any political party
only if a resolution authorizing the same is passed at a meeting of the Board of Directors.
c. Every company shall disclose in its profit and loss account the total amount contributed by
it under this section during the financial year

The above regulations help keep a check on the political bias of company towards a particular
political party which can lead to political interference

15. Promoting Social Equality and Social Welfare: In India, there is lot of discrimination based on
various factors especially based on sex. The companies must ensure zero tolerance for sexual
discrimination. Moreover, companies shall try to give back to the society as social welfare is
one of the important pillars of corporate governance

Companies Act, 2013

a. As per section 151 of the companies act, all listed companies and unlisted companies
having paid up capital >= 100 crore or Turnover >=300 cr are required to have at least 1
women director. This ensures that sexual discrimination does not prevents the capable
women from reaching the top
b. As per section 135 of the companies Act, every company having net worth of rupees five
hundred crore or more, or turnover of rupees one thousand crore or more or a net profit
of rupees five crore or more during the immediately preceding financial year shall
constitute a Corporate Social Responsibility Committee of the Board consisting of three or
more directors, out of which at least one director shall be an independent director.
c. As per section 135 of the companies Act, the Board of every company mentioned in the
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 above point, shall ensure that the company spends, in every financial year, at least two per
cent. of the average net profits of the company made during the three immediately
preceding financial years on CSR activities. This ensures that companies commit
themselves to CSR activities
SEBI LODR Regulations

SEBI LODR regulations mentioned that there shall be at least one-woman director. This ensures
that sexual discrimination does not prevents the capable women from reaching the top

16. Compliance with Regulations: Making regulations is one thing but to ensure that there is
compliance is a difficult part of implementation on the part of government and regulators.
Organizations should always comply with regulations made by government and the
regulators

Companies Act, 2013

Under section 205 of companies act, 2013, it requires the company secretary to provide a report to
the board about compliance with the provisions of this Act. It is however pertinent to note that the
Act does not require the Board to confirm that they comply with all the applicable laws and
regulations, the requirement is to ensure that a system of compliance in defined and it is operating
effectively. What this means is that even if there are non-compliance, it is important that
appropriate and timely remediation’s are put in place to ensure that the non-compliance is
corrected and prevented from reoccurring in future
SEBI LODR Regulations
SEBI LODR Regulations
SEBI LODR Regulations mentions that a listed entity shall appoint a qualified company secretary as
the compliance officer. The compliance office shall ensure that listed entity conforms to all the
regulations

External Mechanisms are:

1. Financial Markets: Well-developed Financial markets act as a place companies with bad
corporate governance can be overtaken by better companies. This results in replacement
of bad managers. So, in this way bad corporate governance is punished. The role the
minority shareholders can play effectively. They can refuse to subscribe to the capital of a
company in the primary market and in the secondary market; they can sell their shares,
thus depressing the share prices. A depressed share price makes the company an
attractive takeover target. SEBI has taken various steps in last decade for the
development of financial markets.

2. Investor Education: Investor Education is especially important for activism by investors.

Sebi gad earlier invited applications from individuals and entities to be empaneled as
Securities Market Trainers (SMARTs) to shore up the regulator's investor education
initiative amid growing retail participation in the capital markets. There is also
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 mechanism for Investor Education and Protection Fund (IEPF) which is for promotion
of investors' awareness and protection of the interests of investors

3. Media and Society Pressure: Any wrongdoing is highlighted in media and prevent people
from indulging in wrong practices. Society can as a group make sure that bad corporate
governance is badly rejected through rejection of the products of that group, people
resigning from jobs of that company etc. Sucheta Dalal had exposed Harshad Mehta's
1992 Securities scam amounting up to Rs 1000 crore. Mehta was considered superstar
of the Indian stock market until the journalist shone light on his scams and was
eventually banished from the stock market. Mehta and few of his associates had
reportedly managed to siphon a walloping amount through interbank transactions.

4. Debt Covenants: A covenant is a promise in an indenture, or any other

formal debt agreement, that certain activities will or will not be carried out. Covenants in
finance most often relate to terms in a financial contracting, such as a loan document
stating the limits at which the borrower can further lend. These covenants prevent firms
from engaging in activities which are prohibited in the covenants

5. Annual Financial Statements also helps to ensure corporate governance is implemented.

a. As per section 129 of the companies act, 2013, at every annual general meeting of a
company, the Board of Directors of the company shall lay before such meeting financial
statements for the financial year.
b. As per section 136 of the companies act, a copy of the financial statements, including
consolidated financial statements, if any, auditor’s report, and every other document
required by law to be annexed or attached to the financial statements, which are to be
laid before a company in its general meeting, shall be sent to every member of the
company

6. Proxy Firms: A proxy firm (also a proxy advisor, proxy adviser, proxy voting agency, vote
service provider or shareholder voting research provider) provides services to
shareholders (in most cases an institutional investor of some type) to vote their shares at
shareholder meetings of, usually, quoted companies. This helps people high turnout in
voting and balance of opinions

7. External Audits: External Audits are an important mechanism to check for any fraud in the
company. The external auditors must be qualified and independent. Many a times
external auditors are at loggerheads with management because when auditors question
the management about their wrongdoings, the conflict initiates between them. Hence it is
especially important that management or the board shall not be able to remove them
easily.
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 a. As per section 139 of the companies act, an individual cannot be appointed as
auditor for more than one term of five consecutive years and an audit firm cannot
be appointed as auditor for more than two terms of five consecutive years.
b. There are also various guidelines with respect to Auditors such as rotation of
auditors to ensure that there is no long-term setting between management and
auditors
c. As per section 140 of the companies act, an auditor can be removed only after
sending an application to the Central Government and taking its consent. Once the
consent is obtained, a special resolution needs to be passed to remove the
auditor. A special resolution is the resolution, that is affirmed by the members of
the company by three-fourth majority. This ensures that if auditor is exposing the
wrong doings of the company the company shall not be able to remove him/her
easily.
d. As per section 141 of the companies act, a person shall be eligible for
appointment as an auditor of a company only if he is a chartered accountant. This
ensures only qualified people can be appointed as auditors
e. One cannot be appointed as auditor if he is
i. partner in the company
ii. person or a firm who has business relationship with the company
iii. A person who in full time employment in some other company
iv. A person convicted by court for a fraud or any other offence till 10 years
from date of conviction
v. A person who himself or his relative or partner is (holding securities of
more than 1 lakh) or (Indebted/Owes more than 5 lakhs to the company)
vi. All the above points ensure that no one who is having monetary or any
other relationship with the company can be appointed as auditor. This
ensures the independence of auditors

8. Competition: Competition from other firms force the companies to innovate and follow
best practices. Yes, sometimes it can lead to bad practices but if companies have good
intentions then they will do everything in line with corporate governance. Competition
commission of India ensures that no cartels are formed. The Competition Commission of
India ("CCI/Commission") imposed a penalty of INR 6.69 billion on four public sector
insurance companies in 2015 for causing an appreciable adverse effect on competition in
the health insurance sector. These companies had formed a cartel and sought higher
premiums from the Kerala government to implement insurance schemes in kerala

9. Rights and Protection to Shareholders: The rights and protection given to the
shareholders also helps in implementing good corporate governance. This has already
been discussed in the earlier section

Company Act, 2013

1. As per companies act 2013, shareholders play an important role in the appointment
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 of directors. An ordinary resolution is required to be passed by the shareholders for
the appointment
2. As per companies act 2013, Shareholders also have the right to attend and vote at
the annual general body meeting. Every company registered in India should comply
with the provisions of the Companies Act 2013.
3. As per companies act 2013, Shareholders have the right to call a general meeting.
They have a right to direct the director of a company to can all extraordinary
general meeting. They also can approach the Company Law Board for the
conduction of general body meeting, if it is not done according to the statutory
requirements
4. As per companies act 2013, shareholders are the main stakeholders in a company,
they have the right to inspect the accounts register and also the books of the firm
and can ask questions about the same if they feel so.
5. As per companies act 2013, Shareholders have the right to get copies of financial
statements. It is the duty of the company to send the financial statements of the
company to all its shareholders either in a quarterly or annual statement
LOD Regulations
1. Right to participate and right to be informed of decision regarding fundamental
corporate changes
2. Opportunity to ask questions to board of directors
3. Right to effective shareholder participation in key Corporate Governance decisions
such as nomination and election of board of directors

10. Pressure form Apex Financial Institution: The apex financial institution such as World
Bank and IMF needs to pressurize the countries which are weak in corporate governance
to improve their standards if they want help in terms of grants or loans form these
financial institutions

After the East Asian financial crisis in 1997, the interest of world bank in corporate
governance of Asian countries became very much evident. World bank made a
remined in G7 meeting in 1998 that unless the standard of corporate governance is
improved, financial crisis may reoccur. World bank endorsed OECD principles of
corporate governance and asked every country to follow these principles strictly.
World bank also warned that if these principles are not followed, no financial help
shall be provided. As a result of this, it was observed that many countries realized that
they would struggle if they do not improve corporate governance standards

11. Monitoring and Enforcement Agencies: No matter how much the regulations and laws
are made, there will always be defaulters. We as humans has a tendency of not complying
with the regulations till the time, they are enforced through implementing agencies which
instill fear of being exposed.

Companies Act,2013
a. The Government of India has set up the Serious Fraud Investigation Office (SFIO) in
the Ministry of Company Affairs (MCA) with effect from July 1, 2003 with an
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 objective to undertake the investigations under the provisions of the Companies
Act, 1956 for corporate frauds
b. Despite the SFIO came into existence over 10 years ago, it did not have the enough
teeth to deal with the fraudsters. However, the Companies Act 2013, which came
into existence on 29th August 2013 is more stringent and conferred more powers
to SFIO to effectively deal the fraud cases and people indulged in fraudulent
activities
c. The new act has empowered SFIO to carry out arrests, raids and seizure in respect
of certain offences of the act which attract the punishment for fraud
d. Further, as per the clause 212 of the companies act,2013, SFIO can investigate into
the affairs of the company on the intimation of special resolution passed by the
company or on the receipt of a report of the Registrar or inspector or in the public
interest or on request from any Department of the Central Government or a State
Government
e. This empowerment of SFIO will surely act as deterrent against the companies
indulged in fraudulent activities and in turn will help in building the confidence of
the stake holders
SEBI LODR Regulations
SEBI itself has many powers to investigate and punish any entity who does not comply
with the LODR regulations

12. Acts and Regulations made by Government and Regulators: These acts mainly drive the
corporate governance in India
a. Clause 49 of the listing Agreement by SEBI: The recommendation of the Kumar
Mangalam Birla and Narayan Murthy Committee constitutes the clause 49 of SEBI
listing agreement. We have already discussed about these committees in the previous
sections. The listing agreement is now replaced by SEBI LODR regulations discussed
below

b. Companies Act, 2013 by MCA: This act has gained prominence off late. Now this act
takes the lead in defining rules and regulation for Corporate Governance. We have
discussed all the relevant clauses/regulations under the company act, 2013 while
discussing about the internal and external mechanisms of corporate governance

c. SEBI LODR Regulations: Many of the clauses listed in clause 49 of listing agreement
by SEBI were not in line with the companies act, 2013. So, SEBI came up with Listing
Obligations and Disclosure requirements (LODR) which specifies various regulations
that companies need to comply with. In LODR regulations, sebi has tried to come up
with regulations which are in line with company’s law. We have discussed all the
relevant clauses/regulations under the LODR regulations while discussing about the
internal and external mechanisms of corporate governance
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 Please note that, as of now since listing agreement is replaced by SEBI LODR regulations,
the listing agreement shall not be mentioned as the act/regulation governing corporate
governance in India. We have included clause 49 of listing agreement in this document
just for completeness perspective

13.Challenges to Corporate Governance in India

1. Power of Dominant Shareholders/Family Ownership
2. Lack of incentives to companies to implement corporate governance:
3. Shortage of Independent directors who understand the business of the company:
4. Multiple regulators: A clear-cut separation of powers is not there between different
regulators which leads to unnecessary power struggle and showdowns. For example, the
authority of SEBI and MCA is not well defined.
5. Inadequate monitoring and response failure by regulatory authorities : The speed with
which regulatory changes have been brought in, the enforcement machinery has not been
strengthened with that speed.
6. Are Independent directors really Independent?
a. In most companies, the nomination committee, nominates independent directors
only with the approval of the promoter or controlling shareholder or the incumbent
management. Therefore, even today, the question ‘how independent are
independent directors’ remains valid. The mindset needs to change here. The
promoters need to give freedom to the board of directors and various committees
working under the board
7. Lack of succession planning and capital allocation mechanism: Companies have often
been found clueless about the successor of the founding directors. Most of the companies
lack good succession planning.
8. Lack of Diversity: Corporate boards lack diversity. The representation of other genders in
the boards is nominal. The company law mandates at least 1 women director in the board
of the company but that is just a symbolic representation and not something which can
really change the landscape with respect to participation of women in the board of the
companies.

14. Open Questions/Issues in Corporate Governance

There are still many questions/issued that needs to be addressed in corporate governance

1. Proportion of Independent Directors: There are different views on number of independent

directors. Some say 1/3rd of directors shall be independent whereas others say 50% of the
directors shall be independent. Actually, it we see carefully then it is not the number of
independent directors rather the quality of independent directors that matter.

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 2. Who shall be given more priority: There is confusion whether priority shall be given to the
shareholders (Anglo-American model) or it shall be given to workers, managers, suppliers
and customers (Continental and Japanese model)
3. What shall be representation of Women? Some people say women should have large
representation whereas regulations in India has mandated just 1 women director on the
board of listed companies. There is no doubt that women representation shall increase but
just mandating higher number of seats be reserved for women directors is not the solution.
The works needs to be done at grassroot level by promoting education for women and
promoting self-confidence in them
4. What shall be the Remuneration of Directors? Some will favour high remuneration and
some low. What is fair is a reasonable package of remuneration depending on the
qualifications, experience and value-added of the Director. All Directors should not be paid
an equal amount of remuneration
5. What shall be the degree of Government Control: Opinion differs on this issue, and many
are in favour of minimal control. It should be instructive to note that in case of India, after
the introduction of liberalization, the role of the government has become minimal, although
in some matters, legal tentacles are still strong. The constant frauds, scams and scandals
makes it necessary for government to have some say in these matters
6. Should there be a few big shareholders, or a large number of small shareholders scattered
over the whole country: large number of small shareholders increase the compliance cost,
and these may not have much combined power to challenge any decision. On the other
hand, the few big shareholders lead to monopoly of these shareholders and there is nobody
left to question them on crucial issues

8. Emerging Trends in Corporate Governance

1. In many countries including India, the role of the Board has been made more elaborate by
making management more accountable through the Audit Committee.
2. Another recent trend in the area of corporate governance is the increasing use of newer
and newer technology and communication system. This has considerably reduced the
problem of information asymmetry
3. There is now a growing trend of more external candidates becoming CEOs. These CEOs
will have a shorter tenure than internal CEOs and would have less inclination and contacts
to engage in frauds
4. Promulgation of corporate governance codes in public sector organizations also to make
them more efficient and accountable
5. In spite of RTI (Right to Information) Act in India in 2005, informers and whistle blowers
are being harassed. Recent recommendations are in favour of protecting the whistle
blowers to make the corporate governance more streamlined and trouble free

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 6. All forms of corporate disclosures are now the trend. Disclosures will make things more
transparent. In the list of disclosures, there are also disclosures of executive remuneration
and compensation
7. A recent trend in corporate governance is to make Audit, Nomination and Remuneration
Committees more neutral by bringing in independent directors. This will, perhaps, make
business activities more transparent and increase accountability.
8. Many corporations are now looking for a market for corporate governance services. Such
services are going to be outsourced in the near future. This may decrease cost and
increase efficiency.
9. All countries, especially India, are engaged in reforming company laws and tax laws in
accordance with the requirements of industrial growth and new responsibilities towards
corporate governance.
10. Corporate social responsibility (CSR) has now been accepted as one of the most
important agreed tasks of corporate governance all over the world.
11. One of the most important emerging trends in the corporate governance now is the
acceptance of a globalized standard of corporate governance. These standards as norms
are already set by the OECD. Many of the world countries have opted for this standard in
recent years.
12. It is trend now to look for people for the position of independent directors based on
their qualification and experience than based on acquaintance
13. Media has become more vigilant
14. Investor education is now a top priority

15. Corporate Social Responsibility (CSR)

Being a good corporate citizen means that companies have to be internally well governed
through corporate governance and externally responsible through CSR. As the cliché goes,
charity begins at home and hence corporates need to ensure that their internal governance
models are robust before they embark on CSR. In other words, CSR and corporate governance
are two sides of the same coin

Corporate Social Responsibility can be explained as:

• Corporate - means organized business

• Social - means everything dealing with the people
• Responsibility - means accountability between the two CSR has become an established part of
the global corporate landscape. It means when a corporation goes beyond making profit and
engages in actions that results in social good.

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 15.1. Government Mandate for CSR
Companies with a net profit of RS 5 crore should spend 2% of their average profit in the last three years
on social development-related activities such as sanitation, education, health care and poverty alleviation,
among others, which are listed in Schedule 7 of the rules

15.2. Need for CSR

The resources and abilities of governments in the developing world are limited. Organizations (Public or
Private), therefore through CSR can play vital role in supporting government in the development
process. Apart from this, it also helps as-

• Creates a favorable public image

• Encourage social involvement of employee
• Coalescing societal and organizational goals
• Gives greater freedom and flexibility in decision-making
• Encourages co-operative attitude and healthy competition

15.3. Issues with CSR

▪ Eyeing profit and displaying greed:
▪ Lack of specialists:
▪ Transparency Issues: NGOs or local agencies do not disclose the information about their
programs, address concerns, assess Impacts and utilize funds. This lack of transparency
creates an indelible impact on the relationship and trust between the companies and local
communities which is the key to the success rate of any CSR initiative
▪ Geographic equity: Five states: Maharashtra, Gujarat, Andhra Pradesh, Rajasthan, and Tamil
Nadu account for well over one quarter of all CSR funding. Towards the bottom of list are
Nagaland, Mizoram, Tripura, Sikkim, and Meghalaya-all from North-east. It reflects the
inclinations, interest, and priorities of the business sector.

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Email – hello@edutap.co.in, M - 8146207241 1|Page http://www.edutap.co.in
 1 What is Ethics?
So, we can define ethics as:
• “the study of what is right or good human conduct”
• “the science of ideal involved in Human life”
• “the science of moral judgment”
• “the science of morals in human conduct”
• “the study of the general nature of morals and of specific moral choices"

2 Why ethical problems occur in business?

Some main reasons are as follows:
1) Personal Gain and Selfish Interest
Personal gain, or even greed, causes ethical problems in Businesses when they employ
people whose personal values are less than desirable. They will put their own welfare ahead
of all others, regardless of the harm done to their employees, the company, or society.

Additional Information
1) Ethical egoist
A manager or an employee who puts his or her own self- interest above all other
considerations is called ethical egoist. Self-promotion, a focus on self-interest to the point
of selfishness, and greed are traits commonly observed in an ethical egoist.
“Looking out For The Number One” is the ethical egoist motto.

2) Altruism – acting for the benefit of others when self-interest is sanctified – is seen to
be sentimental or even irrational.
2) Competitive Pressure on Profits

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 When companies are squeezed by tough competition, they sometimes engage in unethical
activities to protect their profits.
3) Business Goals versus Personal Values
Ethical conflicts in business sometimes occur when a company pursues goals or uses
methods that are unacceptable to some of its employees. Whistle-blowing may be one
outcome if the employee goes to the public with a complaint.
4) Top Management sets an Example
Top managers who are unethical or who promote activities and decisions that are unethical,
project the image that ethics don’t matter.
5) Unclear Policies
In some cases, managers and employees exhibit poor ethical behavior because the
company doesn’t offer a clear model of ethics.
3 Branches of Ethics
Branches refers to the types of ethics, which are as follows:

3.1.1 Descriptive ethics:

It is an empirical study of people’s moral belief, actions, and conduct. It aims to know the
actual choices that people in a particular society make in a particular situation. It is known
as value free approach. It gives us idea about way of life, behavior, choices of people in
different communities.

For Example: Studying opinion of people about live in relationship, male female relations in
different societies. Describing psychological orientation and physical actions will give us
idea about ethical standard of the society.

3.1.2 Prescriptive/Normative Ethics

It involves moral standards that differentiates right and wrong conduct. It is study of ethical
theories which prescribes how people should act in certain situation. It is further divided
into 3 major domains.

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 Normative Ethics

Deontological Teleological/Utilitarian Virtue Ethics

A. Deontological approach (means are important):

This approach gives priority to actions and not results. It prescribes to take actions
which are inherently good. It evaluates the rightness or wrongness of the action based
on characteristic of the action.
B. Teleological Approach (Ends are important):
This approach evaluates morality (right/wrong) of action based on the goals/ends to
be achieved. This approach prescribes that an action is right if it leads to happiness,
pleasure and an action is wrong if it leads to unhappiness or pain not only for the
performer but also for everyone else who is involved in it.
C. Virtue Ethics:
Virtue is the moral behavior of the person/ individual. It is related with the inherent
character of an individual. An action would be right/wrong if it corresponds with the
virtue of an individual.

3.1.3 Meta Ethics

It deals with the broader questions related with study of ethics. Rather than focusing on
what is right and wrong, meta ethics deals with why it is right/wrong. It goes into the origin,
meaning and depth of the concepts related to study of ethics.

3.1.4 Applied ethics

It deals with the study of controversial moral issues. IT helps to use knowledge of moral
principles to present dilemmas. It deals with the practical and live issues to apply ethical
principle.

a. Bioethics: It is the study of ethics concerning issues related with biological issues and
facts concerning living beings. For Example: Abortions, Euthanasia, Aadhar data
breach
b. Environmental ethics: It is the part of environmental philosophy which considers
extending the traditional boundaries of ethics from solely including humans to
including non-human also. For Example: Protecting tigers, forest conservation.

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 c. Social issue: Social aspects of human life which involves questions of right and wrong.
For Example: Inter-caste marriages, reservation issues, gender discrimination.
d. Administrative issues: Administrative officer come across many issues in day-to-day
administration. For Example: whether encroachments of poor should be removed to
beautify city is an ethical issue. Whether to do it or not is an ethical dilemma.
4 Who Sets Ethical Standards?
The moral standard are set by the following agents and institutions:
➢ Tradition and convention, and inter-generational practices.
➢ Various type of institutions, such as, religion, social institutions and educational
institutions.
➢ Nomological axioms.
➢ Knowledge, wisdom and experience.
➢ Family and Friends.

4.1 Ethical standards

Many philosophers and ethicist suggested different sources of ethical standards that we
should use.
4.1.1 Fairness/Justice Approach:
This approach is propounded by Greek philosophers like Aristotle. Core idea of this
philosophy is to treat all equals equally.
For Example: Positive discrimination in India (reservation) is the intervention to do justice
with oppressed
4.1.2 Rights Approach:
Some philosophers suggest that ethical action is the one that protects and respects moral
rights of those affected. This approach considers that humans, living beings have certain
rights and dignity based on humanity. On the basis of this dignity, they have rights to be
considered as ends and not as means.
For Example: The Code of Medical Ethics of the American Medical Association is an example
of rights-based ethics. It defines patient rights and the duty of physicians to respect them.
4.1.3 Utilitarian Approach
Ethicist like Jeremy Bentham suggest that ethical action is the one that provides greatest
balance of good over harm. It teaches to ensure largest good for largest number of entities
involved in the action.
Discussed in detail in later part of the chapter.

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 4.1.4 Common Good Approach
This approach considers the common good while taking actions. If an action is in common
interest will be termed as ethical. This also calls attention to the common conditions that
are important to the welfare of everyone in the society.
For Example: Imposition of lockdown to ensure safety of lives of citizens
4.1.5 Care Approach
The approach believes that context can sometimes overrule justice and our universal code
of conduct. This approach focuses more on the interconnectedness of humanity and places
a moral significance on our relationships as 'care-givers' and 'care-receivers.'
Discuss in more details in the later part of chapter
4.1.6 The virtue Approach:
Virtue ethics is a philosophy developed by Aristotle and other ancient Greeks. It is the quest
to understand and live a life of moral character.
This character-based approach to morality assumes that we acquire virtue through practice.
By practicing being honest, brave, just, generous, and so on, a person develops an
honorable and moral character.
Discuss in more details in the later part of chapter
4.1.7 Ethical Syllogism (Reasoning)
In ethical reasoning, the moral standard of any country or society can be judged with
reference to the set of universal moral standards. In ethical or moral reasoning, there are
two interrelated ethical propositions, and on the basis of this relationship, one can arrive
at the third proposition. The third proposition is called the inference or conclusion.
EXAMPLE:
A country is unjust if there is gender discrimination. Saudi Arabia is a country where there is
gender discrimination. Therefore, Saudi Arabia is an unjust country, In this example, the
first proposition can be regarded as ethically correct. Any form of discrimination is morally
unjust in the sense that it violates human rights and goes against the natural principle of
equality. The second proposition is to be based on strict empirical truth. If the second
proposition is factually incorrect, we will not have correct ethical reasoning.

5 What Are Moral Principles?

Moral principles are guidelines that people live by to make sure they are doing the right
thing. These include things like honesty, fairness, and equality. Moral principles can be
different for everyone because they depend on how a person was raised and what is
important to them in life.

5.1 Types of Moral Principles

There are two types of moral principles: absolute and relative

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 Absolute Moral Principles
Absolute moral principles are based on universal truths about the nature of human beings.
For example, murder is wrong because it goes against the natural order of things. These are
also sometimes called normative moral principles, or those that are generally accepted by
society.

Relative Moral Principles

Relative moral principles are based on opinions and circumstances that may change over
time or from person to person or for different situations.

5.2 Difference Between Ethics and Morality

Morality Ethics

Prescribes right conduct for everyone. Right code of behavior for a group or profession.
Absolute and not changeable. Subject to change and relative in nature.
Individual Disposition. Applied in the social system, groups or
professions.
Nomological in origin. Arises out of specific recommendation of conduct
in a particular profession.
Handed over from generation to generation; It is developed and goes on evolving.
primordial in origin.
It is prescriptive. It is recommended to be followed in a profession.
6 Some concepts related to ethics
6.1 Cognitivism and Non-Cognitivism
One branch of ethical philosophy claims that it is possible to differentiate right from wrong
or good from bad in a noticeably clear and objective manner. This is called cognitivism.
However, some philosophers maintain that it is not objectively possible to know what is
good and what is bad. This is known as non-cognitivism.

6.2 Belief
Belief stem from knowledge or information. Beliefs are ideas or principles that are dear to
people. Ethical behavior of a person in many cases depends on belief and attitudes. Every
type of belief cannot be equated with knowledge because some of our beliefs may turn
out to be false on verification. The beliefs which are supported by evidence are called
justified Beliefs. Only Justified belief is knowledge.

Justified beliefs consist of two types of judgments:

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 ➢ direct or intuitive judgment- based on our sense perceptions
➢ derived judgments - formed out of the existing body of knowledge.

Belief depends on the moral state of the believer.

There are basically two types of beliefs: core beliefs and dispositional belief. Core beliefs
are more or less permanent and difficult to change whereas dispositional beliefs are
dependent and changeable.

6.2.1 Formation of Belief

There are the following six ways of belief formation:
• Beliefs come out of confidence in the spoken words of people we respect. This type
of belief is called commendatory belief.
• We may have a belief from childhood about the existence of ghosts or supernatural
phenomenon they may be real or not. This type of belief is called existential belief.
• Beliefs can be adopted from our role models.
• In our formative years, somebody else's belief may be internalized.
• Sudden changes in life may also result in new beliefs, or cancellation of old beliefs.
• Some beliefs are formed on the basis of knowledge, research or commercials.

6.3 Values
• Every person believes in certain critical values. Mahatma Gandhi valued truth, Plato
valued wisdom, and Moses valued justice.
• A value is a general belief which helps differentiate good from bad. Values guide
actions in your personal or social life. It is a particular standard that a community
gives importance to. In most communities, moral values are assigned to fairness,
justice, honesty and integrity to name a few.
• When we can assign values to particular objects, it becomes easier to make a
choice.
• The intensity attribute of value indicates the degree of its importance in a
particular context. Individual values are commitments to which a particular person
subscribes, like social justice, honesty, and so on.

6.3.1 Significance of Values:

• It gives a person direction and motivation to live in a desired way.
• The value system helps a person in making clear decisions.
• A clear value premise helps a person arrive at flawless logical deductions and moral
reasoning.

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 6.3.2 Types of Values:
There are mainly Two types of values:
1. Terminal Values:
• Terminal values are those that a person wants to address at the end.
• These values are called instrumental values.
• An instrumental value is necessary to achieve the ultimate goal.

2. Personal Values:
• Egocentric value: The value is directed towards satisfying the ego.
• Socio-centric value: The value aims at socialization and adaptation to society.
• Conformist value: This is an orientation to achieve a materialistic goal by controlling
the physical resources
• Supernatural value: It is a type of a metaphysical value beyond norms of the physical
world to achieve the ultimate reality.
• Tribalistic value: It consists of submission of oneself to higher power and authority.
• Deontic value: It considers one's own duty as the supreme religion.
• Utilitarian value: In this type of the aim is to realize the net benefits over cost.
• Consequentiality value: In this case, an important value is assigned to those actions
having good consequences.

6.3.3 Characteristics of Values:

• A value or values are chosen freely without any coercion or compulsion.
• A value is chosen from a number of options.
• The choice of value is made after considering different consequences of this choice.
• The value that is chosen is practiced and then sustained
• Value becomes a part of yourself and being.
• Values are partly genetically determined, and partly acquired through experience
and interactions.

6.3.4 Sources of Value

1. Parents and Family
2. Teachers and Classmates
3. Peer Groups and Friends
4. Reference Groups
5. Culture and Tradition

6.3.5 Values and Business:

A business organization depends on the following types of values:

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 • Excellence in all fields of business-like production, marketing and distribution.
• Innovation in production technique, cost reduction, etc.
• Establishing credibility can be ensured by trust, goodwill, rapport with customers.
• Providing consumers with best services, in particular after-sales services.
• Gathering market intelligence to know the status of the product
• Maintaining external and internal coordination of all product lines
• Creation and development of corporate values towards employees, customers and
suppliers, and social responsibility towards society.

6.3.6 Conflict of Values:

• Every professional has to live with two sets of values: personal and professional.
These two values could be conflicting at times.
• However, whenever a clash occurs between these two values, professional and
morally responsible people give preference to the professional value over the
personal value or interest. Thus, a judge may sentence his only son for murder, or a
teacher may punish his daughter for not learning the lesson.

6.3.7 Difference between Values and Ethics

Ethics Values
Ethics refers to the guidelines for Value is defined as the principles and ideals,
conduct, that address question about which helps them in making the judgement
morality (right/wrong). of what is more importan

Unwritten rules set by society

Mental construct Inculcated through
For Example: Taking respectfully to upbringing, schooling.
elders
For Example: Humility, Disciplene

Compels to follow a perticular action

Values influence emotional state of mind and
For Example: Formal attire in office which act as motivator.
may be irritating sometimes to some people
For Example: Respecting simplicity is a value
so, an indiviadual may enjoy wearing formal
clothes
Ethics are consistent in perticualr set up
For Example: Organisational ethics of reliance
are same for everybody in the office They may change from Person to person
even within same set up/organisation.

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 6.4 Attitude
Attitudes represent likes and dislikes of a person. Attitude is a learnt predisposition of
behavior towards a person, group, object and environment. Attitude regarding an object or
situation may be positive, negative, neutral, or undetermined.

6.4.1 Difference Between Attitude and Values

Attitudes Values

It represents Predisposition It relates to Judgments.

It is mostly personal. They are gathered from social and cultural parameters.

It may amalgamate several beliefs Values originate from a single belief

6.4.2 Similarities Between Attitude and Values:

Attitudes interact with values Values interact with attitude

Attitudes affect the behavior of people. Values affect the behavior of people.

Attitudes are learnt outcomes Values are learnt outcomes

Attitudes are acquired from family, peers, role Values are acquired from family, peers, role
models and institutions. models and institutions.

Attitudes are difficult to change. Values are difficult to change.

6.4.3 Components of Attitude

Affective Component:
• Affective Component (A) of attitude is the emotional aspect of your belief about a
situation or object which could be positive or negative.

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 Behavioural Component:
• The behavioral component is the verbal expression of the intention of the
individual. If any person or situation or event is liked by the agent, he will express it
through his positive attitude of acceptance.

Cognitive Component:
• In this case, there is a cognitive evaluation of the entity that helps form an attitude.
• The cognitive component is rational, and the effective component is emotional in
the formation of attitude.
• In the formation of correct attitude, it is necessary to take into consideration of both
these components; otherwise, the attitude may be incorrect.
• This is so because sometimes the first component dominates the second and vice
versa.

7 Theories of Ethics
The theories we look at here, however, are important to help us understand why the
decisions we make, or someone else makes, are ethical or unethical.

7.1 Virtue Ethics:

• Virtue ethics is a special branch of ethics founded by Plato and his disciple,
Aristotle.
• Virtue ethics emphasizes the importance of right character among human beings.

7.1.1 What is Virtue:

• Virtue is the habit of deliberate choice of right activities and performance of duties in
the correct way. Virtue is excellence of character. According to Aristotle, virtue is a
permanent state of mind to perform the best things in life.
• There can be a long list of virtues. However, the major virtues are honesty, sincerity,
truth, courage, temperance, integrity, compassion, and kindness.
• Virtue is not a congenital (from birth) but an acquired disposition which is in harmony
with moral laws. Virtue constitutes only socially desirable human disposition and not all
types of disposition.

ARISTOTLE ON VIRTUE:

• Aristotle observes that a man who does not feel pleasure or happiness in noble
actions is not a good man. Virtue is not happiness, but happiness is the index of Virtue.

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 • To Aristotle, it is the habit of choosing the relative mean as determined by reason. The
mean is the moderation of two extreme values. The point of mean will not, however,
be the same for every person.
• The moderation will imply that the person is controlling his instincts and impulses to
the point which is consistent with the moral law of reason.

Socrates on Virtue:
• To Socrates, virtue is knowledge. However, this view is not fully correct in the sense
that knowledge by itself does not give us virtue even though it may be a condition or
the necessary basis for acquiring virtue.

Virtue is a Relative Concept:

• Virtue is a relative concept. Virtue is relative to society, the nature of the state and
social position and responsibility.
• Like in a communist state, religious activities are not looked upon as virtues. For a
totalitarian state, loyalty to ruler is a higher virtue than devotion to God.
• The nature of virtue differs from country to country and from time to time.

7.1.2 Classification of Virtue:

7.1.2.1 Plato’s Cardinal Virtue:
These are considered as Basis of all other Virtues. They are: Wisdom, Courage, Temperance
& Justice.

7.1.2.2 Aristotle’s Classification:

1. Intellectual Virtue (rationality and Knowledge).
2. Moral Virtue (temperance, courage, habits for realization of good).

7.1.3 Criticism OF virtues:

• Virtues are not enough for enhancing social welfare which depends on some right
over action. Virtues are covert qualities. Unless virtues are translated into action,
there is no social welfare or personal improvement or gratification.
• At times, it becomes very difficult to distinguish between virtues and values, and to
that extent, virtue ethics loses its importance as a separate branch of ethics.
• Virtues may be looked upon as vice. For instance, in Aristotle's Greece, humility was
a vice but to Christians, it was a virtue. There is no clear-cut classification of unique
virtues.

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 • A man may possess some virtues, yet he may be a bad man. For instance, a man may
possess courage, prudence, justice and temperance (the four classic virtues) and yet
he may be angry, cruel, nasty and vengeful.
• Virtue ethics fails to address the dilemmas that arise in applied ethics. For instance,
in the case of abortion, virtue ethics does not give any direction.

7.1.4 Difference between Values and Virtues

Values versus Virtues
• Values are the principles or standards that • Virtues are qualities that are considered to
are considered as important. be good or desirable in a person.
• All values may not be desirable or have • Virtues have high moral values
moral goodness.
• Values are subjective and personal since an • Virtues are qualities that are universally
individual can decide what is important to accepted to have high moral values.
him/her.

7.2 Golden Mean Theory

• The theory has been given by Aristotle. According to Aristotle virtue ethics is based
on the idea of golden mean. It is a virtue to follow the middle course between
excess and deficiency, doing so requires restraint and control of greed or instincts.
• The essence of Aristotle's theory of golden mean is the idea that moderation is a
definite virtue to enjoy life and is the secret of a good and happy life.
• The Greek philosophical idea on the golden mean is entertained by Buddhism.
• Buddhism advises its followers to adhere to the middle path by abandoning the
sufferings of a very strict ritualistic life on the one hand and the pleasure and easy-
going life of a worldly man on the other.

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 7.3 Teleological Theory
• Greek philosophers, in particular Aristotle, popularized the teleological theory.
• The word teleology is derived from telos which means the end or consequences.
• Thus, the theory of consequentialism is directly associated with the teleological
theory. There are indeed many variations of the theory of teleology.

• Teleological theories do give a definite perspective to make moral choices by

comparing competitive alternatives, and the relative impact on people.

7.3.1 Criticism of Teleological Theory

• They rely too much on unknown and uncertain results, and neglect the rights and
needs of minorities. These right and needs may be in conflict with those of the
majority

7.3.2 Utilitarianism
• Utilitarianism is a teleological theory. According to this theory, social welfare is the
sum of the well-being of all individuals. Utilitarianism states that man's worldly
happiness is the only good. This is a normative positive test of all policies, actions
and institutions. The motto: "greatest good of the greatest number", was first
voiced by Francis Hutcheson.
• The main proponent of this philosophy is Jeremy Bentham who is revered as the
father of utilitarianism. In the Greek period, utilitarianism was regarded as a form of
hedonism (Epicureanism).
• The neoclassical economists used the concept of diminishing marginal utility and
interpersonal comparison utility to demonstrate that overall utility will increase if
there is a transfer of income and wealth from the affluent section of the people to
the poor. The richer section will lose some utility in this case, but the gain of utility
received by the poor people will be more overwhelming.
• The theory of utilitarianism is sometimes interpreted in terms of cost and benefit
analysis (net benefit).

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 7.3.2.1 Summarising the Definition of Utilitarianism:
we can define utilitarianism in the following way:
• Greatest good of the greatest number.
• Maximization of Pleasure
• Minimization of Pains
• Maximization of happiness
• Satisfaction of desire

7.3.2.2 Two Variants of Utilitarianism:

• Act utilitarianism is concerned with those actions which will bring great benefits to
great number of people. However, in case of act utilitarianism, the problem arises
because some acts are by themselves not socially acceptable like stealing.
• Hence, act utilitarianism has to be supplemented with Rule utilitarianism which
gives direction to the former. However, the fact that "stealing is not acceptable" is
not always correct to rule based utilitarianism, because sometimes, stealing can save
innocent lives too.

7.3.2.3 Limitations of Utilitarianism:

• The concept (happiness) means different things to different people.
• In the case of utilitarianism, the end justifies the means. This idea has been
vehemently criticized by many. It is said by critics that for a moral action, both the
end and the means must be good.
• Utilitarianism does not consider individuals or minorities.

7.3.3 Ego Based Principle- Ethical Egoism:

• Human actions are essentially ego-centric and selfish. Even when a man is donating
to an organization, his intention is to gain popularity which will feed his ego.
• However, as Adam Smith observed, some consequences of human selfishness may
bring social welfare by satisfying human needs. However, there is a difference
between selfishness and self-centeredness.
• Self-centeredness is aimed at furthering personal ambition; it does not harm the
interest of others. Selfishness, on the other hand, is the achievement of gains the
cost of others.

7.4 Consequentialism
• A consequentialist theory is end based. If the consequences and end are good, then
it can be recommended for implementation; otherwise not.

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 • Consequentialism is different from utilitarianism. The former simply depends on
good consequences for a policy to be supported but the latter has nothing to do with
any consequences other than utility.

7.5 Theory of Deontology and Categorical Imperative

• Deontologists are non-consequentialists which is governed by certain dos and do

nots. The principle of deontology is based on the idea of correctness or rightness of
moral behavior. According to deontologists, the nature of moral principles is
permanent and stable.
• The philosophy of deonticism has found its best expression in the hands of
Immanuel Kant (1724-1804), a celebrated German philosopher. Kant advised us to
do that act which can be universalized.
• Kant is the leading founder of the principle of universalism. Universal ethical
principles are based on justice, rights, fairness, honesty and respect. Kant makes it
clear at the beginning that:
o Morality is impartial. It applies equally to everybody.
o Morality is concerned with our intentions and not necessarily with the
consequences of our actions.

There are 2 Types of Deontologists: Act Deontologist and Rule Deontologist:

• Act deontologists believe that the ethicalness of a person can be known by his overt
actions which should be based on justice, fairness, benevolence, equity and
kindness. Deontologists observe that deontological rules provide only guidelines.
• Rule deontologists believe that there are certain rules of morality that people
should follow while making decisions. These rules are framed on the basis of moral
and logical principles to guide human actions. Kant's categorical imperatives provide
some of these rules. These rules guide ethical behavior and actions which eventually
override other contextual local practices.

Categorical Imperative
A rule of conduct that is unconditional or absolute for all agents, the validity or claim of
which does not depend on any desire or end.

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 7.5.1 Criticism
• The theory of deonticism is silent in case of ethical dilemma.
• It is often difficult to follow your duties blindly when confronted by a situation that
demands immediate attention.
• It is not a good behavior to follow blindly one’s own duty as directed by your boss.
The duties may be wrong or immoral.

7.6 Rights and Duties:

7.6.1 Rights
• Right is the entitlement or empowerment to do certain things. Rights are moral
claims of individuals recognized by society.
• There are many types of rights, like, legal, constitutional, fundamental and moral.
• These rights are essential for the highest personal good and social benefits.
• Negative and Positive Rights
➢ Negative rights are rights to be free from interference by others.
➢ Positive rights are those that others have a duty to supply. If you have a
right to education, others must supply schools, teachers and books.
• Kant and Rawls argue that rights are based on your intrinsic value.
• To Kant, the intrinsic value lies in your ability to make rational decisions and duties
to respect all human beings and to do what is morally good.
• To Rawls, intrinsic value lies in the ability to do justice based on free and fair
distribution.
• John Locke observes that human beings have - natural right to life, liberty and
property, and by virtue of a social contract, the state is assigned rights to protect
them. The purpose of the state is to ensure that people respect and do not violate
each other's rights.
• Hohfeld (1923) considers all rights as relationships. There are four types of rights:
➢ Claims (A claim entitles a person to demand something from another person).
➢ Privilege (Liberty/No-claim. Therefore, one is free to do something).
➢ Power (A legal relationship or claims can be created by power to control
others).
➢ Immunity (This enables a person to resist the powers of others over a person
having immunity).

7.6.2 Duties:
• Duties are moral obligations. The main examples of duties are:

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 ➢ Respect for truth, laws, society and the state etc
• There are generally three classes of duties:
➢ Duties to self
➢ Duties to others
➢ Duties to God

7.6.2.1 Kantian Theory of Duty

• Immanuel Kant distinguished between duties of perfect obligation and of imperfect
obligation. The former duties are generally duties which are precise and definite and
can be exacted from individuals. The latter duties are mostly positive and are
indefinite, unlimited, and cannot be exacted from individuals.
• There are four principles of Kantian theory of Duty:
➢ Morality of your action depends on what you intend to do and not on the
consequences.
➢ Moral rules are impartial, and these apply equally to everyone.An action is
moral only if you can justify the rule that everyone can follow.
➢ People are not merely means to an end. They should be treated as human
beings with infinite value.
➢ Reversibility and universality are the 2 rules for determining a morally right
duty in the Kantian categorical imperatives.

7.6.2.2 Theory of Entitlement and Property Rights

• Robert Nozick is an American philosopher. His entitlement theory (ET) is a theory of
distributive justice: - a distribution of wealth obtaining in a society as a whole is a
just distribution if everyone in that society is entitled to what he has.
• Nozick is of the view that a voluntary transfer of a property is a just transfer.
Transfer under duress, temptation or false promise is unjust.
• The entitlement theory of Nozick goes against the two popular theories of
distributive justice:
➢ Nozick does not agree with the Marxian theory of equality. According to
Nozick inequality is natural. Equality is a contrived notion that is unjust and
unnatural.
➢ Nozick also does not believe in the difference principle of Rawls. He dislikes
the idea that there should be redistribution of income or goods from the rich
to the poor.

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 7.6.3 W.D. Ross 7 Duties
W.D Ross was an American who has given seven absolute moral rules for human beings to
live a happy life. These 7 rules are:
1. Fidelity
This is essential to maintain a good relation in a society by keeping promises and being
honest in all situations and respecting the rule of mutual trust.
2. Justice
In dealing with people and in the distribution of basic goods, justice and fairness should be
practiced by people.
3. Gratitude
Gratitude is basically an individual virtue that makes life enjoyable and pleasant. It is
necessary to return a favour by words or deeds of gratitude.
4. Reparation
It is a kind of compensation for the injury and harm done to others. This is a form of justice.
5. Beneficence
You must be benevolent in nature and do good to others whenever necessary. Thus,
kindness and compassion are important.
6. non-malice
This means the prevention of injury or harm to others.
7. Self-improvement
Ross's rules do include provisions for constant self-improvement by practicing virtues and a
value system in accordance with the principles of morality.

7.7 Albert Carr’s Theory of Business Ethics

• According to Albert Carr the profit maximization principle should be followed by
businesspeople even if it involves lying.
• According to him, deception is a legitimate part of Business. He compares business
with poker game. Family ethics and values are not relevant in business.

8 Concept of Justice
• The term "justice" is derived from the word "just", which means "appropriate",
"proper" and "fair". When a treatment is accorded to a person in proportion to
what he deserves, he can be said to be treated in a just way.
• Justice is something which can be regarded as reasonable on both moral and
empirical grounds. Justice is a normative social order.
• Absolute justice is divine and is difficult to achieve in the real world. In the actual
practice, we come across what is known as relative justice.

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 8.1 Types of Justice

8.1.1 Procedural Justice

• There may be justice in an act. However, what is important is to see whether that
action has been performed complying to the law or through a correct procedure.
8.1.2 Commutative Justice
• Commutative justice is a form of justice where fairness or justice is ensured at the
beginning and all people are treated equally. In other words, people start on the
level field. The background of the people is totally irrelevant in the case of
commutative justice.
8.1.3 Compensatory Justice:
• In the case of compensatory justice, some compensation is given to the person who
has been treated unequally in the past.
• Compensation for the injustice done in the past must be proportional or
equivalent to the loss sustained by an individual in question. But, in many cases, it is
difficult to assess the appropriate amount of financial compensation.
8.1.4 Retributive Justice
• This ensures some form of punishment to a defaulter. The imposition of fines or
penalties, however, may not be adequate or just in a particular situation.
• Sometimes, the punishment may be more than what is needed and sometimes, it
may be less than what is necessary. The basic purpose of retributive justice is to
prevent the person from doing similar type of unjust work in the future.
8.1.5 Communitarian Justice
• This refers to a system of justice shown to a particular community which has been
suffering in the past from injustice (say, the tribal people in Australia).
8.1.6 Distributive Justice
• Distributive justice is very critical for human society as a whole. The basic idea of
distributive justice is to treat equal people equally and unequal people unequally.
• The principle of distributive justice upholds the view that the benefits and burdens in
a society must be distributed equally among its members.

8.2 Theories of Justice:

8.2.1 Utilitarian Theory

We have already covered this in previous Sections.

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 8.2.2 Egalitarian Theory of Justice
• This theory is based on equality in the matter of distribution of burdens and
benefits. This is an important theory of distributive justice.
• The theory seems to give importance to absolute equality. It does not consider
ability, efforts and need. Thus, according to this theory, the rich and poor will get
the same benefits and will make the same sacrifices. This theory has been criticized
on many grounds.

CRITICISM OF EGALITARIAN THEORY OF JUSTICE:

• Firstly, since human beings are not equal, it is said that the principle of equality is
not a just principle.
• Secondly, it does not consider the genuine need of people.
• Thirdly, if all people are treated equally, there would be no incentive for the
hardworking and intelligent people to produce or achieve more.

8.2.3 Capitalist Theory of Justice

• The basic principle of Capitalist Theory of Justice is that everybody should receive
the benefits according to his contribution. Capitalist justice favors inequality
because inequality leads to differential contribution.
• It assumes that human beings are essentially unequal. Therefore, justice wants
inequality to be accepted as the basis of just reward.

8.2.4 Marxian Theory

• Karl Marx (1867) was of the view that only the establishment of communism could
guarantee the need-based wage payments to workers. Thus, communism to Marx
is a just economic system.
• Justice requires that the wage system should be need-based. The needs should
include not only the individual needs but also the social needs of human beings.
• Marx has given a number of instances where he has proved that a capitalist system
is basically unjust, particularly to the working class.

Surplus value:
• A capitalist does not pay a laborer according to the productivity of his labor. The
wages under a capitalist system are always less than the productivity of labor.
• This surplus is pocketed by the capitalists. The greater this surplus value, the
greater is the degree of exploitation.

Capital Accumulation:

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 • Capitalism survives on the basis of capital accumulation which leads to
centralization of capital and concentration of capital.
• As a result, workers under capitalism not only suffer from physical poverty including
malnutrition, under-nutrition, and poor living conditions but also from social
poverty, implying discrepancy between wages, inequality in consumption, inequality
in opportunities and in resource endowments. Capitalism leads of alienation of
workers.
• According to Marx labor power is regarded as a commodity under capitalism.
• According to Marx the government or the state is also not neutral under capitalism;

CRITICISM OF MARXIAN THEORY:

• Firstly, Marx's prediction that economic conditions of workers under capitalism
worsens, has not been supported by historical evidence.
• Secondly, Marx's idea that workers should be given need-based wage, has not
been accepted on economic grounds.
• Thirdly, Marx's view that the free market is an unjust system because it generates
inequalities has been criticized by non-Marxists by saying that justice does not mean
equality.
• Lastly, it is pointed out by critics that the demise of the Soviet Union is proof that
the Marxian theory is unworkable in actual practice.

8.2.5 Socialist Theory of Justice

• Socialism is based on the idea of equality of human rights, freedom and dignity.
Socialism is the first or the lower phase of communism. In this system, the ideal
form of distribution will be: "from each according to his ability and to each
according to his needs".
• Socialism stands for the abolition of class conflicts, through the socialization of
means of production. Under socialism, the state does not represent the interest of
any particular class, but it stands for the interest of all people.
• The social properties are held by the state.
• All people work collectively, and labor is socialized.
• The surplus product is utilized for the purpose of socio-economic development.

Criticism of Socialist Theory

• The remuneration is not based on contribution but on the needs of the people.

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 • Secondly, the needs of people are very ambiguous. There may be physical, social,
present and future needs. What type of need is to be considered under socialism is
the question?
• Thirdly, no incentive for the workers to increase his productivity.
• Lastly, under socialism, individual freedom may be restricted.

8.2.6 John Rawls Theory

• John Rawls' theory of justice (1971) has been regarded as a landmark that provides
an alternative to the theory of utilitarianism.

Rawls theory is based on the following three principles:

➢ There should be equal liberty for all citizens
➢ There should be equality of opportunities for everybody
➢ Some amount of inequality is permitted
• A morally warranted situation for justice will have to be based on some neutral
position at the beginning, which Rawls refers to as the original position. In this
original position, the parties (the rational people) will choose those principles which
they will apply to themselves.
• According to Rawls, social welfare is the welfare of the worst-off members of a
society. Rawls rejects the importance of merit because merit comes from heritage,
upbringing and natural endowments that are irrelevant from the moral point of
view.
• In Rawls' theory, no person deserves to benefit exclusively from his talent.

8.2.7 Libertarian Theory

• The most important proponent of libertarian thinking is Robert Nozick (1974).
• According to him, the transfer of income or wealth from the rich to the poor is
unjust for many reasons. Nozick is an anti-consequentialist.
• According to Nozick, only those processes are just where exchange is voluntary.
• The motto is from each according to his choice and to each according to what he has
chosen.
• Nozick also does not support the idea of infringement of individual freedom by any
authority.
CRITICISM:
• Most of the poor persons in a society will remain poor forever.
• The level of socio- economic inequality will go on increasing. The theory is anti-
Progressive.

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 • Nozick has given primary importance to freedom from coercion. He is not
concerned with basic human freedom like freedom from poverty and
unemployment, ignorance and starvation.

8.2.8 Gandhian Concept of Justice

• In Gandhi's conceptualization, justice constitutes natural universal justice and is
based on rights.
• Duties are preconditions of rights that are to be earned through proper
performance of duties.
• Gandhi has talked about 6 different Types of Justice: Pure Justice, Social Justice,
Satanic Justice, Claim to natural rights, No harm to the opponent party & Absence
of Duress
• According to Gandhi, an action is just when it does not harm either party to a
dispute. This idea of justice is the very heart of Gandhi’s satyagraha and conflict
resolution.
• The satanic concept of Justice is wicked in nature and is motivated by revenge and
selfish personal gain. As against this auto-centric concept, there is the notion of pure
Justice which is according to Gandhi is motivated by compassion, kindness ad pity
shown by employers towards the subordinate or dependent employees.

9 Care Ethics
• Care-based ethics teach the golden rule: "Do unto others as you would have them
do to you". The ethics of care is based on the philosophical theory of reversibility.
• Care is primarily based on love and includes respecting the dignity of other
individuals. Care for somebody depends primarily on the nature of the relationship.
• Ethics of care is a study of all the factors concerning care, care-based relations,
sources and motivation for care, costs and conflicts of care, care and justice, and
many other related issues.

9.1 Two Broad domains of Care:

1. Esoteric Care
2. Exoteric Care

9.1.1 Esoteric Care

• The conventional analysis that care is only related to one's near and dear ones,
family and friends is indeed a narrow view.

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 9.1.2 Exoteric Care:
• This type of care is shown to the people outside the domain of family and friends.
It can also be about a community (communitarian care).
• Over the course of time, the exoteric domain mingles into the esoteric domain if
the relationship is sustained and nurtured.

9.2 The Feminist Theory of Care Ethics

1. Mary Midgley’s View
2. Nel Nodding’s View
3. Marilyn Friedman’s View

9.2.1 Mary Midgley’s View

• Mary Midgley (1991) concludes that morality begins and grows with our natural
affections for the family and friends.
• Midgley assures us that the natural affection for family and friends plays a major
role in the development of care and compassion.

9.2.2 Nel Nodding’s View

• According to her giving care does not mean the negation of liberty or personal
wishes of the person being cared.
• One should not impose one’s own rules while taking are of others.

9.2.3 Marilyn Friedman’s View

• Marilyn Friedman (1987) is of the view that the ethical principles of care must be
integrated with those of justice. But that does not mean that care and justice are
the same notions.
• Friedman makes it clear that men and women use care and rights more or less in
the same way.
• It is the general belief that most men use justice-based reasoning, and most women
use care-based reasoning.
• We need care in many situations where justice is a major concern, and care can
become an important issue in a case involved with justice. Thus, Friedman advises us
to integrate justice with care for the best possible result.
• Friedman in this context speaks about the following three types of Justice:
➢ Distributive Justice
➢ Corrective Justice
➢ Institutional Justice

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 DISTRIBUTIVE JUSTICE
According to her, distributional equality in the matter of distribution of property, assets and
wealth among the members of a family is unjust, if one of the members is doing most of the
work than others to maintain the family relationship and contributing maximum to the
growth of the family.

CORRECTIVE JUSTICE
Very often, a personal relationship stands in the way of corrective injustice in a family. A
person in the family may constantly impose harm to another or cause injury to others but
he goes scot-free. In an ideal situation, the wrong doer should regret and change his
behavior so that this type of transgression may not happen in future. However, this does
not happen in most of the cases, and women remain the most vulnerable.

INSTITUTIONAL JUSTICE
Institutional justice is based on an integration of care, corrective justice and distributive
justice.

9.3 Conflict Between Care and Justice

• Justice focuses more on values, principles and abstract rules, but care specifically
focuses on persons and personal relations and does not depend on codified rules.

9.4 Why do We Care?

• It is a natural human instinct.
• Natural justice demands that one should take care of those who are dependent on
you.
• Compassionate Behavior.
• Care is based on security (Child parent relationship).
• Care gives a rare sense of happiness, mental peace and satisfaction.
• Care gives us an opportunity to Pay off our debts.
• For many religious-minded people, care for others is a means to get the blessings of
God.

9.5 Care, Cost and Conflict

• As a part of the programme for the social responsibility of business now becoming
popular, many organized and established companies have been undertaking
activities for providing various types of care to the sick, disabled, mentally retarded,
orphans and helpless people.

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 • Care is a function of mind, which does not depend so much on the level of profit or
assets but on values, attitude and the tradition of care culture.
• Some companies that are making huge amount of profit may not be motivated by
the philosophy of ethical care because they lack in the culture of care, sympathy and
compassion.

9.6 Conflict and Trade-off

• There is often a conflict between the personal care (PC) and impersonal care (IC)
expenditures.
• An increase in the personal care expenditure leads to a decrease in the impersonal
care expenditure.
• The situation becomes difficult to settle when personal care expenditure includes
care for one's own parents or dependent children. In such a case what is appropriate
is to make a trade-off.
• There may be many points of trade-offs between PC and IC, and out of these,
depending on the urgency, need and circumstances, one can choose a particular
point of trade-off.

9.7 Criticism of Care Ethics

• Too much care can make a person dependent creating a moral hazard problem.
• The needs of the caretaker are at times ignored and compromised.
• The application of care ethics is likely to give rise to discrimination, inequality and
even injustice. In the same family, some may receive more care and others less
without any apparent cause.
• Care ethics has no legal standing in the same sense in which utilitarianism and
deontology seems to have. Care ethics cannot be made made operational through
enactments, policy and legal codes. It is entirely voluntary.
10 Some Additional Ethical Theories and Philosophies

10.1 Rule Based Ethics:

• This principle believes that ethical action should be based on certain given rules of
ethics. In such a case, the consequences are not important, but the open action is
crucial.

10.2 Ethical Relativism

• It is an empirical fact that all ethical norms and practices are not equally valid and
applicable to all societies.

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 • Thus, ethical standards differ from country to country or from place to place, and
hence the birth of ethical relativism. Ethical standards are relative to a situation,
place, time and circumstances.

Criticism against Ethical Relativism

• It seems that to the proponents of ER, all local moral standards are equally
acceptable without exceptions. Morality in that case becomes a flexible concept
without any rational basis.
• ER believes that the only criteria for judging right and wrong are the local standards
and practices. Such a standard of judgment is too constricted.
• ER tends to believe that the moral standards of a particular society are the
fundamental basis of judging it or for subsequent policy actions. This view is
incorrect.
• ER does not lay emphasis on the universal moral standard. In fact, some moral
standards are unchanged, and live on.

10.3 Ethical Pluralism

Ethical pluralism tries to integrate all the ethical theories or principles while considering a
particular situation.

10.4 Ethical Objectivism

Moral Objectivism holds that there are objective, universal moral principles that are valid
for all people. Louis Pojman proposes one such moral principle that he believes is binding
upon all human beings: “It is morally wrong to torture people just for the fun of it.”

10.5 Ethical Absolutism

Moral absolutism is an ethical view that all actions are intrinsically right or wrong.

10.6 Ethical/ Moral Realism

‘Happiness is good.’ ‘We shouldn’t punish innocents.’ ‘Generosity is a good character-trait.’
Ethical realists say that ethical claims such as these are objectively true: their truth does not
depend on anyone’s particular opinions, beliefs, preferences, or characteristics. That is,
realists believe that there are right answers in ethics. Moral statements provide factual
information about those truths

10.7 Ethical/ Moral Subjectivism

Subjectivism teaches that moral judgments are nothing more than statements of a person's
feelings or attitudes, and that ethical statements do not contain factual truths about
goodness or badness.

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 10.8 Ethical/ Moral Emotivism
Emotivism is the view that moral claims are no more than expressions of approval or
disapproval.Hence, it is colloquially known as the hurrah/boo theory.

10.9 Ethical/ Moral Prescriptivism

Prescriptivists think that ethical statements are instructions or recommendations.

10.10 Ethical/ Moral Supernaturalism

Supernaturalism makes ethics inseparable from religion. It teaches that the only source of
moral rules is God. So, something is good because God says it is, and the way to lead a good
life is to do what God wants.

10.11 Ethical/ Moral Intuitionism

This refers to the philosophical belief that there are objective moral truths in life and that
human beings can understand these truths intuitively. Intuitionists think that goodness or
badness can be detected by adults- they say that human beings have an intuitive moral
sense that enables them to detect real moral truths. Something is good because it's good;
its goodness doesn't need justifying or proving.

10.12 Hedonism
Hedonism is a school of thought that argues that pleasure is the highest good, the supreme
ideal of life. In simple terms, a hedonist strives to maximize net pleasure [pleasure minus
pain).
Hedonism evaluates human actions on the basis of the consequences of actions i.e.,
pleasure and pain.
There are two forms of Hedonism viz. Psychological Hedonism and Ethical Hedonism
• Psychological hedonism is the view that humans are psychologically constructed in
such a way that we exclusively desire pleasure.
• Ethical hedonism is the view that our fundamental moral obligation is to maximize
pleasure or happiness.
Ethical Hedonism again has two varieties viz, gross, and refined.
• Gross Hedonism gives weightage to the sensuous pleasures. All pleasures are alike,
and they differ only in intensity. Present pleasures are to be preferred over future
pleasures.
• Refined Hedonism gives weightage to mental and more subtle, fine pleasures.
Refined Hedonism accepts the role of reason in the attainment of pleasures.

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 11 What is Business Ethics?
Different writers define Business ethics differently. Some of the important definitions are:
1. Business ethics is the application of the principles of ethics in the realm of business,
and commerce.
2. Business ethics deals with certain moral principles that can tell us whether a
particular business concern is run in a morally right or wrong way.
3. Business ethics is the sum-total of rules and principles which can be regarded as the
standard norm to evaluate and guide business activities.

11.1 Relation between Ethics and Business Ethics

There are at least the following three inter-relations between Ethics and Business ethics:
• First, ethical theories offer various concepts and precepts which are relevant to
business managers in conceptualising certain ethical issues in relation to business.
• Second, ethical theories provide a set of analytical guidelines and moral standards,
which can be directly or indirectly applied to the solutions of business problems
• Third, one of the most important ways in which ethical theories can contribute to
business management is the building up of ethical models (framework) about ethical
decision-making, ethical audit, solving ethical dilemmas, and so on.

11.2 Classical View on Business Ethics

• The classical and neo-classical views considered business ethics as irrelevant and
supported unbridled expansion of capitalism and market forces.
• According to these views, business and ethics are two separate categories, and
these cannot be meaningfully mixed up.

11.3 Scope of Business Ethics

Business Ethics works at different planes and levels. It encompasses different level of
activities:
o Individual level (personal Level)
o Organizational Level
o Association Level
o Societal Level
o Internal Policy making (making business strategies)
o Global Level (Business Interactions)

11.4 Importance of Business Ethics

• Following business ethics strictly leads to profits.
• Ethical policies leads to transparency in the business landscape.

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 • Business ethics help the company to get talented employees on board.
• It also helps in setting a safer and conducive environment in the company for
employees to work in.
• Business ethics will create a positive image of the company.
• If business ethics are strictly followed, it will safeguard consumer rights as well.
• It will ensure there are no unfair or malpractices taking place in the company

11.5 Approach to Business Ethics

There are basically the following 3 approaches to Business Ethics:
1. Profit Based Morality Approach
2. Law Based Morality Approach
3. Natural Laws

11.5.1 Profit Based Morality Approach

• This approach recognizes the symbiotic relation between profits and moral
activities.
• Thus, when the profit of a firm is high, its morality gets a better priority.

11.5.2 Law Based Morality Approach

• This approach believes that the laws of a country are mostly based on moral
principles.

11.5.3 Natural Laws

This approach upholds the view that there the following five moral obligations for business
ethics:
• Veracity principle: A business firm should follow the truth under all situations.
• Non-injury (no harm) principle: A business firm should not harm anybody.
• Fairness (Honesty) principle: A business firm must remain honest in its dealings.
• Human Rights principle: A business firm must respect and maintain human rights.
• Autonomy principle: A business firm must ensure that it does not make
infringement of human choice for goods and services.
12 Major Unethical Business Practices:
1. Sexual Harassment at Workplace
o It includes many types of offences including sexual advances, requests for sexual
favours, avoidable physical contacts, request for dates, and so on.
o Sexual harassment has been made punishable by laws.
2. Forced and Bonded Labour
o In India, bonded labour and forced labour in the rural and urban areas is around two
per cent of the total labour force in the country.

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 o The incidence is higher in the rural than in the urban labour market. Bonded child
labour is widespread in many parts of the country.
o Children are also forced to serve as domestic servants, road-side beggars, prostitutes
and shop boys in many Third World countries. These children never get the
opportunity to go to school.
3. Health and Safety in Workplace
o Health and safety concerns should not be limited to physical harm. Factors such as
job insecurity, high demands, effort-reward imbalance, and low autonomy, were all
found to contribute to health-related behavioural risks, including sedentary
lifestyles, heavy alcohol consumption, increased cigarette smoking, and eating
disorders.
4. Discrimination
o Various types of discriminations including gender discrimination, age discrimination,
and racial and minorities discrimination are openly practiced by business houses.
5. Fraud
o A fraud is a type of theft by deception.
o Fraud may be a violation of civil law (Law of Tort) and/or a violation of criminal law.
A fraud is a deliberate misrepresentation of facts that causes the other party to
suffer loss or damage.
6. Unethical accounting
o Publicly traded companies may engage in unethical accounting to appear more
profitable than they actually are. In other cases, an accountant or bookkeeper may
change records to skim off the top.
7. Corruption
o Corruption is the abuse of public offices and power for private gain. The gain may be
financial or in kind or any other temptation. There are many forms of corruption
such as bribery, kickbacks, extortion and the like. Absence of accountability and
transparency and lack of proper control are the basic causes of corruption.

13 Ethical Issues in Business

There are many other issues that fall under the ethical issues in business:

13.1 Compliance
In business ethics contexts, compliance generally refers to a company’s or a
businessperson’s conformity with relevant laws and regulations—that is, following the rules
set out by government.

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 The use of ethical standards can both reduce the chances of a workplace lawsuit and help
to create a positive work environment.

Advantages of Ethical compliance:

1) Ethical compliance helps companies to develop a work culture that abides by the
workplace laws and reduces the costs associated with fines and lawsuits.
2) Better Workplace Culture
3) Improves operational efficiency and safety
4) Enhances Public Relations

Disadvantages of Ethical Compliance

1) One of the disadvantages of an ethical compliance program is that it requires the

comprehensive support of management to be effective. If members of the
management team decide to apply their own version of corporate ethics to the way
they manage their departments, then this clash of principles can cause confusion in
the workplace.
2) Developing, implementing and maintaining an ethics compliance program within an
organization can be expensive and time-consuming.
Creating a Culture of Ethics and Compliance
1. A business need a detailed policy manual, and more specifically, a written code of
conduct and/or code of ethics policy.
2. A business need to have a person responsible for overseeing company’s ethics and
compliance initiatives.
3. Hold employees accountable
4. The next step involves communicating ethics and compliance efforts to employees.
5. Implement ethics training. It is vitally important to train employees according to policies.

13.2 Ethical Issues in Marketing and Advertisement

Paradigm shift in the sphere of Marketing Management over the time:
The emphasis has shifted from the philosophy of "let the buyer beware (caveat emptor)”
to that of "let the seller beware (caveat venditor)". The responsibility of sellers has
enormously increased.
What is Marketing Ethics?
o Honesty in all marketing transactions
o Responsibility for the goods sold
o Openness in all dealing
o Fairness in all the deals (absence of cheating or deception at any stage)

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 o Respect for human dignity
o Disclosure of information regarding the product
o Selling products that are not harmful or injurious
o Absence of unethical means to sell the product (no unethical advertisements
OR surrogate advertisement)
o Charging fair prices
o Truthfulness in disclosing the quality and effect of the product being sold (no
hiding of information)

NOTE: The British Code of Advertising Practice is based on the four fundamental ethical
principles Truthfulness, Legality, Honesty and Decency.

ETHICS OF COMSUMER ISSUES:

Consumer ethics is based on the following theories:
13.2.1 Contractual Theory
It argues that while buying/selling a product, the seller and the consumer enter into an
implicit contract that protects the buyer from the risk of the product.
13.2.2 Social Cost Theory
The theory argues that the product sold should not create extra social cost by creating
negative utility, sickness, disease and environmental degradation, loss of life and any other
type of social danger.
13.2.3 Due Care Theory
This theory is based on the presumption that due care has been taken by the
seller/manufacturer so that it is safe and does not involve any risk at the time of use.

The major issues that ethical consumerism is presently trying to address are:
• Consumer protection and safety.
• Consumer organization is looking after the interest and welfare.
• Assurance about product life, product safety, reliability and maintenance.
• Disclosure of all necessary and relevant information about the product.
• There should be no information asymmetry about the product between the
seller and the buyer.
• Proper marketing and advertisement.
• Proper product labeling with warnings and methods of use.
• Protection against unfair trade practices and unfair and false advertisement.
ethics for selling products.
• Consumers' grievance cells run by the state
• Strong consumer organizations and agencies.

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 • Consumer-seller relations agencies.
• Consumer’s law and policy.

13.3 Ethical Issues in Finance and Accounting

• Financial management is concerned with many related activities like investment,
financial decision making and also decisions on dividend payments.
• A proper financial management, however depends on the correctness of
information and its flow. If there is any uneven flow of information across the
market, the financial market dynamics cannot work in an optimum way.

UNETHICAL FINANCIAL PRACTICES:

• Company cooks the financial data and manipulates them to suit the requirements.
The cooking of data is also known as creative accounting.
• The share prices are artificially raised without any economic fundamentals
justifying this action.
• Insider Trading is a very notorious form of financial practice.
• Merger of companies may be a financial stunt.
• Another unethical financial issue is creating unusual delay in making payments to
suppliers, taxes, excise duties and other legal payments.
• Tax evasion and avoidance.
• Financial irregularities also include cheating employees in the matter of payment of
regular wages, medical bills, bonus, LTC, children's tuition fees, and so on.
• Loans are often taken from those institutions which are ready to do some personal
favour.
• Sometimes, excessive or inappropriate trading on behalf of a client is done by a
broker. This is called churning.
• Many a time a company does not share the correct information in the stock
market.
• The banking sector is not free from fraud. These frauds are of three types: involving
banking officials, non-involvement of banking officials but there may be the element
of dereliction of duties, or frauds committed by outside elements. There may also be
frauds through forgery of signature, misuse of credit cards, and so on.

UNETHICAL PRACTICES IN ACCOUNTING:

• Misappropriation by not recording cash receipts and cash payments.
• Misappropriation of goods by wrong recording.

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 • Manipulation of accounts may be done by showing higher value of assets, lower
liabilities, higher sales and so on. This may be done to show the good financial
position of the company. This is called Window Dressing.

13.4 Ethical Issues in HRM

What is HRM?
Broadly defined, it includes recruitment, training, positioning, allocation, motivation,
performance appraisal, promotional policy, welfare consideration, workforce strategy and
policy, forecasting of workforce demand and supply, and developing a committed
workforce through a healthy relationship between the employer and the employees and
also between the employees themselves to work as an organized team.

UNETHICAL PRACTICES IN HRM:

• Many firms use discriminatory policies in recruitment, promotion, wages payment
and even in work allocation.
• Firms often do not care for safety, health, job satisfaction and comfortable working
environment.
• Workers' rights and unionism are not looked upon favourable by employers.
• While practicing downsizing and lay-offs, sufficient prior notice is not given to
employees.
• Many firms are engaged in exploiting workers by giving them unjustifiably lower
wages.
• Sometimes privacy is not allowed, and this goes against the women workers.
• Forced labour and child labourers are used by many firms.
• Hiring and firing policy is extended too far to threaten the workers.
• Sexual harassment prevails in many firms in both overt and covert forms.
• Conflicts are not settled through negotiations and co-operations.
• For the exploited workers, compensatory justice policy is either delayed or
completely denied.
14 Ethical Principles in Business
Now that we know what is meant by business ethics, we must identify and understand the
12 pillars or principles of ethics for business executives:

1. Honest: Businesses must show honesty in all their communications and conducts.
2. Integrity: You demonstrate integrity when your thoughts, words and actions are in
line with each other. Ethical executives earn trust by having the integrity of
character.

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 3. Keeping Promises: An executive who makes all efforts to fulfil the spirit of their
commitments and promises earns trust and respect.
4. Loyalty: Executives must be loyal with their organizations as well as people or other
organizations they work with.
5. Fairness: Fairness means not to exercise power arbitrarily to gain or maintain any
advantage.
6. Caring: A genuine compassion should be shown towards other’s well being.
7. Respect For Others: Every person with whom a business executive interacts with
must be treated with respect, autonomy and dignity.
8. Law-abiding: All laws, rules and regulations related to one’s business activities must
be followed.
9. Commitment to Excellence: Excellence in their job is key to an organization's
success. Ethical executives must be well-informed and constantly work towards
improving their proficiency in diverse areas.
10. Leadership: An ethical role model would strive to be a role model for his or her
subordinates or employees. They promote ethical decision-making principled
reasoning.
11. Reputation and Morale: Reputation of a company and the pride and morale of their
employees is of the utmost importance to an ethical businessman.
12. Accountability: A business person must own the outcome of their decisions and
accountability of the ethical quality of decisions they make.
15 Organization structure and Ethics
An organizational structure is a system that outlines how certain activities are directed in
order to achieve the goals of an organization. These activities can include rules, roles, and
responsibilities.

As Ferrell has said, “An organization’s structure is important to the study of business ethics
because the various roles and job descriptions that comprise that structure may create
opportunities for unethical behavior.”

Advantage and disadvantage of organizational structure

Though there are many kinds of organizational structures, broadly there are centralized and
decentralized organizational structures. Both these have their own advantages and
disadvantages to business ethics.

Centralized organizations are characterized by concentration of power at the top and there
is little scope for delegation of authority. Such structures are said to promote unethical
behavior in the organization because there is no interaction between the decision makers

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 at the top and the employees at the lowest level of organization. Also, there is hardly any
upward communication due to which the people at the top never come to know of
unethical activities going on at lower levels. Such a structure also promotes blame shifting
as employees may try to transfer the blame for their wrong actions on others.

Decentralized organization structure focuses on delegation of authority and individual

responsibility. Such structure also promotes unethical behavior among organizational
members because there are independent profit centers which make their own decisions
and sometimes these units deviate from organizational objectives and serve their individual
interests. Decentralized structures run on employee empowerment but if the employees
misinterpret their power; this may lead to immoral acts by employees. There are also
chances that middle-level managers when get pressure from the top may exert unnecessary
pressure on lower-level employees and this may again lead to unethical behavior in the
organization.

16 Role of Board of Directors

A corporation’s culture starts at the top with the board of directors, CEO or executive
director, and other top managers.

5 ethical responsibilities of corporate boards:

1. Know the health of the company’s ethical culture.

2. Evaluating the ethics of the business strategy.
3. Monitoring the real ethics risks in the organization.
4. Monitoring the ethical behavior of the leadership team.
5. Verifying that the elements of the ethics and compliance system are strong.

17 Strengthening of Ethical and Moral Values

Following strategies can be adopted to ensure ethics & moral values in private and public
spheres of services.

1. Code of ethics: It is a written set of rules issued by an organization/government to its

employees to help them conduct their actions in accordance with the foundational
values and ethical standards.
Second Administrative reform commission have identified certain values to be guiding
principle in civil services which are as follows:
I. Selflessness: Public interest should always be upheld and should not engage in any
act which deliberately prioritize personal gain.

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 II. Objectivity: Public officials should always act based on certain proof, data, merit.
Public business-like appointment, promotion, contract awarding should be on the
basis of merit devoid of any bias.
III. Openness: Public official should be open about their actions and decisions.
IV. Integrity: Public officials should not come under any kind of liability from other
(monetary or materialistic gains) which may hamper his decisions in future.
V. Honesty: Public officials should disclose their private/personal property in order to
avoid any conflict of interest.
VI. Accountability: It refers to the answerability of the public figure..
VII. Leadership: Public officials should uphold all these principles through proactive
action and leadership skills.

2. Code of Conduct in Business

• The basic purpose of code of conduct in business is to ensure a proper ethical
behaviour in the conduct of the business.
• Code of conduct in business is important to organize certain business activities.
• All codes of conduct in business are based on the core values of the company, its
mission and vision.
• Different companies may have different code of conduct in business; however, the
basic business codes remain the same.

Difference between code of conduct and code of ethics

Code of Conduct Code of Ethics
▪ A set of legally enforceable conduct and▪ It contains a declaration of values for the
the standards of behavior expected from civil services which reflects public
those working in the public service. expectations, and which needs to be upheld
while making decisions and conducting
themselves in public domain

Code of conduct is a set of guidelines that Code of ethics is a set of principles, which
influence employee’s actions influence the judgment.
Code of conduct is narrow in its ambit Code of ethics are wider in nature as
compared to code of conduct
A Code of Conduct might list several A particular rule in the Code of Ethics might
specific laws relevant different type/level of state that all employees will obey the law.
employees within the same organization
It decides punctuality, language in public It reflects the value civil servant would
speaking which reflects good conduct uphold in his decisions.

3. Citizen Charter

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 o A Citizens' Charter represents the commitment of the Organisation towards
standard, quality and time frame of service delivery, grievance redress mechanism,
transparency and accountability. It provides more responsive and citizen-friendly
governance.

Origin and Principle of Citizen Charter

The concept of citizen charter enshrines the trust between the service provider and its
users. The concept was first articulated and implemented in United Kingdom by the
conservative government of John Major in 1991. It was aimed at improving the quality of
public services for the people of the country. It was relaunched in 1998 by Tony Blaire
government.

6 principles of citizen charter movement as originally framed are:

▪ Quality, Choice, Standards, Value For Money, Accountability, & Transparency
Indian Scenario of Citizen Charter
o Department of Administrative Reforms and Public Grievances in Government of
India (DARPG) initiated the task of coordinating, formulating and operationalising
Citizens' Charters.
4. Human Resource Management: Various strategies and mechanism in human resource
management will help to ensure appropriate balance of moral values in civil services.
5. Effective Laws: Legal binding to act in public interest guide the business action in public
interest. It also helps in preventing corrupt practices. Thus, laws ensure ethical values in
public and private organization.
6. Civil Society Engagements: The citizens' voice can be effectively used to expose,
denounce and restrain corruption. This introduces a new dimension to the concept of
accountability of official to the people.
7. Integrity Pacts: Integrity Pact is a mechanism that helps in promoting transparency and
creating confidence in public contracting/tendering.
8. Proactive vigilance: The main emphasis in proactive vigilance has been on identifying
suspected corrupt elements and then devising mechanisms to weed them out or to
ensure that they do not occupy sensitive positions.

18 Best Practices in Ethics Programme

Ethics Management Programs are designed by an organisation or an employer as an
attempt to have formalised structures for ensuring the organisation is perceived as fair,
honest, responsible and just.

Benefits of Managing Ethics as a Program

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 There are numerous benefits in formally managing ethics as a program, rather than as a
one-shot effort when it appears to be needed. Ethics programs:

1. Establish organizational roles to manage ethics

2. Schedule ongoing assessment of ethics requirements
3. Establish required operating values and behaviors
4. Align organizational behaviors with operating values
5. Develop awareness and sensitivity to ethical issues
6. Integrate ethical guidelines to decision making
7. Structure mechanisms to resolving ethical dilemmas
8. Facilitate ongoing evaluation and updates to the program
9. Help convince employees that attention to ethics is not just a knee-jerk
reaction done to get out of trouble or improve public image

The 12 elements of a best-practices ethics program include the following. Each element is
described in reference to the pressure-to-perform scenario.

1) Vision statement. A vision statement defines the long-term, most desirable future state for
the organization. The vision gives employees and managers a first screening test for
decisions.
2) Values statement. A values statement defines general principles of required behavior. It’s
the standard against which decisions and actions are evaluated to determine if they meet
the company’s and employees’ requirements.
3) Organizational code of ethics. Already discussed
4) Ethics officer. An ethics officer ensures that the ethics systems are in place and functioning.
5) Ethics committee. The ethics committee oversees the organization’s ethics initiative and
supervises the ethics officer.
6) Ethics communication strategy. If employees are to know what’s expected of them and
what resources are available to them, the ethics officer must create a cohesive ethics
communication strategy.
7) Ethics training. Ethics training teaches employees what the organization requires, gives
them the opportunity to practice applying the values to hypothetical situations and
challenges, and prepares them to apply those same standards in the real world.
8) Ethics help line. Help lines aren’t just for reporting unethical conduct. They also make it
easier for the organization to provide guidance and interpretation of its expectations when
the intent of an ethics policy is unclear.

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 9) Measurements and rewards. If ethical conduct is assessed and rewarded, and if unethical
conduct is identified and dissuaded, employees will believe that the organization’s
principals mean it when they say the values and code of ethics are important.
10) Monitoring and tracking systems. It’s also critical to assess the extent to which employees
accept and internalize the organization’s values and ethics code.
11) Periodic evaluation. It’s important to assess periodically the effectiveness of any initiative,
especially an ethics program.
12) Ethical leadership. The bottom line is that ethics is a leadership issue. Leaders set the tone,
shape the climate and define the standards.
19 Corporate Social Responsibility
Corporate social responsibility (CSR) applies to businesses that put policies and practices in
place that will have a positive impact on the environment and community. Common CSR
objectives include donating a portion of a company’s proceeds to charitable causes,
supporting local vendors and suppliers, using FSR recycled packaging, among other pro-
social initiatives.

Difference between CSR and Business Ethics

Though business ethics and social responsibility seem to be overlapping, there has always
been a contradiction between the two.

1) There are good things for society that are not good for business and this is where social
responsibility comes in. There are also good things in business that are not good for
society and this is where business ethics comes in.
2) Social responsibility is more of a policy or an obligation to the community, while
business ethics is more of a conscience.
3) Business is focused on profits but with social responsibility. It is still obliged to perform
beneficial activities for society, while business ethics should make a positive move for
society.
4) Without social responsibility, the community will not benefit, however, without
business ethics, business is capitalism at its worst.

20 Ethical Dilemma
• An ethical dilemma is a situation that involves at least an ethical issue where a clear
decision or choice becomes problematic because of competing claims or interests .
• There may be an ethical contradiction or conflict in the choice to be made.

20.1 Characteristic Features of Ethical Dilemmas

• Social cost and private gains are different.

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 • No linkage is established between the two alternative courses of actions (choices).
• Competitive behaviour gains predominance in many cases.
• There may be an inconsistency between goals (e.g. materialism vs altruism).
• Cross-cultural value differentials do exist.
• A problem of right choice is the main issue.
• Very often, the exact impact of the two alternatives may not be known or
determined.

20.2 Types of Ethical Dilemma

• Ethical dilemma may be of different types:
o Ethical dilemma between one ethically right and one ethically wrong alternative.
o Ethical dilemma between two ethically wrong alternatives.
o Ethical dilemma between two ethically right alternatives.
o In the case of two morally wrong situations, the person may choose the one
which brings least harm or injury to the smallest number of people. This may be
called the situation of reverse utilitarianism.

The typology of dilemma may involve the following situations:

o Organization vs Persons (Employees)

o Persons vs Society
o Local culture vs Foreign culture
o Organization vs Law
o Organization vs Society
o Person vs Law
o Right vs Right
o Wrong vs Wrong
o Right vs Wrong

20.3 Resolution of Ethical Dilemma

There is no clear-cut method to resolve an ethical dilemma. But us let us try and discuss the
general resolution process:

1. Study the Nature of the Ethical Dilemmas:

2. Analyse the Consequences of Each Contemplated Solution. Very often, the following
types of ethical dilemmas need resolution:

I. Individual Gain vs Social Gain

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 II. Truth vs Loyalty
III. Justice vs Mercy
IV. Short-run vs Long-run Gains

In each one of these cases of ethical dilemmas, the solution can depend on any prejudiced
preconception. Each case of ethical dilemmas is a different world and the decision has to be
based on circumstances. However, some general naïve views may be useful.

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 Summary Sheet
-
Human Resource Development (HRD)

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 Important Points
1. This Summary Sheet shall only be used for Quick Revision after you have read the
Complete Notes
2. For Building Concepts along with examples/concept checks you should rely only on
Complete Notes
3. It would be useful to go through this Summary sheet just before the exam or before any
Mock Test
4. Questions in the exam are concept based and reading only summary sheets shall not
be sufficient to answer all the questions

1 Concept of HRD
HRD is basically concerned with the development of human resources in the organization for
improving the existing capabilities and acquiring new capabilities for achievement of the
corporate and individual goals. HRD should help employees increasing their knowledge, skills,
and capabilities and create positive attitude towards work

Larson and Tubro was the first company in India to set up practices of HRD and T.V. Rao is
considered father of HRD in India

1.1 Evolution of HRD

Evolution of HRD took place in the following stages

1. Commodity Approach: Workers were treated as commodities and their wages were
dependent on demand and supply
2. Factor of Production Approach: Labor was treated as factor of production just like materials
and machinery. There was no emphasis on the welfare and development of workers
3. Goodwill Approach: At this stage, some welfare measures like safety aids, lunchroom, rest
room were provided
4. Paternalistic Approach: Management adopted fatherly and protective attitude towards
employees.
5. Humanitarian Approach: This approach put emphasis on improving the productivity and
satisfying physical and social needs of the employees.
6. Human Resource Approach: At this stage, the feeling was developed that human resources
are most important part of the organization. To achieve better productivity, effort should be
made to satisfy the needs of the employees
7. Emerging Concept: Employees are accepted as partners in the progress of a company. They
should have a feeling that the organization is their own.

1.2 Principles of HRD

1. Principle of Development of Organization wide capabilities
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 2. Principle of Potential Maximization: HRD must enable the employees to identify their
hidden potential and realize their potential to the maximum
3. Principle of Autonomy: Employees must be given autonomy at work to discharge their duties
4. Principle of Proper Delegation: There should be proper delegation of responsibility and
authority on the organization
5. Principle of Participative decision making: Everyone must participate in decision making
6. Principle of change management: HRD must develop competency to adapt in the changing
environment
7. Principle of Periodic Review:

1.3 Difference between HRD and HRM

1.4 People Capability Maturity Model (PCMM)

PCMM assumes that people in organization moves through 5 levels known as maturity levels.

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 1.5 Human Reengineering
Human reengineering is basically a process through which a person who is already good at
something may become even better after redesigning himself through adjusting his values,
beliefs, behavior, and attitudes. It aims at changing the covert (not visible) behavior at
workplace.

1.6 Learning Culture and HRD

HRD must put emphasis on generative learning rather than adaptive learning. Adaptive Learning
is single loop learning in which errors are corrected against set norms whereas Generative
learning is double loop learning that allows and encourages people to constantly question
existing norms and belief

1.7 Competency Management and HRD

Competency Management is process that aims at enhancing the ability of individuals on
continuous basis and monitoring the same. It has following aspects

1. Competency Mapping:
2. Competency Assessment:
3. Monitoring Competency Development Progress

1.8 Knowledge Management and HRD

Now a day’s emphasis has been put on knowledge management so that any knowledge created
by any individual is organization is shared with all organizational members. The organizations
which practice knowledge management are called knowledge intensive organizations.

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 2 Human Resource Planning
HR planning is a process through which organization ensures that it has right kind and number of
people at right time, at right place who are capable of effectively and efficiently performing
functions that help it achieve its objectives.

2.1 Factors Impacting Human Resource Planning

1. Type of Organization: Nature of business impacts the HR planning as different requirement
are there for Manufacturing and Service Organizations.
2. Approach of Organization towards Planning: In reactive approach there is weak HR planning
whereas in proactive planning there is strong HR planning
3. Strategy of Organization: The strategy of business can be stability, growth or retrenchment
and different strategies for business will have different HR strategies
4. Level of Environmental Certainty: In highly uncertain level, HR planning needs to focus on
contingency HR plans otherwise only one HR plan may be sufficient

2.2 Human Resource Planning Process

1. In first step the Organizational objectives, Plans and policies are taken as input to HR planning
process.
2. In next step the forecast of demand of human resources is made and forecast of supply is
made. The gap between future needs and supply is identified. This gap may be in terms of
shortage or excess of human resources.
3. The actions are identified for bridging the gap. If there is excess, then firing or employees or
voluntary retirement etc. may be initiated whereas if there is shortage then hiring of
employees may be initiated

2.2.1 Techniques for Forecasting Demand Human Resources

In Step 2 of human resource planning, we discussed that forecasting of demand human resources
to be made. Forecasting Resource Demand can be done using Qualitative techniques or
Quantitative techniques.

2.2.1.1 Quantitative Techniques for Forecasting Demand Human Resources

1. Employment Trends: Employment trend in the organization for at least last five years to be
traced to determine the future needs.
2. Replacement Needs: Organization must find out the replacement needs due to retirement,
death, resignation, termination etc.
3. Productivity Changes: The expected increase/decrease in productivity due to better training
of employees or more automated machines etc.
4. Rates of Absenteeism: The number of man-days that would be lost due to employees being
absent

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 5. Growth and Expansion: The growth and expansion plans of company might facilitate number
of people required with specific skills
6. Statistical and Mathematical Models: Famous Stastical models is Burack-Smith Model.

2.2.1.2 Qualitative Techniques for Forecasting Demand Human Resource

1. Managerial Judgement Method: In this forecasting is done based on experience of managers.
2. Delphi Technique: The Delphi method is a forecasting process framework based on the
results of multiple rounds of questionnaires sent to a panel of experts.
3. Work Study Technique or Workload Analysis
4. Ratio-Trend Analysis: In this the ratios are worked for juniors is to seniors. Suppose we
require one manager for every 10 salesmen then the ratio would be 10:1.

2.2.2 Forecasting Supply of Human Resources

Forecasting of Supply of human resources is essential to know the gap between demand and
supply. There are 3 methods for this

1. Human Resource Flow Model: Human Resource Flow model helps us know the supply due
to inflows in different position through transfer and promotions and outflows through
Retirements, Resignations, Demotions, Promotions etc. A famous model used for this
technique is called Markovian Model or Markov Chain analysis
2. Human Resource Inventory/Human Resource Audit: Human Resource Inventory, lists down
the basic information on all the employees, like their education, experience, skills, age,
gender, salary related data, job preference and special achievements.
3. Replacement charts: Replacement chart indicated when the position will become vacant and
who is likely to fill that position.

2.2.3 Human Resource Utilization and Analysis

2.2.3.1 Human Resource Utilization

Before we take actions to bridge the gap between Demand and supply, Human Resource
Utilization needs to take place. It helps us know how we are utilizing our human resources. It can
be of 3 types

1. Underutilization: Abilities of Human resource are not utilized fully

2. Parity: Abilities of Human resource are utilized fully
3. Overutilization: Abilities of Human resource utilized more than required. In short term this
may seem beneficial but in longer term people will start burning out and efficiency will
decrease

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 2.2.4 Actions to Bridge the Gap
If there is shortage, then recruitment and selection can be done which we shall discuss later in
this document. If there is excess, then following steps can be taken

1. Voluntary Retirement Scheme

2. Layoffs
3. Termination
4. Forced Retirement or Iron Handshake
5. Leave without Pay
6. Job-Freeze

3 Job Analysis and Design and Job Evaluation

3.1 Job Analysis

Job Analysis is a procedure, by which information is obtained about a job, i.e., it gives us
information about the skills, knowledge, abilities, and responsibilities required from the worker
for a successful performance of the Job. Job Analysis comes under qualitative aspect

Job Analysis helps us in identifying two things

1. Nature of Job (Job Description)
2. Characteristics of People Employed to the Job (Job specifications)

Nature of the Job (Also known as Job Description)

1. Job Identification: Its title, including its code number. For Example -JOB2341: Special
Data Analyst. Here JOB2341 is the code number and Data Analyst is the title
2. Significant Characteristics of a Job: Its physical settings, hazards, and discomforts
3. Actual Work to be performed: What needs to be done in the job? Like job requires
person to analyze the financial data and find the gaps
4. Relationship with other Jobs, Materials, and equipment to be used, Job Location etc.

Characteristics of people Employed the Job (Job Specification)

1. Skills Required for the Job: Like Analytical skills, proficiency in MS excel etc.
2. Personal attributes required to do the job e.g. education, physical strength etc.

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 3.1.1 Purpose of Job Analysis

3.1.2 Process of Job Analysis

The job analysis at organizational level must follow a process as follows

1. Organizational Job Analysis: It is critical to know what the performance level organization is
looking forward from the job holder and the contribution of the job in the goal attainment of
organization.
2. Selecting Representative Jobs: It is important to understand that analysis of jobs of
organization is bit time consuming and costly affair.
3. Data Collection: The job analysis tools such as observation, interviews, and questionnaire are
used for the collection of data.
4. Preparing Job Description: Based on the collected data the HR team prepares job description
by defining the tasks, duties and responsibilities which are discharged for the effective
performance.
5. Preparing Job Specification: The job specification is prepared which consist of the personal
traits, skills, qualities, and qualification which are required to perform the job properly

3.1.3 Job Analysis Method

1. Sending a questionnaire to the person doing the job.
2. Observing the employee doing the job and recording the analysis. This is appropriate for
employees which do manual jobs such as mechanic, weaver etc.
3. Conducting an interview
4. Log Records: The job incumbents are given a diary and asked to write a brief account of
their job activities they performed at the end of every day.
5. Critical Incidents: Under this method, the supervisor is asked to give instances of on-the-
job behaviors of people which he considers to be important.
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 6. Checklist: Under this method the worker is required to check the task that he performs
from a long list of possible task statements.
7. Position Analysis Questionnaire: It was developed by Purdue University. In this
questionnaire various job elements have been grouped into 6 categories (shown below)
and with each category there are relevant Job elements

Category Meaning

Information Where do Managers get information to do their Jobs

Input

Mental Process What planning, organizing and decision making is done

Work Output What physical activities, tools and machines are used?

Relationships What contact with people is maintained with and outside organization

Job Contract What is physical and social context in which job is performed

Other Job What are other Job activities, conditions or characteristics not covered by
Characteristics other categories

8. Management Position Questionnaire: There are 208 items divided into 13 categories as
listed below in the questionnaire. It is very time-consuming process

3.1.4 Job Description, Job Specification

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 Job Analysis is a primary tool to collect job-related data. The process results in collecting and
recording two data sets including job description and job specification

Difference between Job Description and Job Specification

3.1.5 Functional Job Analysis

Functional job analysis (FJA) is a method of job analysis that was developed by the Employment
and Training Administration of the United States Department of Labor. It assumes that each job
involves three broad worker functions: 1) data 2) people 3) things.

3.1.6 Role Analysis

Role analysis is replacing Job analysis these days. Role analysis is art of finding out wha t people
are expected to achieve when carrying out their work and competencies and skills they need
to meet their expectation

Difference between Job analysis and Role Analysis

1. Role analysis focusses on results to be achieved and not what the tasks are to be done
2. Job analysis is based on assumption that jobs are static and job description remains the same
whereas role analysis is based on assumption jobs are dynamic and the role profile needs to
handle the changes in a dynamic way

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 3.1.7 Competency Based Job Analysis
Competency-based job analysis means describing the job in terms of the measurable,
observable, behavioral competencies (Knowledge, skills and/or behaviors) that an employee
doing that job must exhibit to do the job well.

3.2 Job Design

Job design refers to the way tasks are combined to form a complete job or unit of work. In
simple words Job Design is about how organizations define and structure jobs. The aim of a job
design is to improve job satisfaction, to improve through-put, to improve quality and to reduce
employee problems (e.g., grievances, absenteeism).
Techniques of Job Design
There are 4 main aspects of Job Design

3.2.1 Job Simplification

Job simplification is a design method whereby jobs are divided into smaller components and
subsequently assigned to workers as whole jobs. Many fast food restaurants such
as McDonald's, Burger King and KFC use simplification because employees can learn tasks
rapidly.

3.2.2 Job Rotation

Job Rotation is a management approach where employees are shifted between two or more
assignments or jobs at regular intervals of time to expose them to all verticals of an organization.

3.2.3 Job Enrichment

Job enrichment adds new sources of job satisfaction by increasing the level of responsibility of
the employee in organization. Job enrichment is a way to motivate employees by giving them
increased responsibility and variety in their jobs. In Job Enrichment, this increase in responsibility

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 is often vertical. Vertical means that Employee is given the responsibility of work earlier done
by his superior.

3.2.4 Job Enlargement

Job enlargement is a job design technique wherein there is an increase in the number of tasks
associated with a certain job. In other words, it means increasing the scope of one’s duties and
responsibilities, but these new duties and responsibilities are the ones which earlier use to be
taken up by your peers and not your boss. It is also known as horizontal loading in that the
responsibilities increase at the same level and not vertically

Difference between Job Enrichment and Enlargement

1. Job enrichment means a vertical expansion in duties and responsibilities and span of control
whereas in job enlargement the expansion is horizontal in nature.
2. Need for skills: Job enrichment does not need acquisition of higher skills where is job
enrichment needs acquisition of higher skills
3. Nature: The difference between job enrichment and job enlargement is essentially of
quantity and quality. Whereas job enlargement means increasing the scope of job
quantitatively by adding up more tasks, job enrichment means improvement in the quality
of job such that employees are more satisfied and fulfilled.

3.2.5 Approaches to Job Design

Approach Founder Details

Name

Human Approach Theorists It was the outcome of Hawthorne studies which we have already
(Psychological who laid discussed in earlier chapters. According to this approach jobs should
Considerations) down gratify an individual’s need for recognition, respect, growth, and
Motivational responsibility.
theories

Scientific FW Taylors Work, according to this approach should be scientifically analyzed

Management and fragmented into logical tasks. Due emphasis is then laid on

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 organizing the tasks in a logical sequence is followed for efficient
execution of the same

Job Hackman
Characteristics and Oldham This puts emphasis on the Job Satisfaction. They laid down five core
dimensions, which are
Approach
A. Skill variety
B. Task Identity
C. Task Significance
D. Autonomy
E. Feedback

Socio Technical
Systems Socio-technical systems aims on jointly optimizing the operation of
the social and technical system; the good or service would then be
Approach
efficiently produced, and psychological needs of the workers fulfilled.

3.2.6 Job Redesign

Job Redesign is basically a process of ‘restructuring’ the elements of a job (like tasks, duties, and
responsibilities). It is usually done to the job more interesting, exciting, encouraging, and inspiring
for the employees.

3.2.7 Recent Development in Job analysis and Job Design

With the ever-changing work environment, there are some recent developments in this area

1. Autonomous work teams: Many organizations constitute autonomous work teams to

achieve specific goals. Autonomous work team is also called self-directed team.
2. De-jobbed Environment: De-jobbing is the broadening of the responsibilities of the
company’s jobs and encouraging employees not to limit themselves to what is on their job
descriptions.

3.3 Job Evaluation

Every individual in company needs to be paid for the jobs done by him. The basis should be
1. Nature of the Job
2. Present worth of the Job
3. Effectiveness with which that Job is done
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 The first 2 factors are part Job evaluation and third one is part of Performance appraisal

Job evaluation is basically comparison of job with other jobs in the same organization or same
job in other organization. It helps in the rating of jobs in an organization. This is the process of
establishing the value or worth of jobs in a job hierarchy.

Job evaluation needs to be differentiated from job analysis. Job analysis is a systematic way of
gathering information about a job. Every job evaluation method requires at least some basic job
analysis to provide information about the jobs concerned. Thus, job evaluation begins with job
analysis and ends at that point where the worth of a job is ascertained.

Primary reason for Job evaluation is for developing equitable salary structure in which salary is
paid for a job as much as it deserves.

3.3.1 Process of Job Evaluation

3.3.2 Methods of Job Evaluation

1. Ranking Method: Perhaps the simplest method of job evaluation is the ranking method and
is more suitable to organization with smaller size. According to this method, jobs are
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 arranged from highest to lowest, in order of their value or merit to the organization. Jobs can
also be arranged according to the relative difficulty in performing them. There are 3
techniques used in Ranking method which are given below

A. Utilizing Job Descriptions: In this Job descriptions of various jobs are studied and used
for comparison. Jobs are ranked as per the study of Job Description

B. Making Group Comparison: In this method jobs to be compared are compared in

pairs. Each job is compared with other job once and superior job is assigned a point.

C. Raking along a number line - Here ranks obtained from job descriptions or paired
comparison are spaced along a number line.

2. Grading Method (Mostly used in Government Jobs): According to this method, a

predetermined number of job groups or job classes are established, and jobs are assigned to
these classifications.
3. Points Rating or Point Method: Under this method, jobs are broken down based on various
identifiable factors such as skill, effort, training, knowledge, hazards, responsibility, etc.
Weights are given to factors depending on their importance to perform the job.

4. Factor Comparison Method: Thomas E. Hitten was the first to originate factor comparison
method of job evaluation. This method is a combination of both ranking and point methods
in the sense that in this also jobs are broken down based on various identifiable factors
such as skill, effort, training, knowledge, hazards, responsibility, etc. and Weights are given
to factors depending on their importance to perform the job. But instead of assigning
grades to the Job the jobs are ranked as per the points achieved by them.

4 Induction and Placement (Also known as Orientation)

4.1 Induction
Induction is also known as Orientation or indoctrination. It is the process of introducing a new
employee to the organization and the organization to the employee by providing relevant
information. Generally, Induction programme includes information about the organization such
as objectives, mission, vision, employee benefits provided by the organization, human resources
policies and rules, introduction to the team etc.

4.1.1 Problem areas in Induction

1. Giving too much information in orientation becomes too much of problem as providing
too little information
2. Orientation may suffer from Micky Mouse assignment i.e. sometimes the first
assignments are insignificant tasks. Giving information about those tasks during
orientation might discourage the employee
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 4.1.2 Socialization of Employees
Socialization means adaptation of process that takes place as new employees attempt to learn
and inculcate new norms and values of work roles in an organization.

Socialization Process of Employees

As per Maanen and Schein there are 3 stages in Socialization process

1. Pre-arrival: This stage recognizes that each new employee arrives with a perception of
organizational from what he has heard from outside.
2. Encounter: Encounter Stage is the part of the stages of socialization where a person joins or
enters an organization.
3. Metamorphosis: Metamorphosis Stage is the last stage in which a new employee changes
himself/herself to adjust to the job, new groups, or organization. Placement

5 Job Changes: Transfer, Promotion, Demotion and Separation

Job changes through transfers, promotions and demotions is called internal mobility whereas
employees leaving or getting separated from the organization due to resignation, retirement or
termination is called external mobility

5.1 Transfer
A transfer may be defined as change in job within the organization where the new job is
substantially equal to old in terms of pay, status, and responsibilities. Transfers are usually done
to move employees to position with higher priority in terms of organizational goals

Transfer Vs. Promotion

Promotion takes place when an employee moves to a position higher than the one for merely
occupied. Transfer is the movement of an employee from one job to another without involving
any change in his status, duties and responsibilities and compensation.

5.1.1 Types of Transfers

1. Production Transfers: Such Transfers are initiated when there is surplus in one
department and need of manpower in another department
2. Shift Transfers: In case of manufacturing concerns, there are normally three shifts.
Usually, these shifts are rotating. In case shift assignments are not rotating, an employee
may be transferred from one sift to another shift.
3. Versatility Transfers: Such Transfers are done to make employee skilled in various
departments as part of job rotation. Such Transfers help employees in promotion
4. Remedial Transfers: In case an employee does not feel comfortable on his job, he may be
transferred to some other job. His initial placement might be faulty; his health might have
gone down; he may not be getting along with his supervisor or workers i.e. he might have
developed personal friction with his boss or fellow employees
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 5. Replacement Transfer: When an old employee is handling pressure since long, he may be
replaced with the new employee to give him some relief

5.2 Promotion and Demotion

Promotion means giving higher position to an employee which carries higher status, more
responsibilities and higher salary. Promotion means advancement of an employee in the same
organization

5.2.1 Types of Promotions

1. Vertical Promotion (Also known as Promotion): In Vertical Promotion employee moves to
higher level or higher grade with increase in salary, status, and responsibility
2. Upgradation: In this the salary is increased but not the level or grade
3. Dry Promotion: In this the level, responsibilities and status are increased but not the salary

5.2.2 Open Vs. Closed Promotional System

A company is said to have an open promotion policy if it considers all employees within the
organization as potential candidates and announces internally such vacancies. When an
organization does not announce vacancies or where the openings are not open to all employees
within the organization for the promotion, the company has a closed promotion policy

5.2.3 Demotion
Demotion is just an opposite of promotion. It is a downward movement of an employee in the
organization with lower status and salary. It is a punishment for incompetence or mistakes by
employee.

5.3 Separation
Separation means employee leaving the Organization due to one of the following reasons

1. Resignation: Separation initiated by employee themselves is example of resignation.

2. Layoff: It is temporary removal of employees from the payroll of the company to reduce the
financial burden on the organization. Employer and employee relationship do not come to an
end, but this is merely suspended during period of layoff.
3. Discharge or Dismissal: Discharge or Dismissal or Termination means end of relationship
between employee and employer. In this total separation between them.
4. Retirement: When an employee has worked till stipulated age as per the policy of the
company, the person must retire. Retirement can be of following types
5. VRS: VRS is also known as voluntary Retirement Scheme. It basically kind of golden
Handshake between employee and organization and try to create a win-win situation.
Organization gets to reduce cost or higher more skilled people and employee gets some
lumpsum money and full retirement benefits. It differs from premature retirement as

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 premature retirement is due to problems faced by employee whereas VRS is due to changing
environment in business where organization needs to revamp

6 Human Resource Accounting (HRA)

Like other physical assets Human Resources is one of the most important assets of the company.
Therefore, the valuations of human resources along with other assets are also required to find
out the total cost of an organization.

6.1 Methods of HRA

1. Historical or Actual Cost Method: As per this method the actual cost to recruit and train an
employee is considered as value of that employee.
2. Multiplier Method: As per this method there is no relation between cost incurred on
employee and his value.
3. Replacement Cost method: This method values human assets as what would be the cost to
replace the existing person
4. Economic Value Method: This method considers the possible future earning from the
employee and adjusting that to the present value resulting in economic value of the
employee.

7 Training and Development

Training and development encompass three main activities: training, education, and development

1. Training: As per Edwin Flippo, Training is act of increasing knowledge and skills of an
employee and changing the attitude for performing a particular job
2. Education: Education is meant for development of individual from social, mental, and
physical perspective. It is used in more generic sense and is meant for school and college
learning
3. Development: Development is not associated to a particular job, but it is meant for overall
development of the individual which might help in realizing future potentials of the
candidate

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 7.1 Distinction between Training and Development

7.2 Types of Training

1. Induction: Introducing or orienting a new employee to the organization and its procedures and rules
2. Job Training: This training is for the job that worker must handle. It gives information about machines,
process of production etc.
3. Apprenticeship Training: In this both knowledge and skills is imparted for doing a job using vocational
training. The trainees also get salary during this training. This is like earn while you learn
4. Internship Training: In this industry enter arrangement with vocational or educational institutes
where industries impart practical knowledge to the students.
5. Refresher Training: Also known as retraining, this is for old employees of the organization to acquaint
with latest methods of working and latest technology
6. Training for Promotion: The talented employees might be given training to make them eligible and
competent for promotion to higher job in the organization.

7.3 Steps in Training and Development cycle

7.3.1 Assessment Stage

This step is also called TNA (Training Need Analysis). The aim of the assessment stage is to understand
whether training is required. Assessment is conducted at three stages - at the level of organization,
individual and the job, each of which is called as the organizational, individual and job analysis

I. Organizational Analysis: The organizational analysis is aimed at short listing the focus areas for
training within the organization and the factors that may affect the same.
II. Job Analysis or Task Analysis: Job Analysis helps find out various operations and conditions under
which job is performed.
III. Individual Analysis: As evident from the name itself, the individual analysis is concerned with who
in the organization needs the training and in which area.

7.3.2 Methodology Stage

Once the training needs analysis is complete, the next stage is that of Design. This stage involves the
development of content and the training material and selecting the methodology to give the training. For
effective designing one must

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 I. Know the Employees
II. Interactive Content
III. Selecting the Technique

7.3.2.1 Methods of Training

1. On the Job Training Methods: These are also known as direct instruction. This type of training is
imparted on the job and at the workplace where the employee is expected to perform his dutie s.
2. Off the Job Training Methods: In these Training Methods Training is provided outside the workplace

On the Job Training Methods

1. Coaching/Understudy: Coaching also called as Understudy is a one-to-one training. It helps in quickly

identifying the weak areas and tries to focus on them.
2. Mentoring: The focus in this training is on the development of attitude.
3. Job Rotation: It is the process of training employees by rotating them through a series of related jobs.
4. Apprenticeship: This method of training is in vogue for those in trades, crafts, and technical fields
such as toolmaker, electrician etc.

Off the Job Training Methods

1. Job-Instruction Training: Job Instruction Training (JIT), also known as ‘Training through step by step’
involves listing of all necessary steps involved in the job performance with a sequential arrangement
of steps.
2. Programmed Instruction: In this there is no instructor and instead there is an instruction booklet or
a teaching machine.
3. Lectures and Conferences: Lecture and conference are knowledge-based methods.
4. Vestibule Training: It is also known as Training-Center training. In vestibule training, the workers are
trained in a prototype environment but not at the actual workplace . It is useful when large number
of people need to be trained for similar kind of work.
5. Simulation is any artificial environment exactly like the actual situation. In simulation a real-life
situation is replicated, and participants are required to react in that situation. There are four basic
simulation techniques used for imparting training: management games, case study, role playing, and
in-basket training

I. Management Games: Professionally designed games help to ingrain thinking habits, analytical,
logical, and reasoning capabilities, importance of teamwork, time management etc.
II. Case studies are complex examples which give an insight into the context of a problem as well
as illustrating the main point. It was developed by Christopher Langdell.
III. Role Play: Role playing was introduced by Moreno. In this each trainee takes different role
corresponding to a situation assigned to them.
IV. In-Basket Exercise: It is also known as in-tray training or “incoming email” training, consists of
a set of business papers which may include e-mail SMSs, reports, memos, and other items which
one faces in a day.

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 6. Sensitivity training: It is also known as laboratory or T-group training which evolved from the group
dynamics concept of Kurt Lewin. This training is about small group sessions in an unstructured form which
requires people to interact and become sensitive to feeling and behavioral pattern of others.

7. Syndicate Training: Syndicate refers to group of trainees and involves analysis of problem by different
groups where each group is of 8-10 members. Each group is given a problem and each group presents
their ideas to solve the problem with other groups. This is quite helpful in developing analytical skills .

8. Brainstorming: In brainstorming a problem is given to the group and each of the members in the group
are required to present their ideas. The brainstorming sessions is free and frank and each one is
encouraged to participate.

7.3.3 Organizing stage

Every organization must decide whether Training is to be held in-house or by external agencies

1.1.1.1 In-House or External Agencies

Organization will have two alternatives
1. In Company Program: Large companies usually have in-house trainings. It helps them to train large
number of people at less cost.
2. External Agencies: The program run by external agencies are generally standard and not customized.
Companies must consider content quality, cost, and duration before selecting any external agency

Irrespective of how training is organized, the care must be taken to ensure right learning techniques is
used. There are two different way of learning

1. Pedagogy (Mechanistic Model): This model consider learner is passive. As per this model education is
imparted and learner just gathers the information. This model is not good for training.
2. Andragogy (Organic Learning model): In this model, man is considered as active. It puts emphasis on
experiencing the learning. This model is better for training and development

7.3.4 Evaluation of Training

The various criteria used for measurement of Training and Development are Internal and external criteria

1.1.1.2 Internal Criteria

Various model used in Internal Criteria for evaluating training and development program are given below.
Let us discuss them one by one

Uirle-Patrick (also known as Kirkpatrick model)

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 CIRO Approach: This focuses on context, input, reaction, and output, later Return of investment was also
added to this approach.

CIPP Approach: This focuses on context, input, Process and Product

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 .

7.4 Attitude Development

Attitude is a crucial factor to understand because it helps managers to understand their employees in a
better way. It can be described as a persistent tendency to feel and behave in a way towards some
object. Attitude development is an important part to be developed as part of training and development

1.1.2 Components of Attitudes

Attitudes can be broken down into three components

1. Emotional:
2. Information Component
3. Behavioral Component

8 Career Planning and Development

8.1 Concept of Career

The meaning of term carrier is advancement in life or profession. It is also called sequence of positions
occupied by person during his lifetime. Career of a person does not mean his stay in single organization,
it may span any number of organizations

8.1.1 Career Stages

Super has suggested 5 stages of career development cycle or career cycle

1. Exploration:
2. Establishment Stage (25 to 35 years of age)
3. Mid-Career Stage (35 to 45 years of age)
4. Late Career Stage

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 5. Declining stage

8.1.2 Career Patterns/Career Concepts

The expected changes emerge as pattern of movements that occur in life related to work. These are
known as Career Concepts. Various Career Concepts are

1. Linear Career Concept: Plan for upward movement within the same profession using organizational
hierarchy. Upward movements of employee are also known as going up the ladder
2. Steady State Career: Individuals choose a profession, acquire higher skills, but do not choose to go
higher up in the hierarchy
3. Transitory Pattern: Individuals shift from one job to another not necessarily related to the previous
one without acquiring any excellence
4. Spiral Career: Individuals take on a new job, work hard, perform well, move up in the status and rank,
then move on to another type of work and follow the same pattern of development and performance
5. Plateau Career: Reaching a level higher than where one started but then continuing the same level

8.1.3 Career Anchors

Career anchors denote the basic drives that create the urge to take up a certain type of a career. As per
Person by the name Schein there are five such career anchors

1. Managerial Competence:
2. Technical or Functional Competence
3. Security
4. Creativity
5. Autonomy

8.1.4 Career Roles

We have often seen that Individuals loose interest in the job after certain time. So, managers need to
understand the career planning of the individual. Managers must understand these stages which are
known as career roles.

8.2 Career Planning or Career Strategy

Career planning has different meaning with respect to Organization and Individual. From an individual
point of view, career planning is process by which he selects his career goals and the path to achieve these
goals. From an organization point of view career planning is identification of individuals and charting out
their career paths and giving the opportunities to grow

Career Planning has benefits both for organization and Employees. Employees get increased productivity,
self-development, higher motivation etc. Organization gets to attract and retain talent

8.2.1 What is Career Path?

Career path is a logical sequence of positions in an organization to enable an individual to have knowledge
of all activities of the organization (horizontal movement), experience of various levels of management
(hierarchical)

Career Path has two underline concepts

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 1. Career Line: It is the area/function of work. The career line can be marketing, finance, HR. A
person in his career path may keep shifting from one line to another
2. Career ladder: Career Ladder is basically vertical movement in the hierarchy in any line

8.3 Career Development

Career plan sets career path for an employee, career development ensures that the employee is well
developed before he moves to the next ladder in hierarchy or makes a horizontal movement from one
line to another.

Career Development is different from employee development since career development has long -term
orientation covering the entire work-life of an individual, employee development has immediate and
intermediate-term orientation.

8.3.1 Career Development Program

Since both organization and individual make efforts for an individual's development, there are two types
of career development programs

1. Career Development Programs by Organization:

2. Career Development Programs by Individuals

8.3.2 Essentials of Success in Career

Subjective success factors are those which are kind of not materialistic rather intrinsic. Objective success
factors are those which are linked to money, power, position etc.

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 8.3.3 Terms related to Career Planning and Development
Term Meaning

Career Career is succession of related jobs, arranged in a hierarchy of prestige,

through which persons move in an ordered (more or less predictable)
sequence

Career Goals Future Position one tries to reach as part of career

Career Cycle The stages through which one goes through as part of career

Career Paths Career path is a logical sequence of positions in an organization to enable

an individual to have knowledge of all activities of the organization
(horizontal movement), experience of various levels of management
(hierarchical)

Career Anchors Career anchors denote the basic drives that create the urge to take up a
certain type of a career

Career Progression Career Progression is making progress in one’s career through right
moves. Progression can be in form of moving the career ladder in a
particular career line or moving through different Career lines to gain
competence

Career Planning Process of selecting goals and path to those goals

Career Development Actions undertaken to achieve the goals

Career Counselling Process of advising employees on setting career goals and assisting them
find suitable career paths

8.4 Self-Development
The career development by individuals is called self-development. Self-Development is also known as
Self-Control or Self-Management. In self-development process following 3 conditions must be met

8.4.1 Concept of Self-Development

Before we understand self-development, it is important to understand the concept of self. Self can be
categorized into two parts

1. Patent -Self: Patent self can also be called external self which normally comprises of individuals
identify and physical features.
2. Inner – Self: Inner self signifies the behavior patterns, values and other psychological factors
including strengths and weaknesses.

Process of discovering and utilizing the tremendous potential within one’s individual personality is called
self-development. We will discuss about the aspects of self-development at following levels

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 8.4.1.1 Individual Level
1. Motivational Pattern - Different Individuals work for distinct reasons. Some work for money and
benefits whereas some work for satisfaction, appreciation, and self -growth. HR policy of the
company needs to be sensitive towards various needs of employees
2. Locus of Control - Locus of Control is belief of an individual about who is responsible for what
happens in life
3. Power Bases - Power means a person’s potential to get others to do what he or she wants them
to do, as well as avoid being forced to do what he or she does not want to do. Interpersonal Level

8.4.1.2 Group Level

Team is defined a group of people with high degree of interdependence geared towards the achievement
of a goal or the completion of task. How does one perform in a group is important to understand the
concept of self-development? Various stages in group formation are

1. Forming (Awareness
2. Storming (Conflict)
3. Norming (Cooperation)
4. Conforming (Adjustment)
5. Performing (Productivity)

The self-development at this level should be such that people behave in mature way and are able to
contribute to group goals

8.4.2 Self-Development and Emotional Intelligence

For a good self-development, a person must be able to have good emotional intelligence. One may have
high IQ, but it is not sufficient to succeed in life. Apart from that high Emotional Intelligence is also require

Five components of emotional intelligence are

1. Self-Awareness
2. Self-Regulation
3. Self-Motivation
4. Empathy
5. Social Skills

8.5 Organizational Development

Organizational Development is a long-term strategy which focuses on the whole culture of the
organization to bring about the planned change. It seeks to change the change the attitudes, beliefs,
values, and structure of the organization

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 8.5.1 Techniques of Organizational Development

8.6 Succession Planning

Succession planning is a process for identifying and developing new leaders who can replace old leaders
when they leave, retire, or die.

8.7 Replacement Planning

Replacement planning is kind of unexpected succession planning. If any executive suddenly leaves the
organization or suddenly dies, then there must be someone 2 replace that individual. This is called
replacement planning. Replacement Planning is essentially making ready a backup. These backups are
sometimes called ‘truck lists’ because these are readily available in case someone is hit by truck.

9 HR Outsourcing
HR Outsourcing is a process in which the human resource activities of an organization are outsourced to
focus on the organization`s core competencies.HR outsourcing has become a popular solution for
organizations to remain competitive and cut costs. It also provides skilled professionals who are focused
specifically on HR.

10 Edward De Bono Role in Training

Edward De Bono worked on six thinking hats and Lateral thinking as part of training and development.

10.1 Six Thinking Hats

Edward De Bono devised a new thinking technique to solve any problems. You and your team members
can learn how to separate thinking into six distinct categories.

Lateral thinking is solving problems through an indirect and creative approach, using reasoning that is not
immediately obvious and involving ideas that may not be obtainable by using only traditional step -by-
step logic. The term was promulgated in 1967 by Edward de Bono

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 11 Performance Management
Performance Management basically is process of -

1. Planning Performance as in what employee is expected to achieve within a certain time frame
2. Appraising the Performance whether the result has been achieved
3. Giving Feedback to Employee regarding where he lacks or what are his strengths
4. Counselling Employee regarding how he can improve his performance .

Difference b/w Performance Management and Performance Appraisal

Performance Management has broader perspective as compared to Performance Appraisal. Performance

Appraisal is one of the steps in Performance management. Performance Management unlike Performance
Appraisal also contains Performance Planning, providing feedback and counselling to employees

11.1 Performance Appraisal

A performance appraisal (PA), also referred to as a performance review, performance
evaluation, merit rating, merit evaluation, (career) development discussion or employee appraisal is
a method by which the job performance of an employee is documented and evaluated for providing
promotion, incentives or other benefits. It does not only evaluate knowledge but also evaluates
behavioral qualities

11.1.1 Biases/Errors Performance Appraisal

Managers commit mistakes while evaluating employees and their performance. Biases and judgment
errors of various kinds may spoil the performance appraisal process

1. First Impression (primacy effect): Raters form an overall impression about the employee on the
basis some first impression.
2. Halo Effect: The individual’s performance is completely appraised based on one perceived good
or bad quality, feature, or trait. If a worker has few absences, his supervisor might give him a high
rating in all other areas of work.
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 3. Horn Effect: The individual’s performance is completely appraised based on a negative quality or
feature perceived. “He is not formally dressed up in the office and therefore he cannot be a good
worker.
4. Central Tendency: Appraisers rate all employees as average performers. That is, it is an attitude
to rate people as neither high nor low and follow the middle path.
5. Spillover Effect: The present performance is evaluated much based on past performance.
Example would be employee being given high rating because he has good ratings in the past too.
6. Recent Effect: Rating is influenced by the most recent behavior ignoring the commonly
demonstrated behaviors during the entire appraisal period.
7. Stereotyping: This implies forming a mental picture of a person based on his age, sex, caste, or
religion. It results in an over-simplified view and blurs the assessment of job performance.
8. Varying Standards or Personal Bias: When a manager appraises (evaluates) his or her employees
and the manager use different standards and expectations for employees who are performing
similar jobs.
9. Constant Errors: There are easy appraisers and tough appraisers in all phases of life. Some
appraisers habitually rate everyone high; others tend to rate low
10. Leniency Effect: Rating of all employees are at the high end of the scale. For Example, When the
professor tends to grade all the students on a higher side
11. Strictness: When a manager uses only the lower part of the scale to rate employees. For Example,
When the professor tends to grade all the students on a lower side
12. Contrast: The tendency to rate people relative to other people rather than to the individual
performance he or her is doing.
13. Similar-to-Me / Different-from-Me: Sometimes, raters are influenced by some of the
characteristics that people show.
14. Idiosyncratic rater effect: Sometimes the rates are so biased that rating tells us more about the
rater than the person being rated. Such as phenomenon is called Idiosyncratic rater effect

11.1.2 Collecting Data for Performance Appraisal

There are three main methods used to collect performance appraisal (PA) data:

1. Objective production
2. Personnel
3. Judgmental evaluation

11.1.2.1 Objective Production

The objective production method consists of direct, but limited, measures such as sales figures,
production numbers, the electronic performance monitoring of data entry workers, etc. Although these
measures deal with unambiguous criteria, they are usually incomplete because of criterion contamination
and criterion deficiency

In criterion deficiency there might be more emphasis on quantity than quality. An example of this is that
of a job of a secretary and not being able to include a criterion that measures the competency of
performing word processing tasks means that there is a criterion deficiency in the evaluation of
performance of the secretary.

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 The factors which are outside employees control leads to employee Criterion contamination. For
Example, keeping number of sales in the criteria for evaluation of secretary since secretary does not
pitch for sales and hence sales target should not be part of evaluation of secretary

11.1.2.2 Personnel
The personnel method is the recording of withdrawal behaviors (i.e. absenteeism, accidents). Most
organizations consider unexcused absences to be indicators of poor job performance .

11.1.2.3 Judgmental Evaluation

Judgmental Evaluation basically deals with evaluations in which appraisal is made on personal judgement
of the rater rather than following a specified criterion

11.1.3 Techniques of Performance Appraisal

Numerous methods have been devised to measure the quantity and quality of performance appraisals.
Broadly all methods of appraisals can be divided into two different categories.

Traditional Methods
1. Ranking Method: Here, each employee is compared with all others performing the same job and
then he is given a rank i.e. First Rank, Second Rank etc.
2. Paired Comparison: In this method, each employee is compared with other employees on one -
on one basis, usually based on one trait only.
3. Grading Method: In this method, certain categories of worth are established in advance and
carefully defined such as outstanding, satisfactory, and unsatisfactory.
4. Forced Distribution Method: This method was evolved by Tiffen to eliminate the central
tendency of rating most of the employees at a higher end of the scale.
5. Forced Choice Method: Forced-choice method is developed by J. P. Guilford. It contains a series
of groups of statements, and rater is forced to select a statement which describes everyone
being evaluated.

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 6. Checklist: Under this method, checklist of statements of traits of employee in the form of Yes
or No based questions is prepared.
7. Critical Incidents Method: In this method, the rater focuses his or her attention on those key
or critical behaviors that make the difference between performing a job in a noteworthy
manner (effectively or ineffectively).
8. Graphic Rating Scale Method of Performance: This method is also known as linear rating
scale. Under this method, scales are established for a number of fairly specific factors.
9. Essay Method: In this method, the rater writes a narrative description on an employee’s
strengths, weaknesses, past performance, potential and suggestions for improvement. Its
positive point is that it is simple in use.

Modern Methods
1. MBO: MBO can be defined as a process whereby the employees and the superiors come together
to identify common goals which are in line with Organizational objectives. The set goals are to be
taken as the criteria for measurement of their performance and contribution
2. Behaviorally Anchored Rating Scales (BARS): It was developed by Smith and Kendall to provide a
better method of rating employees. BARS are descriptions of various degrees of critical behavior
about a specific performance dimension.
3. Assessment Centers: Under this technique the basic idea was to assess candidate in social situation
using variety of assessors and methods. An assessment center is a central location where managers
come together to participate in well-designed simulated exercises..
4. 360-degree Feedback: Under 360 – degree appraisal, performance information such as employee’s
skills, abilities and behaviors, is collected “all around” for an employee, i.e., from his/her
supervisors, subordinates, peers, self-appraisal and even customers and clients. 360-degree
feedback, also known as multi-rater feedback, multi-source feedback, or multi source assessment
5. Peer and Self-Assessment: While assessment can be performed along reporting relationships
(usually top-down), net assessment can include peer and self-assessment.
I. Peer assessment is when assessment is performed by colleagues along both horizontal
(similar function) and vertical (different function) relationship.
II. Self-assessments are when individuals evaluate themselves. Graphic rating scale is used for
self-assessments
6. Cost Accounting Method: This method evaluates an employee’s performance from the monetary
benefits the employee yields to his/her organization.
7. Human Asset Accounting Method: In this method the employees of the organization are treated as
Human Capital and money estimates are attached to the value of the organization’s personnel and its
external goodwill.
8. Negotiated Performance Appraisal: The negotiated performance appraisal (NPA) is an emerging
approach for improving communication between supervisors and subordinates and for increasing
employee productivity and may also be adapted to an alternate mediation model for supervisor-
subordinate conflicts. -

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 11.1.4 Development Appraisal
The focus is on development and growth of employees rather than data for decision making relating to
rewards and promotions. Development appraisal is done through workshops like assessment centers and
the appraisal is done against critical success factors for the job

11.1.5 Potential Appraisal

The potential appraisal refers to the appraisal i.e. identification of the hidden talents and skills of a
person. Potential appraisal is a future – oriented appraisal whose main objective is to identify and
evaluate the potential of the employees to assume higher positions and responsibilities in the
organizational hierarchy. Psychological appraisal is one of the types of Potential Appraisal.

11.2 Appraisal Feedback

Appraisal feedback is especially important part of Performance Management. It helps employees to know
where he stands in terms of performance efficiency and What are his strengths and weakness?

Generally, Appraisal feedback is given through an interview. There are 3 types of interview

1. Tell and Sell Interview: In this the basic idea is to tell the deficiencies to the employee and convince
him regarding those deficiencies. The appraiser also gives suggestions to overcome the deficiencies.
2. Tell and Listen Interview: The basic idea is to communicate the feedback to the employees and then
listen to his reaction. Therefore, interviewer acts as an indirect counsellor rather than dominating the
discussion.
3. Problem Solving Interview: In this interview, the basic objective is not just to communicate the
appraisal results to the employee but to invite him how he perceives the problems and what are the
possible solutions as per him.

11.2.1 Nature of Feedback

Feedback can be oral comments, written reports like performance appraisal etc. Feedback should
be

• Feedback should be descriptive and non- evaluative. It should be two-way process

• It should be focused on the behavior of the person rather than on the person himself. The
intent is not to condemn the employee as an individual. When conveying feedback, it is
generally desirable to back it up with few examples of actual events.
• Feedback should be given timely, continuous, checked, and verified.

11.3 Performance Counselling

Performance Counselling is interactive process between the employee and his counsellor, mentor,
coach etc. to anticipate the likely problems in the job performance and defining proactive actions to
overcome those problems

11.3.1 Types of Counseling

1. Directive Counselling:
a. This is Counselor Centered. In this approach Counselor directs the client to take certain steps
to resolve the conflict.
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 2. Non-Directive Counselling
a. It is client Centered. The idea is to create an atmosphere in which client can resolve the
problem by himself
3. Eclectic Counselling or Cooperative Counselling
a. This is neither Counselor Centered nor client Centered but in between both
b. Here both the client and Counselor tries to resolve the problem

11.3.2 Steps of Counselling

1. Identify the Need:
2. Preparation for Counselling: During the preparation phase one must
A. Select the place for Counseling. It should be private not public place
B. Notify in advance to the employee so that he can also prepare
C. List the points you want to discuss
3. Conduction the session
A. Rapport Building: In the rapport building phase, a good counselor attempts to establish a
climate of acceptance, warmth, support, openness, and mutuality.
B. Exploration: In this phase, the counselor should attempt to help the employee understand
and appreciate his strengths and weaknesses.
C. Action Planning: The main contribution of the superior in this phase is in helping the
employee think of alternative ways of dealing with a problem.
4. Follow Up - Counselor should provide support to the employee and should review his
performance on regular basis. If required there might be change in action plan

12 Compensation Management

12.1 Meaning of Compensation

Compensation include direct cash payments, indirect payments in form of employee benefits and
incentives to motivate employees to strive higher levels of productivity

12.2 Components of Compensations

Compensation is expressed in terms of money. It would thus include

1. Wages or salary - Guaranteed Pay

2. Incentives or Variable Pay
3. Fringe Benefits
4. Prerequisites such as Equity Compensation:

12.2.1 Pay Aggregates

Various combinations of the above four categories are referred to as pay aggregates. Common aggregates
are explained below.
Together, guaranteed, and variable pay comprise total cash compensation
1. Total guaranteed package or fixed cost to company are aggregates that include guaranteed pay and
benefits.

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 2. Total direct pay refers to total cash compensation plus equity compensation. Benefits are excluded
from this aggregate.
3. Total Compensation would include all four categories: guaranteed pay (salary and allowances),
variable pay, benefits, and equity compensation.
4. Remuneration is a term often used to refer to total cash compensation or total compensation.
As noted above, total rewards would include total compensation as well as intangible bene fits such as
culture, leadership, recognition, workplace flexibility, development, and career opportunity.

12.3 Compensation Theories

12.3.1 Traditional Theories

1. Subsistence Theory: According to this theory wages would be equal to the amount just sufficient for
subsistence (minimum amount required for food, clothing, and shelter).
2. Wages Fund Theory: This theory was developed by J.S.Mill. According to him, the employers set apart
a certain amount of capital to pay wages for labourers. This is fixed and constant. This is called as wages
fund. So, if number of laborer’s increase the wages will decrease since the wages fund is constant
3. Residual Claimant Theory: This theory was propounded by Walker. According to this theory, rent and
interest are contractual payments. A

12.3.2 Contemporary Theories

1. Agency Theory: As per agency theory an agency is relationship between two parties in which one is a
principal and other is an agent who acts on behalf of the principal.

12.4 Factors for Compensation

What is the basis or factors on which compensation gets decided? These factors are also called contingent
factors and they are of two types – External and Internal Factors

Internal Factors

1. Company objectives:
2. Ability to pay:
3. Nature of Jobs:
4. Potential for Performance

External Factors

1. Market situation or prevailing market rate

2. Demand and Supply:
3. Trade Unions:
4. Legal framework
5. Cost of Living

12.5 Wage Policy in India

Government of India had set up Fair wages in 1948 which has defined various concepts of wages that
govern the wage structure. These concepts of wages are minimum wage, living wage and fair wage

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 Minimum Wage: A minimum wage is a compensation to be paid by an employer to his workers
irrespective of his ability to pay.

Living Wage: A living wage is one which should enable the earner to provide for himself and his family not
only the bare essentials of food, clothing and shelter.

Fair Wage: Fair wage, according to the committee on Fair Wage, is the wage which is above the minimum
wage but below the living wage.

12.5.1 Methods of Wage payment

1. Time Wage Method: In this method the worker is paid for the time he has worked on hourly,
weekly or monthly basis
2. Piece Wage Method: In this method workers are paid on the basis of quantity of output
irrespective of the time taken

13 Incentives (Rewards) and Benefits

13.1 Meaning and Types of Incentives

Generally, when term incentive is used it is used in monetary term. But incentive can be financial
incentive or non-financial incentive.

1. Financial Incentives include all those payments in monetary terms that provided to employees to
motivate them for better performance.

2. Non-financial incentives are the one those which do not impact employees in monetary terms, but
they are still important as they help in providing motivation to employees.

13.2 Financial Incentives and its Types

1. Output Linked Incentive
2. Bonus
3. Scanlon Plan: This was introduced by Joseph Scanlon at United Steel Works of USA. In this
employee can participate by giving suggestions to cut costs. Any resultant cost savings from these
suggestions is distributed among the employees.
4. Profit Sharing: It is the distribution of Profit of the company with employees. The percentage of
profit to be distributed is determined in advance.
5. Co-Partnership: In co-partnership the employees participate in equity capital of the company i.e.
when shares of company are floated, they buy them on the market prices.
6. Employees stock option: Employees are given shares of company in such a way that they enjoy
long-term benefits due to appreciation is share prices.
7. Cafeteria Compensation Plan

14 Fringe Benefits
Employees are provided various types of benefits which are not linked to productivity of the employee
but rather they are given to all employees depending on their seniority level in the organization. They

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 are basically payment to employees directly or indirectly either in cash or in-kind excluding
wage/salary and incentives linked to productivity.

14.1 Types of Fringe Benefits

Fringe benefits are of two types

1. Employee Welfare
2. Social Security

14.1.1 Employee Welfare

Employee welfare is not only about monetary benefits, but it is understood to include such services,
facilities and amenities which enable the persons employed to perform their work in healthy, congenial
surroundings and to provide them with amenities conducive to good health and high morale .

14.1.1.1 Types of Employee Welfare Schemes

14.1.1.1.1 Economic, Recreational and Facilitative Services

Overall, employee welfare services may be categorized as

1. Economic Services
2. Recreational Services
3. Facilitative services

14.1.1.1.2 Statutory or Non-Statutory Schemes

The employee welfare schemes can be classified into two categories based on compulsory or mandatory
viz. statutory and non-statutory welfare schemes. The statutory schemes are those schemes that are
compulsory to be provided by an organization, the non-statutory schemes are voluntary schemes
implemented by the industry.

14.1.1.1.3 Intramural or Extramural Activities

Another way to categorize is based on internal or external facilities. Facilities provided inside the
organization are called Intra-mural facilities such as latrines and Urinals, Canteens etc.
Those provided outside the organization are called extra-mural facilities lie housing accommodations,
maternity benefits, holiday homes, club membership etc.

14.1.1.2 Types of Employee Welfare Theories

1. Policing Theory: According to this view, the factory and other industrial workplaces provide ample
opportunities for owners and managers of capital to exploit workers in an unfair manner.
2. Religion Theory: Religion theory implies that the fruits of today's deeds will be reaped tomorrow.
Inspired by this belief, some employers plan and organize canteens and crèches .
3. Philanthropic Theory: The philanthropic theory of labor welfare refers to the provision of good
working conditions, crèches and canteens out of pity on the part of the employers
4. Paternalistic Theory: According to the paternalistic theory, also called the trusteeship theory, of
labor welfare, the industrialist or the employer holds the total industrial estate, properties and
the profits accruing from them, in trust.
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 5. Placating Theory: This theory assumes that appeasement pays when the workers are on strikes
or angry. Workers are like children who are intelligent, but not fully so.
6. Public Relations Theory: According to this theory, welfare activities are provided to create a good
impression on the minds of the workers and the public, particularly the latter.
7. Functional Theory: Also known as the efficiency theory of labor welfare, the functional theory
implies that welfare facilities are provided to make the workers more efficient.
8. Social Theory: The social theory implies that a factory is morally bound to improve the conditions
of the society in addition to improving the condition of its employees.

14.1.2 Social Security

Social security is essentially a measure for the employees against economic and social distress such
as old age, sickness, maternity, employment injury etc. They are of the following types
1. Payment for time not worked: Weekly offs, national holidays, sick leave, casual leave, maternity
leave come under this
2. Retirement benefits such as provident fund scheme, pension scheme, gratuity
3. Insurance benefits such as health insurance, life insurance etc.

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 Summary Sheet
-
Business Organisation and
Business Environment
Important Points
1. This Summary Sheet shall only be used for Quick Revision after you have read the
Complete Notes
2. For Building Concepts along with examples/concept checks you should rely only on
Complete Notes
3. It would be useful to go through this Summary sheet just before the exam or before any
Mock Test
4. Questions in the exam are concept based and reading only summary sheets shall not
be sufficient to answer all the questions

1 Introduction

The term business organization describes how businesses are structured and how their
structure helps them meet their goals.
In general, businesses are designed to focus on either generating profit or improving society.
When a business focuses on generating profits, it is known as a for-profit organization.
These organizations are based on some form of ownership. This choice affects several managerial
and financial issues, including the amount of taxes the entrepreneur would have to pay, whether
the entrepreneur may be personally sued for unpaid business bills, and whether the venture will
die automatically with the demise of the entrepreneur.
When an organization focuses on improving the social good through the arts, education, health
care, or some other area, it is known as a non-profit (or not-for-profit) organization and is not
typically referred to as a business.

We shall discus various types of business organizations in this chapter

2 Forms of Business Organizations

2.1 Single and Joint Ownership

Our business may be owned by one person or by a group of persons. When it is owned by one
person, it is known as sole proprietorship
Except this form of business organisation, all other forms of business organisation come under
the category of group ownership or joint ownership.

Group ownership may take the form of -

1. Joint Hindu business family,
2. Partnership firm,
3. Joint stock company,
4. Limited liability partnership, or
5. Cooperative organisation.
We will briefly discuss different types of organization later in this document.

2.2 Proprietary and Corporate Enterprises

1. Proprietary Enterprise: Proprietary enterprises are owned by owners. In this case the
business does not exist independent of its owners who have the right to manage and run
the enterprise on daily basis.

2. Corporate Enterprises: In case of corporate enterprises, there is separation of ownership,

that is, a corporate enterprise enjoys a separate legal entity which is not affected by the
life of its shareholders or its members.

Corporate Entity Non-Corporate Entity

Joint stock company, limited liability partnership, Sole proprietorship, Joint Hindu Family and
cooperative society are categorised as corporate Partnership Firm are categorized as Non-corporate
entities entity
Separate legal entity Not a separate legal entity
Limited liability Unlimited liability
Separation of ownership from management Owners are the managers of the business
Perpetual succession Life is affected by the death of owners
can be launched and run only after fulfilling lot of can be launched and run without much legal
legal formalities formalities

3 Non-Corporate Entities

3.1 Sole Proprietorship

Sole proprietorship or individual entrepreneurship is a business concern owned and operated
by one person. The sole proprietor is a person who carries on business exclusively by and for
himself. Following are the features of Sole Proprietorship
1. One Man Ownership: In proprietorship, only one man is the owner of the enterprise
2. No Separate Business Entity: No distinction is made between the business concern and the
proprietor. Both are one and the same.
3. No Separation between Ownership and Management: In proprietorship, management rests
with the proprietor himself/herself. The proprietor is an owner also
4. Unlimited Liability: Unlimited liability means that in case the enterprise incurs losses, the
private property of the proprietor can also be utilized for meeting the business obligations
to outside parties
5. All Profits or Losses to the Proprietor: Being the sole owner of the enterprise, the proprietor
enjoys all the profits earned and bears the full brunt of all losses incurred by the enterprise
6. Less Formalities: A proprietorship business can be started without completing much legal
formalities. There are some businesses that too can be started simply after obtaining
necessary manufacturing license and permits
7. Capital: The capital is employed by the owner himself from his personal resources. He may
also borrow money from his friends and financial institutions if he cannot depend solely on
his personal resources
8. Limited resources: In case of sole proprietorship the owner is an individual. Resources of an
individual are always small and limited as compared to the resources of the group.
9. One person control: It is a one person show. He provides management to the business. He
takes all the decisions, procures resources, employee’s personnel, and direct and control the
affairs of the enterprise. He is not required to consult anyone else in taking any decision.

3.1.1 Merits - Sole Proprietorship

1. Easy to Form and Wind up:
2. Direct Motivation: The profits earned belong to the sole proprietor alone, and he bears
the risk of losses as well. Thus, there is a direct link between effort and rewards
3. Quick Decision and Prompt Action:

3.1.2 Demerits - Sole Proprietorship

1. Limited Capital: In sole proprietorship business, it is the owner who arranges the
required capital of the business.
2. Unlimited Liability: In case the sole proprietor fails to pay the business, obligations and
debts arising out of business activities, his personal properties may have to be used to
meet those liabilities.

3.2 Joint Hindu Business Family

Hindu Undivided Family business is a precise kind of business structure found only in India. This
is one of the classical methods of business structure in the nation. It is administered by the Hindu
Law. It is also known as HUF. It refers to a form of business organization which is owned and
carried on jointly by the members of the Hindu Undivided Family (HUF)

Important Terms in HUF

1. HUF: The family who runs or carry on the business organization. Hindu Undivided Family
includes an eldest male member ‘Karta’ and the other male members called co-parceners.
2. Karta: He is the person who is the head and eldest member of the family. Karta is the
person who has full control over business activities
3. Ancestral Property: It is the property of forefather or an ancestor and over which the
members have equal right
4. Co-Parceners: The male members related to three successive generations. They have equal
ownership right over the property of an ancestor

3.2.1 Features of Joint Hindu Family

1. Formation:
a. There should be at least two male members in the family to form a HUF
b. Ancestral property should have been inherited by members of HUF
c. All the members enjoy this property and have an equal share in that property.
d. Thus, any child taking birth in that family becomes a member of the HUF.
e. There is no requirement for an agreement to become a member

2. Liability
a. There is limited liability of all the members or co-parceners in the Hindu Undivided
Family business
b. The Karta has unlimited liability.

3. Registration: It is not compulsory for joint Hindu family business to get registration
certificate as it is governed by Hindu law act
4. Rights: All the members of HUF have the rights to inspect the accounts. The members can
also claim their share in the family property at the time of partition of the family
5. Control: Karta is the person who has full control over the Hindu Undivided Family
business. Karta can take advice from all the members, but he is not bound to accept their
decisions.
6. Continuity: Continuity is not affected by the death of a family member will stop next
generation control the business after the first generation and thus, business goes forever.
7. Minor Members: A child becomes a member by birth only, so there is no restriction for a
minor to become a member of the business

3.2.2 Merits of Joint Hindu Family

1. Easy Formation
2. Quick decision making
3. Continuity
4. Secrecy: All the decisions are taken by Karta and he only knows their business secrets. There
are no chances of leaking out of business secrets
5. Limited liability: The liability of all the members is limited to the extent of their shares. It
gives them a relief. The liability of Karta is though unlimited

3.2.3 Demerits of Joint Hindu Family

1. Limited resources: The Karta has limited scope of raising capital. His own funds may be
insufficient for expansion
2. Unlimited liability: Karta is personally liable for all the business obligations. His personal
property can be sold if the business assets are insufficient
3. Powerful Karta: Karta is all in all in the business. An incompetent Karta may ruin the
business since all the business decisions are taken by him only

3.3 Partnership
Partnership is an association of persons who agree to combine their financial resources and
managerial capabilities to run a business and share profits in an agreed ratio. The persons who
join hands are individually known as ‘Partner’ and collectively a Firm. The partners provide the
necessary capital, run the business jointly, and share the responsibility

3.3.1 Features of Partnership

1. Two or more Members: At least two persons are required to form a partnership. In any
partnership, where the number of partners is less than two, partnership is dissolved. The
maximum permissible number of partners has been prescribed under the Companies Act
2013. Section 464 of the act provides that number of persons in any partnership shall not
exceed 100 subject to the limit prescribed in the rules. In this regard, rule 10 of the
companies (miscellaneous) rules, 2014 provides that no partnership shall be formed,
consisting of more than 50 persons. Therefore, the limit as of now is 50 partners

2. Agreement: Whenever you think of joining hands with others to start a partnership business,
first of all, there must be an agreement between all of you. This agreement is called
Partnership Deed
• The amount of capital contributed by each partner
• Profit or loss sharing ratio
• Salary or commission payable to the partner if any
• Duration of business if any
• Name and address of the partners and the firm
• Duties and powers of each partner
• Nature and place of business; and
• Any other terms and conditions to run the business
 3. Lawful Business: The partners should always join hands to carry on any kind of lawful
business.
4. Competence of Partners: Since individuals join hands to become partners, they must be
competent to enter into a partnership contract.
5. Sharing of Profit: The main objective of every partnership firm is to share of profits of the
business amongst the partners in the agreed proportion.
6. Unlimited Liability: That means if the assets of the firm are insufficient to meet the
liabilities, the personal properties of the partners, if any, can also be utilized to meet the
business liabilities.
7. No Separate Legal Existence: Just like a sole proprietorship, a partnership firm also has
no separate legal existence from that of its owners
8. Principal Agent Relationship: All the partners of the firm are the joint owners of the
business. They all have an equal right to participate in their management actively.
9. Restriction on Transfer of Interest: No partner can sell or transfer his interest to anyone
without the consent of other partners.
10. Continuity of Business: A partnership firm comes to an end in the event of death, lunacy,
or bankruptcy of any partner.

3.3.2 Merits of Partnership

1. Pooling of Skills of different partners enhances the overall skill of the company
2. Flexibility in operations: The partnership firm is a flexible organization. At any time,
the partners can decide to change the size or nature of the business or area of its
operation.
3. Secrecy: A partnership firm is not legally required to publish it accounts and submits its
reports. Hence, it is able to maintain confidentiality of information related to its
operations

3.3.3 Demerits of Partnership

1. Unlimited Liability: The partners are jointly as well as separately liable for the debt of the
firm to an unlimited extent.
2. Uncertain Life: The partnership firm has no legal entity separate from its partners. It
comes to an end with the death, insolvency, incapacity, or the retirement of any partner.
3. Lack of Harmony: Every partner can place his or her opinion or viewpoint before the
management regarding any matter at any time.

3.3.4 Types of Partnership based on Duration

Partnerships can be classified on the basis of duration..
1. Partnership at will: Such types of partnerships are neither for an affixed period not for a
particular purpose. This type of partnership exists at the will of the partners.
2. Particular Partnership: When a partnership is formed for a certain undertaking or for a
certain period, it is called a particular partnership.

3.3.5 Types of Partners based on Participation

1. Active Partner: An active partner is also known as Ostensible Partner. As the name suggests
he takes active participation in the firm and the running of the business.
2. Sleeping or Dormant Partner: This is a partner that does not participate in the daily
functioning of the partnership firm, i.e., he does not take an active part in the daily activities
of the firm.
3. Nominal Partner: This is a partner that does not have any real or significant interest in the
partnership.
4. Partner by Estoppel: If a person holds out to another that he is a partner of the firm, either
by his words, actions or conduct then such a partner cannot deny that he is not a partner.
This basically means that even though such a person is not a partner he has represented
himself as such, and so he becomes partner by estoppel or partner by holding out
a. Secret Partner: A secret partner is one whose association with the firm is unknown
to the general public. Other than this feature, in all other respects he is like the
rest of the partners. He contributes to the capital of the firm, takes part in the
management, shares his profits and losses, and has unlimited liability towards the
creditors.

3.3.6 Partnership Vs. Sole Tradership

Area Partnership Sole Tradership

Number of Members As per partnership act, the A sole trading concern is owned
minimum number of members is by one person
two and maximum twenty in
ordinary business and 20 in case of
banking business

As per company law, the max

number of partners is limited to 50
Agreement a partnership arises only because there is no question of
of agreement between the agreement here
partners
Capital it is an economically more strong it is economically weak. The
as partners can raise more capital ability of sole trader to provide
capital is limited

3.3.7 Partnership Vs. Joint Hindu Family

 Basis Partnership Joint Hindu Family
Formation It arises as a result of an It arises from the status i.e. by
agreement between two or birth in the family
more persons
Number of persons As per partnership act, the there is no maximum limit on
minimum number of members is members
two and maximum twenty in
ordinary business and 20 in case
of banking business

As per company law, the max

number of partners is limited to
50
Minor a minor cannot be a partner but a male minor becomes a
can be admitted into the member merely by birth in the
benefits of partnership family

4 Corporate Entities
Let us discuss the Corporate Entities now one by one

4.1 Joint Stock Company

A company is an association of many persons who contribute money to a common stock and employ it
for a common purpose. The common stock so contributed is denoted in money and is the capital of the
company. The persons who contribute it are the members of the company. The capital of company is
divided into shares or stock of fixed amount and every member purchases several shares in the company.
Thus, the capital of company is jointly held by the shareholders. Therefore, it is known as joint stock
company.

Its shares are transferable, and its life is not affected by the incoming and outgoing of its members

4.1.1 Features of Company

1. Incorporated Association:
2. Artificial Person:
3. Separate Legal Entity
4. Limited Liability: The company being a separate person, its members are not as such liable
for its debts. Hence, in the case of a company limited by shares, the liability of members is
limited to the nominal value of shares held by them.
5. Separate Property: A company being a legal person is capable of owning, using, and
disposing of the property in its name.
6. Transferability of Shares: The shares of companies are transferable except in case of private
companies.
7. Common Seal: A company is an artificial person is not bestowed with a body of natural being.
4.1.2 Merits of Company
1. Large Financial Resources:
2. Limited Liability
3. Professional Management: Management of a company is vested in the hands of
directors, who are elected democratically by the members or shareholders.

4.1.3 Demerits of Company

1. Difficult to Form
2. Lack of Secrecy:
3. Delay in decision making:
4. Conflict among various groups: A company has various groups of stakeholders such as
shareholders, debenture holders, employees, directors etc. Each group has different
interests.

4.1.4 Types of Companies – Private and Public

Difference between Public Company Vs. Private Companies

Basis Private Company Public Company

Number of Shareholder Min – 2 Min – 7
Max - 200 Max – No Condition
Issue of Prospectus it cannot issue a prospectus it can issue prospects for
to invite the general public for inviting public for
purchase of its securities. It subscription of its shares. It
can issue securities, through can also issue securities
private placement only through private placement
Transfer of shares there is restriction on the shares of public company can
transfer of shares of the be transferred to any third
private company party

4.1.5 One Person Company

In many countries, law allows the registration of one person company having only one member
who subscribes to the entire share capital. According to Section 2 (62) of the Companies Act,
“One person company is a company which has only one person as a member”. It shall be
incorporated as a private company, that is, one person company is a special case of private
company. The words “one person company” shall be mentioned in the brackets below the name
of the company
1. No person shall be eligible to incorporate more than one “One Person Company”
2. it would be compulsory for a one-person company to convert itself into public or private
company in certain cases.
4.1.5.1 Features of One Person Company
1. An OPC may be registered as private company with one member only
2. An OPC will have a separate entity of its own
3. In India, concept of One Person Company was mooted by J.J. Irani committee

4.2 Limited Liability Partnership

Limited Liability Partnership enterprise, the worldwide recognised form of business organisation,
has now been introduced in India by enacting the limited liability partnership act, 2008.
LLP also offers the advantage of company form of organisation such as separate legal entity
though it does not have to follow the strict regulation of company law.

4.2.1 Features of LLP

1.Separate Legal Entity and Perpetual Succession:
2.Regulating Act: an LLP is governed by the Limited Liability Partnership Act,2008.
3.Number of Partners: Every LLP shall have at least two partners.
4.Designated Partners: Every LLP shall have at least two designated partners who are
individuals and at least one of them shall be a resident in India.
5. Limited liability: Unlike traditional partnership, in LLP the liability of partners is limited to
the extent of the capital contributed by each to the LLP.

4.2.2 Merits of LLP

1.Simple Formation
2. Separate Legal Entity
3.Perpetual Succession
4.Flexibility to the LLP to manage its own affairs: Partners can decide the way they want
to run and manage the LLP, as per LLP agreement. The act does not regulate the LLP to
large extent rather it allows partners the Liberty to manage it as per their agreement
5. Easy to transfer the ownership
6. Not agent of other partners
7. Limited liability

4.2.3 Limitations of LLP

1. An LLP cannot raise funds from public by issuing shares and debentures
2. There is no separation of management from owners as in case of company
3. This form of organisation cannot engage in certain businesses like banking, insurance,
telecom etc.

4.2.4 Distinction between Company, Partnership and LLP

 Features Company Partnership LLP
Firm
Registration Compulsory registration with Registration Compulsory
the ROC is not registration required
compulsory with ROC
Name at the end of the name word no name to end with
“Limited” needs to be used in guidelines “LLP”
case of public company and
the word “Private Limited
“with a private company
Legal entity separate legal entity not a separate legal entity
separate
legal entity
Liability limited to the extent of unpaid unlimited limited to the extent
capital of contribution to
the LLP
Number of Public Company Min -7 Min – 2 Min – 2
shareholders/partners Public Company Max – No Max – 50 Max – No condition
Condition

Private Company Min – 2

Private Company Max - 200

4.3 Cooperative Society

A cooperative organisation is a voluntary Association of individuals who associate together to
promote their common economic and social interests. It is based on the principles of collective
effort, mutual self-help, equality, and freedom. It is generally formed and registered under the
Indian cooperative societies act, 1912.

4.3.1 Features of Cooperative Society

The essential characteristics of cooperative society are a follow

1. Voluntary Association
2. Equal Voting Rights-
3. Separate Legal Entity
4. Service Motive
5. Distribution of Surplus- Members are paid dividend and bonus out of the profits of the
co-operative society.
6. Elimination of Middlemen- The main object of the cooperative societies is to eliminate
middlemen and to establish direct contact between members and customers.
7. Democratic Management
 8. Limited Liability: The liability of members is limited to the extent of amount contributed
by them as capital

4.3.2 Types of Cooperative Society

1. Consumer Cooperative Society: These societies are primarily for consumers who wish to
buy household goods at lower prices. Some of the best examples of a consumer co-
operative society are Super Bazar and Apna Bazar.
2. Producer Cooperative Society: Also known as industrial co-operatives, these types of
societies look out for the small-scale producers in a cut-throat market scenario.. Best
examples are dairy, fish farmers, weavers and artisans and tribal co-operatives.
3. Co-operative Credit Societies: These are urban and rural financial societies that provide
loans to members at low rates of interest, protecting the members from massive debts
to traditional moneylending agencies. Some examples are Teachers Co-op Credit society,
State Electric Board Employee Co-op Credit Society.
4. Marketing Cooperative Society: Mostly for the benefit of farmers, these societies
function to market the produce profitably at the best possible prices, increase the
bargaining strength of the farmers and protect them from the trials of individual selling
and market exploitation. Some good examples are Milk Co-operatives in Gujarat.
5. Housing Cooperative Society: Housing co-ops are a type of society that provides
affordable housing to the middle and low-income groups. One becomes a member by
purchasing shares in the co-operative.
6. Co-operative Farming Societies: The financially challenged farmer may not be able to
maximiser his agricultural output individually and earn optimum profits.

4.3.3 Merits of Cooperatives

1. Easy to Form-
2. Open Membership
3. Democratic Management- A cooperative society is managed in a democratic manner. It
is based on the principle of ‘one man one vote’. All members have equal rights and can
have a voice in its management
4. Limited Liability

4.3.4 Limitations of Cooperatives

1. Limited Capital
2. Inefficient Management- The management of a co-operative society is generally
inefficient because the managing committee consists of part-time and inexperienced
people.
3. Absence of Motivation- A cooperative society is formed for mutual benefit and the
interest of individual members is not fully satisfied. There is no direct link between effort
 and reward. Hence, members are not inclined to put their best efforts in a cooperative
society
4. Conflict among Members- Once the initial enthusiasm about the co-operative ideal is
exhausted, differences and group conflicts arise among members.
5. Government Control: A cooperative society gets various concessions and benefits from
the government. In return there is excessive government regulation and control by the
government.

5 Choice of Form of Business Organizations

Till now we have discussed various forms of business organisations. You might be confused at
which kind of business organisation is useful in which scenario. The impact of various factors on
the choice of suitable form of organisation is discussed below
1. Ease information: It implies an organisation which involves least expenses information
and minimum legal formalities is the best. From this point of view sole trader ship and
partnership are preferable
2. Liability: Limited liability implies that in case of insolvency or winding up, the owners will
be responsible only up to the amount of capital contributed by them. From this point of
view, the company and the LLP form of organisation are preferable
3. Nature of business: Business activity may be trading, manufacturing, or rendering
services. Trading business generally requires small capital and limited managerial ability.
Thus, it can be easily managed by sole proprietorship organisation. Service activities are
usually undertaken by the proprietorship firms. For a manufacturing business,
partnership or company or LLP form of organisation may be a better choice
4. Ease of raising finance: When a large amount of capital is needed, company may be the
right form of organisation. If small finance is required, then sole trader ship or partnership
may be the desired forms of organisation
5. Control: If one wants to have a direct control over his business then sole proprietorship
would be the preferable form. If partnership is created, the sole proprietor must share
control with partners. In a private company, promoters may be able to retain effective
control over the business of the company but in case of public company, the owners will
have indirect control over the management of the company
6. Business secrecy: Sole tradership is the best to maintain secrecy. In partnership the
secrets must be shared with the partners. In company form of organisation, the secrets
become public in case of public company though in case of private company, the secrets
will remain with the private members
7. Stability or Continuity: From the point of view of stability, company form is idle form of
organisation because it remains unaffected by the continuance or discontinuance of its
 members, whereas sole proprietorship and partnership get affected immediately if the
partner or sole proprietor ceases to exist
8. Government Regulations: If one wishes to avoid too much government controls and
regulations of business, he will prefer sole proprietorship or partnership. Business
undertaken through company and cooperative forms of organisation are subject to lot of
government controls and regulations through the Company Act and Cooperative Societies
Act.

6 Concept and Nature of Business Environment

Business environment is the aggregate of all conditions, events, and influences that surround and
affect the business. It implies that business environment refers to all conditions and forces
external or internal to business under which it operates. These external or internal forces include
customers, creditor’s, competitors, suppliers, government, employees, owners, managers, and
political parties etc.

The business environment can be of 2 types

1. Internal Environment: The internal environment consists of conditions and forces within the
organisation that affect its operations and management.
2. External Environment: The external environment consists of all forces that affect an organ
organisation from its outside. These include customers, competitors, creditor's, suppliers,
social and political forces, technological and international forces etc.

6.1 Characteristics of Environment

1. Totality of External Forces: Business Environment is the sum total of all the external factors
that influence the functioning of the business.
2. Specific and General Forces: Business Environment is made up of both specific and general
forces.
3. Inter-relatedness: Various elements of business environment are very closely related to each
other.
4. Dynamic Nature: Business environment is dynamic in nature i.e., it keeps on changing. For
exampl
5. Uncertainty: Business environment is very uncertain as one cannot predict as to what will
happen in future.
6. Relativity: Different countries and different regions have different business environment.
Thus, business environment is a relative concept.

7 Layers of Business Environment

A business form is surrounded by three layers of environment
 1. Micro: Microenvironment is the immediate environment of the firm including its mission,
policies, resources, culture, organisation structure etc.
2. Meso: Meso environment includes all external forces operating on the firm at the industry level
such as customers, competitors, suppliers, distribution partners, regulators etc. Meso
environment is the setting between the microenvironment and the microenvironment of the firm
3. Macro: Macroenvironment consists of external forces that are remote and have no direct
influence on a firm. The examples include economic, social, political, technological, international
factors, etc. These factors may be clubbed together as domestic external environment

7.1 Microenvironment
Micro environment includes all forces or factors that shape the internal environment of a business
enterprise. It includes its mission, policies, resources, culture, organisation structure etc.

The components of microenvironment are as follows

1. Mission and objectives of the firm

2. Policies of the firm
3. Financial, human, physical and technological resources of the firm
4. Organisation structure of the form
5. Organisation culture of the firm

7.2 Meso Environment

Meso environments consist of all external forces operating on a business at the industry level. The
examples would be customers, competitors, supplier’s, distribution partners, regulators etc. The forces in
the Meso environment have direct impact on the business of the firm and therefore these are also called
direct action elements. Miso environment must be watched closely because of its direct influence on the
business

Meso forces include the following

1. Competitors
2. Customers of Suppliers
3. Creditors
4. Investors
5. Intermediaries like wholesalers
6. Regulators like SEBI, RBI etc.

Since these forces operate between micro and macro environment, these are also called intermediate
environment.

7.2.1 Tool to Analyze Meso Environment – Porter’s Framework

Porter’s Framework is a tool analyze the Meso Environment.

Porter recognized that organizations likely keep a close watch on their rivals, but he encouraged
them to look beyond the actions of their competitors and examine what other factors could
impact the business environment. He identified five forces that make up the competitive
environment, and which can erode your profitability. These are:
1. Threat of New Entrants: New entrants in an industry bring new capacity and the desire
to gain market share. The seriousness of the threat depends on the barriers to enter a
certain industry.
2. Bargaining Power of Suppliers: This force analyzes how much power and control a
company’s supplier (also known as the market of inputs) has over the potential to raise
its prices or to reduce the quality of purchased goods or services, which in turn would
lower an industry’s profitability potential

3. Bargaining Power of Buyers: The bargaining power of buyers is also described as the
market of outputs. This force analyzes to what extent the customers are able to put the
company under pressure, which also affects the customer’s sensitivity to price changes.

4. Threat of Substitute Products: The existence of products outside of the realm of the
common product boundaries increases the propensity of customers to switch to
alternatives
5. Competitive Rivalry. This last force of the Porter’s Five Forces examines how intense the
current competition is in the marketplace, which is determined by the number of existing
competitors and what each competitor is capable of doing.

7.3 Macro Environment

Macroenvironment consists of external forces that are remote and have no direct influence on a firm.
The examples include economic, social, political, technological, international factors , etc. In other
words, they are beyond the control of the business firm. Macro environmental forces have the
potential to influence a specific firm by influencing the meso environmental forces. Therefore, they
are also known as indirect action elements or remote environment.

The components of microenvironment are following. These are also called components of PESTEL
analysis which is done to analyse the Macro Environment. It is called PESTEL analysis due to each letter
in PESTEL denoting a particular type of force
1. P - Political Forces
2. E - Economic Forces
3. S - Social cultural Forces
4. T - Technological Forces
5. E - Environment Forces
6. L - Legal Forces

7.3.1 Tool to Analyze Macro Environment – PESTEL Analysis

PESTEL Analysis is a strategic framework used to evaluate the external environment of a business
by breaking down the opportunities and risks
into Political, Economic, Social, Technological, Environmental, and Legal factors.
 Let us discuss these factors one by one
1. Political Factors: These include factors that affect the extent and the impact of the government
on the economy of a country. For example, the laws, taxation policies, monetary policies, etc. are
all a part of the political environment.
2. Economic Factors: Economic factors have a huge effect on the firm and its success. Some of
the factors to consider when monitoring the economic environment are Economic growth,
current phase of business cycle and inflation rates.
3. Social Factors: Everything that goes on in a society greatly affects the organization. Therefore, it
is important to analyze social factors while studying the social environment.
4. Technological Factors: Technological factors are linked to innovation in the industry, as well
as innovation in the overall economy. Not being up to date to the latest trends of a particular
industry can be extremely harmful to operations.
5. Environmental Factors: Environmental factors concern the ecological impacts on business. As
weather extremes become more common, businesses need to plan how to adapt to these
changes.
6. Legal Factors: Legal factors pertain to any legal forces that define what a business can or cannot
do. Many a times legal factors are impacted by the political forces and it is political forces that
define the laws

8 Managerial Response to Business Environment

The management of a business may choose from the following strategies to deal with changing
environment:
(i) Anticipating and Adapting
(ii) Smoothing or Leveling
(iii) Competitive Advertising: In order to meet competition in the market, business firms may
resort to competitive advertising.
(iv) Brand Building: Often, multinational companies have invested huge amounts on building
brands, such as LG, Samsung etc.
(v) Strengthening of Distribution Network: Several companies like Hindustan Lever, Coca
Cola, Pepsi, Titan, ITC, etc. have strengthened their distribution network in India.
(vi) Upgradation of Technology: Use of latest technology can provide a competitive edge to
their users.
(vii) Diversification Strategy: Many companies have undertaken diversification programmers
to strengthen their position in the market.
(viii) Joint Venture and Merger and Acquisition:
9 What is Organizational Culture?
Organizational culture refers to a system of shared meaning held by members that distinguishes
the organization from other organizations. Seven primary characteristics seem to capture the
essence of an organization’s culture
1. Innovation and risk taking. The degree to which employees are encouraged to be
innovative and take risks.
2. Attention to detail. The degree to which employees are expected to exhibit precision,
analysis, and attention to detail.
3. Outcome orientation. The degree to which management focuses on results or outcomes
rather than on the techniques and processes used to achieve them.
4. People orientation. The degree to which management decisions take into consideration
the effect of outcomes on people within the organization.
5. Team orientation. The degree to which work activities are organized around teams rather
than individuals.
6. Aggressiveness. The degree to which people are aggressive and competitive rather than
easygoing.
7. Stability. The degree to which organizational activities emphasize maintaining the status
quo in contrast to growth..

9.1 Do Organizations have Uniform Culture?

Organizational culture represents a perception the organization’s member hold in common. The
dominant culture expresses the core values a majority of members share and that give the
organization its distinct personality. For example, in Amazon the dominant culture is to help the
customer by understanding his needs rather than simply selling to the customer
Each organization will have a culture of its own. For example, let us try to understand this from
an example of organization A and organization B

Organization A
This organization is a manufacturing firm. Managers are expected to fully document all
decisions, and “good managers” are those who can provide detailed data to support their
recommendations. Creative decisions that incur significant change or risk are not encouraged.
Because managers of failed projects are openly criticized and penalized, managers try not to
implement ideas that deviate much from the status quo. One lower-level manager quoted an
often-used phrase in the company: “If it ain’t broke, don’t fix it.” There are extensive rules and
regulations in this firm that employees are required to follow. Managers supervise employees
closely to ensure there are no deviations. Management is concerned with high productivity,
regardless of the impact on employee morale or turnover. Work activities are designed around
individuals. There are distinct departments and lines of authority, and employees are expected
to minimize formal contact with other employees outside their functional area or line of
 command. Performance evaluations and rewards emphasize individual effort, although
seniority tends to be the primary factor in the determination of pay raises and promotions
Organization B

This organization is also a manufacturing firm. Here, however, management encourages and
rewards risk taking and change. Decisions based on intuition are valued as much as those that
are well rationalized. Management prides itself on its history of experimenting with new
technologies and its success in regularly introducing innovative products. Managers or
employees who have a good idea are encouraged to “run with it.” And failures are treated as
“learning experiences.” The company prides itself on being market driven and rapidly
responsive to the changing needs of its customers. There are few rules and regulations for
employees to follow, and supervision is loose because management believes that its
employees are hardworking and trustworthy. Management is concerned with high productivity
but believes that this comes through treating its people right. The company is proud of its
reputation as being a good place to work. Job activities are designed around work teams, and
team members are encouraged to interact with people across functions and authority levels.
Employees talk positively about the competition between teams. Individuals and teams have
goals, and bonuses are based on achievement of these outcomes. Employees are given
considerable autonomy in choosing the means by which the goals are attained

9.2 What are subcultures?

Apart from a dominant culture there can be some subcultures in the company. For example, in
the same company, the sales department might have aggressive subculture whereas R&D
department might have subculture of innovation and risk taking. Subcultures tend to develop in
an organization to reflect specific problems, situations or experiences that organizational
members face.
Generally, the subcultures emerge among two dimensions: functional and geographical.
Functional subcultures emerge because people who work in a particular functional department
tend to have specialized knowledge and training relevant to the function.
Geographical subcultures emerge because of impact of location features. In a large country like
india, there are numerous subcultures based on geographical locations.

9.3 Strong Vs Weak Culture?

It is possible to differentiate between strong and weak cultures. If most employees (responding
to surveys) have the same opinions about the organization’s mission and values, the culture is
strong; if opinions vary widely, the culture is weak
In a strong culture, the organization’s core values are both intensely held and widely shared. The
more members who accept the core values and the greater their commitment, the stronger the
culture and the greater its influence on member behavior.
9.4 Culture Vs. Formalization?
The stronger an organization’s culture, the less management needs to be concerned with
developing formal rules and regulations to guide employee behavior. Those guides will be
internalized in employees when they adopt the organization’s culture

10 Impact of Organizational Culture

Organizational culture being unique and distinctive, prescribes some specific modes of behavior
for its members. These modes of behavior then affect the entire behavioral process. Though such
behavioral processes may have different dimensions, they ultimately create impact on the
objective setting, work ethic, motivational pattern, and organizational processes
1. Objective Setting: Culture moulds people, and people are the building blocks of the
organisation.
2. Work Ethic: Work ethic in an organisation is derived from its culture. Thus, an organisational
culture determines the ethical standards for an organisation as a whole and its individual
members
3. Motivational pattern: Culture interacts to develop in each person a motivational pattern.
Culture determines the way people approach their jobs and even life in general. If
organisational culture is geared towards the achievement, people will find it quite
motivating, and they will put their outmost energies for the work.
4. Organizational Processes: Various organisational processes like planning, decision making,
and controlling are determined by organisational culture because these processes are
carried out by the people in the organisation. The table below presents practices adopted
by two types of organization having high-performing and low-performing organization
cultures

10.1 Culture as a Liability

Though the concept of organizational culture is used in normative way as it is used to develop
commitment on the part of employees. In actual practice, sometimes, it becomes dysfunctional.
It starts to have bad impact on the employees and performance of the organization.
Culture becomes a liability when it is low performing. A low-performing culture is characterized
by rigid organizational processes and rules, centralized decision making etc. When an
organization works in such a culture for a long time, its acts a barrier in many situations as
discussed below
1. Barriers to change: Culture is a liability when shared values don’t agree with those that
further the organization’s effectiveness.
2. Barriers to Diversity: Hiring new employees who differ from the majority in race, age,
gender, disability, or other characteristics creates a paradox. Management wants to
 demonstrate support for the differences these employees bring to the workplace, but
newcomers who wish to fit in must accept the organization’s core culture
3. Barriers to acquisitions and mergers: Historically, when management looked at
acquisition or merger decisions, the key decision factors were potential financial
advantage and product synergy. In recent years, cultural compatibility has become the
primary concern.

11 Creating and Maintaining Organizational Culture

For creating an organization culture, there may be two options to an organization.
1. First, let the cultural characteristics of the founders of the organization percolate among
the members. Most of the organizations which are not large enough adapt this approach.
However, this approach is not highly effective for an organization which start as large.

2. In second approach there is explicit attempt to prescribe what the culture of an

organization is. Where this approach is followed, creation of organizational culture
proceeds as a process with distinct steps as shown below

Lets us discuss these 4 steps one by one

11.1 Establishing Values

Values define what is right and what is wrong. Values of an organisation are created by those
who establish the organisation. These values decide, to a very great extent, what business the
organization should be in.

11.2 Creating Vision

Vision implies the imagination of future events and prepares the organisation for the same. It
tells where the organization should be in future and what are the challenges that it will face.

11.3 Operationalizing Values and Vision

Till values and vision are not put into practise, these remain just the thinking of those who have
created these. For putting values and vision in action, the organisation can undertake following
activities
 1. The organisation should prepare a written statement containing its values and vision and
communicate the same to its organisational members
2. The organisation should design its structure that help employees to take those actions
that have been envisaged by values and vision.
3. In selection of employees, care should be taken that their values match the
organisational values.
4. Reward system should be such which encourages employees to engage in behaviours
that are compatible with organisational values and vision.

11.4 Socialization of Employees

No matter how good a job the organization does in recruiting and selection, new employees need
help adapting to the prevailing culture. That help is socialization.
Socialization Process
The prearrival stage recognizes that each individual arrives with a set of values, attitudes, and
expectations about both the work and the organization. One major purpose of a business school,
Encounter Stage: The selection process can help inform prospective employees about the
organization as a whole.
Metamorphosis Stage: This is the completion phase of socialization process in which the new
employee works out any problem discovered during the encounter stage. He reconciles with the
values and norms of the organization and brings necessary changes in his role behavior to suit
them. He tries to internalize these values and norms. The completion of socialization is indicated
by the following features
1. High Productivity of Employees
2. High Commitment of employees
3. Low turnover among employees

12 Creating a Customer Responsive Culture

In the present environment almost, every organisation is taking actions to win customers. One
of these actions is creating customer responsive structure. Customer responsive culture is that
whose employees can understand customers and respond them quickly. Main features of
customer responsive culture are as follows
1. Employees of the organisation are outgoing and friendly
2. Employees need to have freedom to meet changing customer service requirements.
Therefore, there should not be rigid rules, procedures, and regulations.
3. employees should be empowered so that they can make decisions quickly
4. employees should have good communication skills including patience for listening.
13 Spirituality and Organization Culture
What is Spirituality? Workplace spirituality is not about organized religious practices. It’s not
about God or theology. Workplace spirituality recognizes that people have an inner life that
nourishes and is nourished by meaningful work in the context of community
Characteristics of Spiritual Organizations
1. Benevolence. Spiritual organizations value kindness toward others and the happiness of
employees and other organizational stakeholders.
2. Strong sense of purpose. Spiritual organizations build their cultures around a meaningful
purpose. Although profits may be important, they are not the primary value.
3. Trust and respect. Spiritual organizations are characterized by mutual trust, honesty, and
openness. Employees are treated with esteem and value, consistent with the dignity of
each individual.
4. Open-mindedness. Spiritual organizations value flexible thinking and creativity among
employees.

14 Socio-Cultural Features of India and their Impact

We have seen earlier that organisation is connectivity of individuals. When individuals join the
organisation, they not only bring with themselves their ability, intelligence, and personality but
also their sociocultural features too. Following are some of the major characteristics of Indian
society relevant to managerial application

14.1 Joint Family

In India there is a joint family system. In a joint family system, the head of the family has authority
over its members. The children are taught obedience to their elders. Female members are
subjected to discipline. There is a discrimination between male and female members. However,
joint family is not built around a central authority. In a joint family, it is a good deal of
consultativeness. The major decisions are taken through consultation. On the same lines the
superior in the organisation is expected to consult more frequently and informally.
The elders in the joint family think the younger people to be incapable to taking any decision. On
the same lines, the superiors may think themselves as the protectors of the subordinates and the
later cannot decide anything on their own

14.2 Caste System

Caste system is prevalent in India since ages. It is the caste that decides the status in the society.
People of lower caste have become quite conscious to protect and develop their status. Thus, to
protect the status, people will work hard. In an organisation many people may be interested in
the status though without additional tangible benefits
The caste system affects interpersonal relationship between the superior and the subordinate.
Generally, the higher status persons have more power and influence than those with low status.
Thus, hypothetically, a person with a lower caste as superior is unlikely to manage the affairs of
persons of higher caste as subordinate .

14.3 Social Class

The society is divided into many classes – elite class, middle class, lower-middle class etc.
Generally, a large number of managers come from families having elite professionals such as
business executives, landlords, lawyers etc. This is so because these groups have distinct
advantages in regard to academic achievement.
Such a division in classes impacts the organizational culture also. The people from elite class
believe they only have the true right to be in manager’s role and others are just there to obey
them. The do not accept people form middle class excelling as a manager
 Summary Sheet
-
Learning and Attitude
1 Concept of Learning
Learning is a term frequently used by people in a wide variety of contexts: education,
training, etc. Learning involves some kind of change in knowledge and behaviour. Santord
has defined learning as a relatively enduring change in behaviour brought about as a
consequence of experience.

Nature of Learning - Based on the definition of learning, we may identify the following nature
of learning:

1. Learning involves a change in behavior, though this change is not necessarily an

improvement over previous behavior. Learning generally has the connotation of improved
behavior, but bad habits, prejudices, stereotypes, and work restrictions are also learned.

2. The behavioral change must be relatively permanent. Any temporary change in behavior
due to fatigue or any reason is not a part of learning.

3. The behavioral change must be based on some form of practice or experience. Thus, any
behavioral change because of physical maturation is not learning. For instance, the ability to
work which is based on physical maturation would not be considered learning.

4. The practice or experience must be reinforced in order for learning to occur. If

reinforcement does not accompany the practice or experience, the behaviour will disappear.

1.1 Learning Process

Learning is a process and contains the following elements: drive, cue stimuli, response,
reinforcement, and retention. Let us go through these elements.

1. Drive - Learning occurs in the presence of drive. Drive is an internal force of an individual
that arouses him to respond to a stimulus. Thus, it is the basis of motivation. Drives are
of two types - primary or physiological and secondary or psychological.
2. Cue Stimuli - Cue stimuli (called just stimuli) are any objects existing in the environment
as perceived by the individual. There are two types of stimuli so far as their results in terms
of response are concerned: generalization and discrimination.
3. Responses - The stimulus results in responses. Responses may be in physical form or in
psychological form like attitudes, perception, or other complex phenomena. However,
learning psychologists usually make attempt at measuring learning in behavioral terms,
that is, responses must be operationally defined and preferably observable
4. Reinforcement - Reinforcement is a fundamental condition of learning. Without
reinforcement, no measurable modification of behaviour takes place. Reinforcement is
 defined as environmental events affecting the probability of occurrence of responses with
which they are associated.
5. Retention - Stability of learned behaviour over time is defined as retention and the
converse is forgetting. Some of the learning is retained over a period of time while other
may be forgotten. Extinction is a specific form of forgetting.

1.2 Principle of Learning

Educational psychologists and pedagogues have identified several principles of learning, also
referred to as laws of learning, which are generally applicable to the learning process.
Learning principles provide insight about what makes people learn most effectively. These
principles are as follows:

Primacy

Intensity Effect

Principles
Freedom of Exercise

Learning
Recency Readiness

Requirement

1. Readiness - Readiness implies a degree of concentration and eagerness..

2. Exercise - Principle of exercise states that those things most often repeated are best
remembered.
3. Effect - Principle of effect is based on the emotional reaction of the learner.
4. Primacy - Primacy principle implies that things learned first are usually learned easily
and remain in the mind of the learner without effort. This has significant implication tor
sequencing learning materials.
5. Recency - Recency principle states that things most recently learned are best
remembered.
6. Intensity - Intensity principle suggests that the more intensely the learning material is
taught, the more likely it will be retained.
7. Freedom - Freedom principle states that things freely learned are best learned.
8. Requirement - Requirement principle states that "one must have something to obtain
or do something through learning.
1.3 Learning Curve
Learning curve, also known as experience curve, is a graphical presentation of how a leaner is
progressing in his learning. Degree of learning is plotted on vertical axis and time/effort is
plotted on horizontal axis. There may be three types of learning curves:

1. Negative accelerated curve - Which is formed when learning is not difficult in beginning
and learning progresses easily. This shows rise from the beginning. This stage is also
called as Diminishing returns.

2. Positive accelerated curve - Which is formed when learning is difficult in beginning.

Therefore, the progress in learning is at slow pace at the initial stage, and its speed
increases after adjustment. This stage is also called as Increasing returns.

3. S-shaped curve - which is formed when the progress of learning is at slow pace, averages
thereafter, and slows again. S-shaped curve may take the form of plateau curve at the
upper end of S shape in which the rate of learning becomes very slow or negligible.

2 Learning Theory
Learning theories can be grouped into three categories: conditioning theory also known as
connectionist or behavioristic theory, cognitive learning theory, and social learning theory.

2.1 Conditioning Theory

Conditioning is the process in which an ineffective object or situation becomes so much
effective that it makes the hidden response apparent. In the absence of this stimulus, hidden
response is a natural or normal response.

2.1.1 Classical Conditioning

Classical conditioning states that behaviour is learned by repetitive association between a
stimulus and a response (S-R association). The organism learns to transfer a response from
one stimulus to a previously neutral stimulus. The work of the famous Russian physiologist
and Nobel Prize winner, Ivan Pavlov demonstrated the classical conditioning process.
Through various experiments, Pavlov has concluded that behavioral response can be
conditioned through use of stimuli. In Brief Pavlov experiments are as follows -

1. Pavlov presented meat (unconditioned stimulus -US) to a rat and rat salivated
(unconditioned response - UR). He rang bell (neutral stimulus) and rat did not respond.
2. He presented meat (US) plus bell ringing (conditioned stimulus - CS) and rat salivated
(UR).
3. He rang bell only (CS) and rat salivated (conditioned response -CR).

Implications of Classical Conditioning.

Classical conditioning is based on findings of experiments conducted on animals, particularly,
rats. Therefore, it fails to explain total behaviour of human beings related to learning. In case
of human beings, there is no definite relationship between stimulus and response. Therefore,
many psychologists view that classical conditioning does not explain total behaviour of human
beings. For example, Skinner feels that classical conditioning explains only respondent's
reflective behaviour. People's behaviour is emitted rather than elicited and it is voluntary
rather than reflective. The behaviour affects, or operates on, the environment. This type of
behaviour is learned through operant conditioning

2.1.2 Operant Conditioning

Operant conditionings implies, that behavior is voluntary and it is determined. maintained,
and controlled by its consequences. It presupposes that human beings explore Their
environment and act upon it. The basic principle of learning new behavior (operant, also
called instrumental) involves the relationship between three elements.

1. Stimulus situation (important events in the situation).

2. Behavioral response to the situation, and
3. Consequence of the response to the person.

A simple example of the operant behavior is the application of brake by a vehicle driver to
avoid accident. Here, the possibility of accident without application of brake is stimulus
situation, application of brake is the behavior, and avoidance of accident is the consequence
of behavior. those behaviors. Through this process, human beings learn what behavior will
be rewarding and they engage in those behavior.

2.1.3 Difference between Classical and Operant Conditioning

Classical conditioning and operant conditioning differ in their approach to explain the causes
and process of learning. The major difference between these may be summarized as
follows.

1. In classical conditioning, behavior is the result of stimulus either of first order or higher
order. In operant conditioning, many possible behaviors can result in the particular stimulus
situation. Thus, in the former case, there may be direct relationship between stimulus and
response, while no such relationship is necessary in operant conditioning.

2. In classical conditioning, a change in the stimulus (unconditioned stimulus to conditioned

stimulus) will elicit a particular response. In operant conditioning, one particular response
out of many possible ones occurs in a given stimulus situation. In this case, stimulus does not
elicit response but serves as a cue for a person to emit the response. The emitting of response
depends upon the outcome of the response so emitted.

3. In classical conditioning, the stimulus, conditioned or unconditioned, serving as a reward.

is presented every time for response to occur. In operant conditioning, the reward is
presented only if the organism gives the correct response. Thus, response is instrumental in
receiving the reward

2.2 Cognitive Learning Theory

Cognitive learning theory is based on cognitive model of human behaviour which puts
emphasis on positive and free-will aspects of human behaviour. Cognitive learning involves
enabling people to learn by using their reason, intuition, and perception. There are eight
cognitive processes:

1. Extraverted sensing - Extraverted sensing occurs when people become aware in detail of
what is in the physical world.
2. Introverted sensing - Introverted sensing involves storing data and information, then
comparing and contrasting the current situation with similar ones.
3. Extraverted intuiting - Extraverted intuiting involves noticing hidden meanings and
interpreting them, often entertaining a variety of possible interpretations from just one
idea or interpreting what someone's behaviour really means.
4. Introverted intuiting - Introverted intuiting involves synthesizing seemingly contradictory
phenomena in the situation which takes understanding to a new level
5. Extraverted thinking - Extraverted thinking involves organizing environment and ideas
through charts, graphs, tables, flowcharts, etc. to understand them in a better way.
6. Introverted thinking - Introverted thinking involves finding just right words to clearly
express an idea concisely, crisply, and to the point.
7. Extraverted feeling - Extraverted feeling involves a desire to connect with (or disconnect
from) others and expressions of warmth (or displeasure) and self-disclosure
8. Introverted feeling - Introverted feeling is associated with images, feeling tones, and gut
of reactions. As a cognitive process, it often serves as a filter for information that matches
what is valued, wanted, or worth believing in.

2.3 SOCIAL LEARNING THEORY

Social learning theory combines and integrates both behavioristic and cognitive concepts
and emphasizes the integrative nature of cognitive, behavioral, and environmental
determinants.
This theory agrees with some parts of behavioral and cognitive theories but finds that these
theories do not explain the processes and elements therein fully. It posits that learning can
also take place via vicarious or modeling process.

According to social learning theory, learning occurs in two steps:

1. The person observes how others act and then acquires a mental picture of the act and its
consequences (reward and punishment).

2. The person acts on the basis of acquired image and if the consequences are positive, he
will tend to do it again. If the consequences are negative, the person will not do it again.

3 Organizational Behavior Modification

Organizational behaviour modification (briefly called as OB Mod) is a sophisticated tool for
improving the organizational effectiveness.

Derived and developed from the concept of Skinner’s operant conditioning, this technique is
used to modify or eliminate undesirable behavior and replace it with behavior that is more
compatible with goal attainment. Behavior modification concentrates on a person's overt
behavior, and this allows a manager to realistically try to observe and deal with outward
manifestations of behavior.

1. Identification of Critical Behaviors.

In order to apply OB Mod, it is necessary that critical behaviors which have significant impact
on the performance outcome of the employees should be identified. Employees may be
engaged in several behaviors in the organization. Out of these, some behaviors may be
critical like absenteeism or attendance, tardiness or promptness, complaints or constructive
criticism, and doing or not doing a particular task or procedure and some behaviors may
not be critical like bad attitudes or goofing off.
2. Measurement of Behaviors.

After the critical behaviors are identified, these are measured in terms of the rate at which
these are occurring. If the rate of occurrence is within the acceptable limit (for example, rate
of absenteeism at the rate of one per cent), no action may be required.

3. Functional Analysis of Behaviors

Functional analysis involves a detailed examination of present behaviors of the employees to

determine what consequences each of the behaviors produces, what conditions lead to their
occurrences, etc. It pinpoints one of the most significant practical problems of using an OB
Mod approach to change critical performance behaviors.

4. Intervention.

Identification of critical behaviors to change and the factors that cause such behaviors will
determine the development of an appropriate intervention strategy. Intervention is the
action taken for changing the undesirable critical behaviors. Its main objective is to strengthen
and accelerate desirable performance behaviors and/or weaken and decelerate undesirable
behaviors.

5. Systematic Evaluation.

The final step in OB Mod is the systematic evaluation whether the intervention strategies are
Working properly or not. Since the basic purpose of OB Mod is to bring change in undesirable
behaviors so as to improve performance, the evaluation must be made on this line. Changed
behaviors can be compared with baseline behaviors and deviations can be noted. It there
is positive change, it suggests that the strategies are successful. However, it the change is
not significant, it may call for adoption of more appropriate strategies.

4 Learning Organization
Some organizations take proactive actions in the light of anticipated environmental
changes; some take reactive actions based on environmental changes and some do not
react at all to environmental changes. The organizations which fall-in the First category
anticipate likely changes in the environment and gear their human resources to face
environmental threats that are likely to be posed. Such organizations emphasize continuous
organizational learning and are known as learning organizations.

Two terms, organizational learning and learning organization, are effectively synonymous
but their nuance differs. While organizational learning is à process, a set of actions, learning
organization is an entity. Garvin has defined a learning organization as follows:

"A learning organization is one which is skilled at creating, acquiring, and transferring
knowledge and modifying its behaviour to reflect new knowledge and insights,"
In the context of learning organizations, Senge has differentiated between adaptive learning
and generative learning.

1. Adaptive learning merely involves adaptation to environmental changes while

generative learning embraces creativity and innovation and also relates to anticipation
of environmental changes. Adaptive learning is single loop learning that involves
correcting errors against set norms. It does not work when an environment is uncertain,
and cause and effect relationship cannot be reasonably established.

2. Generative learning is double loop learning that allows and encourages people to
constantly question and test existing norms, belies, values, and even goals to ensure
alignment with fast-changing environment.

4.1 Characteristics of a Learning Organization

Senge has identified five characteristics of a learning organization: systems thinking, personal
mastery, mental models, shared vision, and team learning

1. Systems Thinking -

The idea of a learning organization has developed from systems thinking which considers an
entity under study as a system having all the features of a system.

2. Personal Mastery -

Mastery means a special level of proficiency. Personal mastery involves continually clarifying
and deepening one's personal vision, focusing energies, developing patience, and seeing
reality objectively. l

3. Mental Models

Mental models are deeply ingrained assumptions and generalizations that influence how
people understand the world and how they take actions

4. Shared Vision

Shared vision focuses on what thoughts and concepts managers share with their teams. The
development of shared vision is important in motivating employees to learn as it creates a
common identity that provides focus and energy for learning Successful visions are built on
the individual visions of the employees at all levels of an organization

5. Team Learning –

Instead of individual learning, there is emphasis on team learning in a learning organization.

Team learning, also known as shared or cooperative learning, involves learning by team
members how they can contribute to team efforts so as to achieve synergistic effect in the
team.
4.2 Creating learning organization
The process of creating a learning organization begins which goes through the following steps:

1. Commitment of Top Management - Creation of learning organization may require major

changes in the existing techniques, structures, processes, beliefs, values, and even goals. Any
major organizational change can be successful only if it has received the commitment of top
management.

2. Sharing of Commitment and Creation of Vision - From top management commitment for
creating learning organization flows sharing of commitment and, then, vision of learning
organization is created.

3. Wider Acceptability of Desirability of Learning Organization. - Once vision of learning

organization is created, it is communicated organization-wide for wider acceptability of
desirability of learning organization.

4. New Techniques/Structures/Processes - This is the most crucial step in creating learning

organization. Creation of learning organization requires total transformation of the existing
organization, that is, aligning existing techniques, structures, and processes to the
requirements of the learning organization.

5. Commitment of Entire Workforce - Changing of existing techniques, structures, and

processes facilitates the creation of learning organization but it does not work effectively
unless there is a commitment of the entire workforce for the learning organization.

6. Creating Learning Organization - After the completion of the above steps, the learning
organization is created which is quite conducive for learning and development of personnel..
This can be done by undertaking the following activities:

 Practicing knowledge management for creating, sharing, and utilizing knowledge

organization wide.
 Creating centers of excellence organization-wide to achieve excellence in every field
including learning.
 Instituting team rewards for ensuring greater cooperation among individuals.
5 Knowledge Management.
In recent years, more emphasis has been put on knowledge management so that any
knowledge created at any place of an organization is shared by all relevant organizational
members and duplication of effort to create the similar knowledge is avoided. Throughout
the world, it has been recognized that the fundamental sources of wealth creation are no
longer natural resources and physical labor, but it is the knowledge that has become the pre-
eminent resource and has come to play a dominant role in any type of organization.

Knowledge management is creation, sharing, and use of knowledge organization wide. Thus,
in knowledge management, there are three basic elements: knowledge creation, knowledge
sharing, and knowledge utilization.

Let us discuss these elements.

1. Knowledge Creation - Knowledge creation involves generating facts, information, and

techniques that are relevant to an organization and those associated with it.

2. Knowledge Sharing - Knowledge sharing involves communication and distribution of

knowledge organization-wide. When a new knowledge is created in the organization, it is
stored in organization's database for its wider dissemination.

3. Knowledge Utilization - The third element in knowledge management is knowledge

utilization, that is, using knowledge to solve problem for which it has been acquired. Unlike
other resources that deplete when used, knowledge can be shared and used and grows
through this process. "Knowledge perishes when it is not used; it increases when it is used;
knowledge is essentially 'self-regenerative' and 'feeds on itself.

6 Attitude
The importance of attitudes in understanding psychological phenomenon was given formal
recognition early in the history of social psychology From the time of entry of the term
attitude into the language of psychology until now, interest in attitudes has been strong
and growing.

Attitude is defined as follows:

Attitude is the persistent tendency to feel and behave in a Favourable or unfavorable way
towards some object, person, or idea.

6.1 Components of attitude

Understanding of components of attitude helps to identify how attitude works. Components
of attitude can be explained through ABC model of attitudes in which A stands for affective,
B stands for behavioral, and C stands for cognitive. However, these terms may not be in the
same sequence. For example, cognitive component comes first followed by affective and
behavioral components.

These components are as follows:

1. Cognitive Component - Cognitive component is a description or belief in the way things

are. Usually, this description tends to be objective and without any emotional element.

2. Affective Component - Affective component refers to the emotional reaction one has
towards an attitude object. In the above example, the employee may feel that "the
organization does not have fair pay policy." Affective component affects behavioral
component.

3. Behavioral Component - Behavioral component refers to the way one behaves when
exposed to an attitude object. In the above example, the employee getting low pay may think
of leaving the organization and joining somewhere else. If he is not able to find alternative
employment and remains in the organization, his productivity will be low.

6.2 Attitude Opinion and Belief

There are certain other terms, such as opinion and belief, which are used quite closely with
attitude. However, there is a basic difference in these terms.

An opinion is a view, judgement, or appraisal formed about a particular matter. For

example, people may have opinion that teachers are noble persons. An opinion is response
to a specifically limited stimulus and tends to be focused on more specific aspects of the
object while attitude tends to be generalized predisposition to react in some way towards
object.
Belief is a state or habit of mind in which trust or confidence is placed in some person or
thing, for example, belief in God. A belief is an enduring organization of perceptions and
cognitions about some aspects of individual's world. Beliefs are stronger than opinions.
Opinions and beliefs affect human behaviour. Most psychologists, however, believe that
attitudes are more fundamental to human behaviour than are the related aspects. For this
reason, more attempts have been made to analyze attitudes as compared to others.

6.3 Types of Attitudes

There are three types of attitudes: positive attitude, negative attitude, and neutral attitude .

6.3.1 Positive Attitudes

Positive Attitude. Persons having positive attitude explore good things in others and do not
go after negativity. This type of attitude has the following features:

1. The people with positive attitude move forward with confidence and optimism
2. They remain happy and cheerful
3. Their dealing with others is comprised of sincerity.
4. They exercise great degree of diligence.

6.3.2 Negative Attitudes

Persons having negative attitude always search weaker elements of others and are not
inclined towards positive elements. This type of attitude has the following features:

1. People with negative attitude put focus on bad people and avoid good People
2. They are likely to complain about changes, rather than adapting to the changing
environment.
3. They tend to blame others for their failure.

6.3.3 Neutral Attitude

Persons having neutral attitude are very balanced in their approach. They remain indifferent
to problems and wait for others' intervention for resolutions. Such type of persons remains
self-satisfied and complacent. Their attitude is composed of indifference and detachment.
Another striking element of their attitude is serene and unemotional type of posture which
makes them very balanced.
6.4 Attitude and Behavior
Attitudes alone do not influence behaviour but these act with other factors in the individual
influencing his behaviour, such as personality, perception, motivation, etc. Further, attitudes
are also affected by the individual dimensions as well as the objects, persons, and ideas.
Attitudes have been thought as serving four functions and thereby influencing the
behaviour. These are: utilitarian or instrumental, ego defensive, value orientation, and
knowledge.

1. Instrumental. - Attitudes serve as a means to reach a desired goal or to avoid an undesired

one. Instrumental attitudes are aroused by the activation of a need or cues that are associated
with the attitude object and arouse favorable or unfavorable feelings.

2. Ego defensive - The ego-defensive function of attitudes acknowledges the importance of

psychological thought. Attitudes may be acquired and maintained to protect the person
from facing threats in the external world or from becoming aware of his own unacceptable
impulses.

3. Value Orientation - The value-orientation function takes into account attitudes that are
held because they express a person's values or enhance his self-identity. These attitudes arise
by conditions that threaten the self-concept, appeals to reassert the person's self-image, or
by cues that engage the person's values and make them salient to him.

4. Knowledge - The knowledge function of attitudes is based on a person's need to maintain

a stable, organized, and meaningful structure of the world. Attitudes that provide a standard
against which a person evaluates aspects of his world serve the knowledge function too.
These functions of attitudes affect the individual's way of interpreting the information coming
to him.

6.5 Theories of Attitude Formation

A number of theories have been proposed to explain attitude formation and change. Though
these theories have many limitations, they provide useful thinking about the processes
underlying attitude formation. These theories are organized into major groupings according
to the nature of the psychological processes postulated to underlie formation and change of
attitudes.

These theories may broadly be classified into three categories: cognitive consistency
theories, functional theory, and social judgment theory. However, there is frequent
discontinuity between various groupings because related approaches have focused on
different sets of phenomena, Nevertheless, such classification is valid from practical point of
view.
 Theories of
Attitude
Formation

Social Cognitive
Functional
judgement consistency
theory
theory theories

Cognitive
Balance
dissonance
theory
theory.

6.5.1 Cognitive Consistency Theories

Cognitive consistency theories state that people seek consistency among their attitudes and
between their attitudes and behavior. This means that people seek to reconcile divergent
attitudes and align their attitudes and behavior so that they appear rational and consistent.
When there is an inconsistency, forces are initiated to return the individual to an
equilibrium state where attitudes and behavior are again consistent. This can be done by
either altering the attitude or the behavior. There are two important theories under this
group: balance theory and cognitive dissonance theory.

Balance Theory.

Balance theory, developed by Heider, is concerned with consistency in the judgement of

people and/or issues that are linked by some form of relationship. There are three elements
in the attitude formation: the person, other person, and impersonal entity. Balance occurs
when at least two elements are compatible. This theory suggests that persuasive
communication can be used to change the attitudes. The persuasive communication conveys
information about how the attitude object or issue furthers the attainment of certain
desirable ends or conveys persuasive material that results in a re-evaluation of the goals
themselves.

Cognitive Dissonance Theory

The cognitive dissonance theory, proposed by Festinger, has had by far the greatest impact
on the study of attitudes.?
This theory states that a person experiencing cognitive dissonance attempts at bringing
cognitive consonance by changing his beliefs and/or attitudes. Cognitive dissonance exists
When a person has conflicting beliefs about a phenomenon.

6.5.2 Functional Theory

Functional theory, developed by Katz, states that the functions served by attitudes are
important for attitude change procedure. There are four types of functions served by
attitudes: instrumental, ego defensive, value orientation, and knowledge

When a particular function served by the attitude changes, one of the two conditions must
prevail before the change of attitude: (i) the attitude and the activities related to it no longer
provide the satisfaction they once did: or (ii) the individual's level of aspiration has been
raised. shifts in the satisfaction which come from behaviors bring with them changes in the
attitudes, When new behaviors inconsistent with attitudes bring satisfaction, these
attitudes then must be adjusted. However, Katz's functional theory has not stimulated
much research except for the Work on changing ego-defensive attitudes.

6.5.3 Social judgment Theory

Social judgement theory, formulated by Sherif and Hoveland, attempts to explain how
existing attitudes produce distortions of attitudinally related objects and how judgements
mediate attitude change. Accordingly, a person's own stand on an issue which is his initial
attitude serves as an anchor for the judgement of attitudinally related stimuli. The person's
initial attitude on an issue provides a point of reference against which he evaluates other
opinions. Based on this evaluation, the person may change his initial attitude, if required. The
person encompasses the opinion that best characterizes his own stand and rejects the
opinions that the person finds objectionable.

6.6 Attitude Measurement

Sttitude measurement of employees in organizations is most commonly carried out with self-
report questionnaires. Measurement of attitudes based on questionnaires uses several
scaling methods.

There are three types of attitude scaling which are commonly used in attitude
measurement: Thurstone type of scale, Likert scale, and semantic differential.

6.6.1 Thurstone Type of Scale

Thurstone type of scale is based work of Thurstone and Chave, who collected a large number
of statements relating to the area in which attitudes were to be measured. These statements
may be relating to any object about which attitudes are to be measured. The statements are
both favorable and un-favorable, and are placed in 11 piles, With most favorable statement
being placed in pile 1 and the most unfavorable one being placed in pile 11.
6.6.2 Likert's Attitude Scale.
Soon after Thurstone scale, Likert experimented with certain other varieties of attitude
scales." Likert's attitude scale uses five points. The statement relating to the measurement
of attitudes is given to the person concerned and he is asked to check one of the five points
given for every statement. These points show degree of agreement or disagreement with
the given statements. The Likert scale is considered better as compared to Thurstone because
of several positive facts.

6.6.3 Semantic Differential

Semantic differential, developed by Osgood, Suci, and Tannenbaum, is an attitude scaling
technique that has various applications.8 Semantic differential means the successive
allocation of a concept to a point in the multidimensional space by selection from among a
set of given scaled semantic alternatives. For any given purpose, it consists of many pairs of
opposite phrases, with scale values in between. In using this scale, the respondent marks
the position along each scale that reflects his attitude to the object. Scale values (often
ranging from 1 to 7) are associated with the different responses and individual's attitude
score usually is the sum of these.

6.7 Attitude Relevant for Organisational Behavior

Though all these attitudes are important for the behaviour of the employees in an
organization, specially the employee attitudes towards the following aspects are more
important:

1. Job satisfaction.
2. Job involvement
3. Organizational commitment.

Job Satisfaction

Job satisfaction reflects the extent to which employees find gratification or fulfilment in
their work. There are a variety of factors which affect job satisfaction of an employee, such
as personal factors like an employee's needs and aspirations, group and organizational
factors like relationships with coworkers and superiors, working conditions, work policies,
compensation, etc.

Job Involvement

Attitudes of employees towards job involvement are important for organizational

effectiveness. Job involvement is the degree to which employees immerse themselves in
their jobs, invest time and energy in them, and view work as a central part of their overall
lives.

Organizational Commitment
Organizational commitment of employees is a strong force for organizational effectiveness.
Organizational commitment, also known as employee loyalty to organization, is the degree
to which an employee identifies with the organization and wants to continue actively and
meaningfully participating in it.

7 Values
Like attitudes, values that a person has are one of the major forces shaping behaviour. Values
are convictions and a framework of philosophy of an individual on the basis of which he
judges what is good or bad, desirable or undesirable, ethical or unethical. Rokeach, a noted
socio. psychologist, has defined values as "global beliefs that guide actions and judgements
across a variety of situations. "

He further says,

"Values represent basic convictions that a specific mode of conduct (or end-state of
existence) is personally or socially preferable to an opposite mode of conduct (or end-state
of existence).

On the basis of definition of values, we can infer their following characteristics:

1. Part of Culture - Values are elements of culture, and culture is the complex of values, ideas,
attitudes, and other meaningful symbols to shape human behavior in the society. Every
society has its own culture and people in that society adhere to cultural requirements.

2. Learned Responses. Human behavior represents learned phenomenon. Unlike other

animals, human beings have to learn almost everything about how to be human from
experience. This is because human beings live in a society having certain cultural
characteristics which prescribe to behave in a particular way.

3. Inculcated - Values are inculcated and are passed through generation to generation by
specific groups and institutions. Such transmission starts from the family from where the
socialization process starts. Apart from family, educational, religious, and ethnic institutions
also transmit cultural values from one generation to another.

4. Social Phenomenon. Values are a social phenomenon, that is, cultural habits are shared by
aggregates of people living in organized society. An individual's way of thinking and behaving
is not culture, rather group behavior constitutes culture. Group is developed and reinforced
through social pressure upon those who are interacting with one another.

5. Gratifying Responses - Values exist to meet the biological and other needs of the
individuals in the society. Thus, elements in the culture become extinguished when they no
longer are gratifying to members of the society. The society rewards behaviors which are
gratifying for its members.
6. Adaptive Process - Culture is adaptive, either through a dialectical process or evolutionary
process. Dialectical or sharply discontinuous change occurs when the value system of a
culture becomes associated with the gratification of only one group or class in the
environment.

In such a case, other classes of the society reject the logic of the value system and replace it
with a new value system, such as through revolution or other methods. In the evolutionary
process, the change occurs slowly as a gradual process, but not through revolution.

7.1 Types of Values

Allport have classified personal values into six categories: economic, theoretic, political,
social, aesthetic, and religious based on the orientation of people towards certain things.

1. Economic. People having values of economic orientation attach importance to what is

useful. They are concerned with the practical affairs of the work.

2. Theoretic. People having values of theoretic orientation involve themselves in the use of
rational, critical, and empirical processes. They strive to discover truth.

3. Political. People having values of political orientation place great emphasis on power. They
remain interested in gaining power and using it to influence others.

4. Social - People having values of social orientation attach importance to love and affection,
They care for the interests of others and are sympathetic to them.

5. Aesthetic - People having values of aesthetic orientation put emphasis on artistic values
and harmony. It is not necessary that they themselves are creative or artistic but have love
for these.

6. Religious - People having values of religious orientation attach importance to unity. Allport
suggest that a person may have different values in different degrees but he is affected more
by the most important values held by him.

Graves's Value Classification. Graves has classified personal values into seven categories
ranging from the lowest (reactive) to the highest (existential). These values are as follows:

1. Reactive - People having reactive values remain unaware of themselves and others as
human beings; they react to only basic physiological needs.

2. Tribalistic - People having tribalistic values have orientation towards safety by submitting
to power exercised by authority figures; want strong directive leadership.

3. Egocentric - People having egocentric values believe in rugged individuals; are aggressive
and selfish; respond primarily to power; desire individual responsibilities; want to work
alone in an entrepreneurial style.
4. Conformist - People having conformist values have low tolerance for ambiguity; have
difficulty in accepting with divergent values; desire that others accept their values.

5. Manipulative - People having manipulative values strive to accomplish goals by

manipulating things and people; are materialistic and seek status and recognition.

6. Socio-centric - People having socio-centric values have desire to be liked and go along with
others rather than getting ahead; dislike materialism, manipulation, and conformity; seek
primarily the social relationships in all activities.

7. Existential. - People having existential values have high tolerance for ambiguity and for
people with divergent values; are outspoken on inflexible systems, restrictive policies, status
symbols, and arbitrary use of authority; seek full expression and self-fulfillment of growth
and self- fulfilment needs through work.

England's Value Classification. England has classified personal values into two categories:
pragmatic and moralist.

1. Pragmatic - People having pragmatic values take a pragmatic view of the situation which
is stereotyped; opt for concepts and actions which appear to them as important and
successful irrespective of good or bad.

2. Moralist - People having moralist values are guided by the ethical considerations of right
or wrong, just or unjust, and honest or dishonest.

Rokeach's Value Classification. Rokeach has classified various personal values into two
main categories: terminal (end) values and instrumental (means) values.

1. Terminal Values - Terminal values reflect what a person is ultimately striving to achieve,
for example, sense of accomplishment, freedom, equality, etc.

2. Instrumental Values - Instrumental values relate to means for achieving desired ends, for
example, being courageous, logical, honest, etc.

According to Rokeach Value Survey (RVS) developed by Rokeach to measure personal

values), there are terminal values and instrumental values. People differ in holding terminal
values, at least, in the context of degrees. Similarly, people differ in respect of instrumental
values for achieving a particular terminal value.

8 Difference between Attitude and Values

 Summary Sheet
-
Work teams, power, and Group Dynamics

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 Important Points
1. This Summary Sheet shall only be used for Quick Revision after you have read the
Complete Notes
2. For Building Concepts along with examples/concept checks you should rely only on
Complete Notes
3. It would be useful to go through this Summary sheet just before the exam or before any
Mock Test
4. Questions in the exam are concept based and reading only summary sheets shall not
be sufficient to answer all the questions

1 Concept of Group Dynamics

The term group dynamics contains two terms: group and dynamics. Group is basically a
collectivity of two or more persons. Dynamics comes from Greek word meaning force.
Theory of dynamics is used in physical sciences and engineering which explains the
phenomena of universe by some immanent energy and operation of force.

Thus, group dynamics refers to the interaction of forces between group members in a social
situation. Thus, group dynamics is the social process by which people interact face to face
in small groups.

1.1 Concept of Group

A group consists of two or more persons who are interacting with one another in such a
manner that each person influences and is influenced by each other. Based on this definition,
the following features of the group can be identified.

• Two or More Persons - To form a group, there should be at least two persons because a
single individual cannot interact.
• Collective Identity. Members of the group must be aware about their membership of the
group. Each member of the group must believe that he is a member of, is a participant in,
some specific group.
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 • Interaction - Members of the group interact among themselves.
• Shared Goal - Members of the group should subscribe to the attainment some common
objectives. However, it is not necessary that each member subscribes to or agrees with
all the objectives of the group.

1.2 Types of Groups

Groups may be classified into different types. The basis of differentiation may be purpose,
extent of structuring, process of formation, and size of the group membership. However, an
analytical classification of the group may be: formal and informal, primary and secondary,
membership and reference, command and task, in-group and out-group, and responsive
and apathetic. Each type has different features and different effects on its members.

1. Primary and Secondary Groups. A primary group is characterized by intimate, face-to-face

association and cooperation. The membership of such a group is small and is based on
intimate relationship. Examples of such groups may be families, friendship groups, or
neighborhood groups. A secondary group is more formal, general, and remote. The
members of the secondary group may not have any interest in the problems and pleasures
of others.
2. Membership and Reference Groups. A membership group is one to which an individual
really belongs while a reference group is one with which the individual identifies o r to which
he would like to belong. In fact, an individual may be member of several groups at a time, but
he may not participate actively in all such groups; he would like to participate in those groups
whose norms are more attractive and gratifying. The attractiveness of the reference group
makes the norms more attractive to the individual who aspires to join it.
3. Command and Task Groups. A command group is composed of the subordinates who report
directly to a common superior. This type of group is determined by organization chart.
Examples of such a group may be a production manager and his subordinates in his
department, a college principal and teachers, and so on. A task group is comprised of the
employees who work together to complete a particular task or project.
4. In-groups and Out-groups. In-group represents a clustering of individuals holding prevailing
values in a society or, at least, having a dominant place in social functioning . It can be a
majority numerically, or it may represent the power structure with its pattern of behaviour
considered desirable. The out-group is the conglomerate looked up as subordinate or
marginal in the society; it is usually referred to as the minority group even though in certain
instances, It may represent a numerical majority.
5. Responsive and Apathetic Groups - A responsive group is one which reacts to environmental
demands quickly to satisfy these demands. Therefore, such a group remains effective. An
apathetic group, also known as non-responsive group, remains unconcerned to its
environmental demands.

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 2 Formal Group Development
Groups generally pass through a standardized sequence of their evolution. This sequence is
known as five-stage model of group development (also known as team development stages).
These stages are forming, storming. norming, performing, and adjourning

It is not necessary that all groups follow the rigid pattern prescribed here and the similar
problems they face at each stage because each group is different in some respect based on the
type of members and problems and functions assigned. However, concept of stages is significant
in the context of the nature of problem which group members are likely to face in a work group.

2.1 Punctuated Equilibrium Model of Group Development

While five-stage model of group development is applicable for most of the groups, however,
some types of groups, particularly temporary groups with certain deadline of work performance,
do not seem to follow this model. They have their unique sequencing of actions. This pattern of
sequencing of actions is known as punctuated equilibrium model of group.

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 1. First Meeting or the initial meeting - The first meeting of group members sets the group's
direction. A framework of behavioral patterns and assumptions through which the group will
approach its task emerges in this first meeting.
2. Transition - At the end of the first phase which takes almost half of allotted time of project
completion, transition phase begins which is characterised by a concentrated burst of
activities, dropping even old patterns, and adopting new perspectives. In this phase, the
group executes plans developed during this period.
3. Completion - Completion is the final phase of group actions. During this period, there is a
final burst of activity that leads to completion of the work assigned to the group.

Thus, punctuated equilibrium model characterizes groups as exhibiting long p eriod of inertia
interspersed with brief revolutionary changes triggered primarily by their members' awareness
of time deadlines.

3 Informal Groups
Informal group, (also called informal organization), is created because of the limitations of formal
organization. Informal groups have significant impact on formal organization and the actual
behaviour of organisational members emerges out of interaction of formal and informal groups.

The first basic issue in analyzing informal groups is to identify the basic logic behind the
formation of informal groups as these are not created by the management of the organization
but emerge on their own.

1. Propinquity Theory. The term propinquity means nearness. The theory of propinquity states
that individuals affiliate with one another because of spatial or geographical proximity. Thus,
in organisational context, individuals working together tend to form a group with others
more easily as compared to with individuals working relatively at a distant place.

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 2. Homans Interaction Theory - Homans theory is based on activities, interactions, and
sentiments. All these elements are directly related to one another. For example, Homans
states that "the more activities persons share, the more numerous will be their interaction
and the stronger will be their shared activities and sentiments." .

3. Balance Theory . Balance theory of group formation, propounded by Newcomb, has suggested
similarity of attitudes towards relevant objects and goals as the basics for group formation.
Newcomb has stated that "persons are attracted to one another on the basis of similar attitudes
towards commonly relevant objects and goals.

4. Exchange Theory. Exchange theory of group formation derives its clue from social exchange
theory which says that people involve in social exchange on the basis of perceived reward-cost
relationship in a particular relationship. Exchange theory of group formation suggests that an
individual will (or will not) join a group on the basis of the outcomes of reward and cost.
Reward for joining a group is in the form of gratifying the needs while cost is in the form of
anxiety, frustration, embarrassment, and fatigue.

3.1 Types of Informal Groups

Since informal interaction is spontaneous, it can take place in any way. Consequently, informal
groups may be of different types.

Dubin has distinguished two contrasting classifications of informal groups as presented by Mayo
and Lambard and Sayles based on their research studies. Mayo and Lambard have classified
informal groups into three categories - natural, family, and organized - on the basis of the
functions of the group in determining standards of conduct and the internal structure. The
natural group does have very little structure. The family group has regular members who exert
marked influence on the behaviour of members. The organized group has some acknowledged
leaders and a more consistent structure.

Sayles has classified informal groups into four types: apathetic, erratic, strategic, and
conservative.

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 The apathetic groups show indifferent attitudes towards formal organizations consistently. The
erratic groups are marked by rapid inflammability, poor control, inconsistent behaviour,
centralized autocratic leadership, and union formation activities. The strategic groups have
relatively antagonism, continuous pressures, well-planned and consistent grievance activity, high
degree of internal unity, sustained union participation, and usually good production record in the
long run. The conservative groups have usual cooperation, moderate internal unity, limited
pressures for highly specific objectives, and self-assurance and activity-inactivity cycles in terms
of union activities and grievance procedure.

Clique - Clique is a specific type of informal group which is formed for a specific purpose and
does not allow others to become members. It consists of limited number of members (five or
six) who interact regularly and follow certain norms and standards of behaviour. Dalton has
identified the following types of cliques:

1. Horizontal Clique - It consists of persons more or less of the same rank working in the same
unit.

2. Vertical Clique. It consists of persons of different ranks, mostly from the same unit.

3. Mixed or Random Clique. This type of clique consists of persons of different ranks and
departments and has some similarity. For example, clique members reside in the same locality,
travel by the same vehicle, or are members of the same club.

4 Introduction to Group Behavior

Group behavior in organizations tends to follow the organizational norms and rules wherein the
employees are expected to be disciplined, follow orders, and work to the requirements of the
organization rather than their own whims and fancies.

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 Deviant Workplace Behavior, (also called anti-social behaviour or workplace incivility) is a
voluntary behaviour that defies significant group norms.

Examples of deviant workplace behaviour are leaving workplace early, wasting organisational
resources, gossiping, showing favoritism, sexual harassment, etc. Such behaviors are quite
common in some types of organizations though such behaviors lead to group and
organisational inefficiency. Therefore, such behaviors should be controlled by enforcing group
norms.

4.1 Group Cohesiveness

Group cohesiveness means the degree of attachment of the members to their group. If group
cohesion is high, the interaction between members of the group is high and the degree of
agreement in group opinion is high. A cohesive group usually has the following features:

1. The members share the group goals and norms and have common interests and
backgrounds.
2. The number of members is small.
3. The members interact among themselves quite frequently and interpersonal
communication is very effective.
4. Group loyalty among the members is high because the group enjoys high status.
5. The members stand united against any perceived external threats to the group.
6. The members keep themselves glued to the group as they feel that their needs would be
satisfied by the group.
7. The group has a history of past success.

4.1.1 Group Cohesiveness and Productivity

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 4.2 Group Status and its determinants
A status is a position that has been determined as being important in the relationships of the
group. In the society, a person may have more than one status. This is so because a person may
have to perform a variety of roles, and there is a possibility that different roles may attract
different status. The status can be determined in the context of ranking and comparison.
Therefore, two or more persons are required to make status to others in the system.
relationship. Individuals are bound together in status systems which define their rank relative

4.2.1 Status Determinants

There are four scales by which one can describe various types of status. These are ascribed-
achieved, functional-scalar, positional-personal, and active-latent.

1. Ascribed Achieved. The ascribed-achieved

dimension of status measures the extent to which
prestige or value is earned or is a matter of birth-
right. In the society, a certain amount of prestige is
derived merely from being born into a prominent
family.
On the other hand, a person may earn it through his
own work and admiration of others. The status in
the society may be achieved through the
acquisition of special skills, education, and other
qualities by virtue of which a person is given higher
status

2. Functional-Scalar - Functional-scalar dimension is related with the vertical and horizontal

positions. In an organization, the position of a person may be evaluated on the basis of its
rank in the hierarchy.
3. Personal-Positional - Personal-positional scale relates status to the extent to which prestige
or value is based on characteristics of the individual himself or based on the position he holds
without regard to the person who occupies it.
4. Active-Latent - Active-latent dimension arises because a person performing various roles
may have different status with each role. Apparently, the status attached to a particular role
has nothing to do with other role, but in actual practice, such a status may affect his
functioning in other roles too. For example, a person may be lowly placed in an organization,
consequently his status is very low in the organization. But if he is holding a high office in
civic affairs, this status may affect his working in the organization.

4.2.2 Status Symbols

In general, symbols are the features for identifying anything. Status symbols are the various
indicators on the basis of which a person of higher status is distinguished from a lower status

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 person. Thus, status symbols are a set of externally visible markings that systematically rank
individuals and groups in relation to each other. There can be several types of status symbols:

1. Insignia. Places or people having different status can be distinguished on the basis of insignia
marks of identification differentiating things or people of different status, for example, various
hotels are classified on the basis of stars; sport tournaments on the basis of grades, and so on. In
the similar way, people in the various places are identified on the basis of such things, for
example, a minister's car bearing national flag.

2. Titles and Designations

3. Pay and Perquisites

4. Physical Facilities

4.3 Group Processes

Group processes have effect on group performance because of operation of social facilitation
effect .

Social Facilitation Effect - Social

facilitation effect refers to the tendency
for performance to improve or decline in
response to the presence of others.
Though this tendency is applicable to
individual performance also as some
individuals do better in presence of
some but poor in presence of some
others, social facilitation effect is more
applicable in the case of group
performance. Because of operation of
social facilitation effect and effect of
group factors, two types of features
may appear in groups: synergy in group
and social loafing (group dysergy).

Synergy in group is a social process that occurs when a group, by acting in concert, achieves an
outcome that is superior to what would be achieved by the most capable member or by any
simple pooling of individual member efforts. And Social loafing suggests that people working
together on a common task may actually decrease their individual efforts; group work does not
necessarily spurt group extorts.

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 5 Group Decision Making
Group decision making is an activity based on the old adage "two heads are better than one.” It
permits many persons simultaneously to interact and to arrive at a decision. Thus, group decision
making has the following features:

1. There are at least two decision makers

acting jointly on the issue under decision
making the number of decision makers
in a group can be more than two.
2. There is active interaction among group
members. This is possible through
participation in decision making. Thus,
participation is the backbone of group
decision making.
3. In group decision making, there can be
either consensus among the members of
the group or the decision can be arrived
at through simple majority unless group prescribes any other mode of majority.
4. All the members are jointly responsible for the decision made by the group.

5.1 Positive Aspects of Group Decision Making

1. Pooling of Knowledge and Informatio
2. Satisfaction and Commitment.
3. Personnel Development
4. More Risk Taking

5.2 Negative Aspects of Group Decision Making

1. Time-consuming and Costly.
2. Individual Domination. Some individuals dominate the group processes and have
considerable bearing on decision outcomes because of the group dynamics prevailing in
group interaction.
3. Problem of Responsibility. No doubt, group decision brings more commitment from
members and its implementation is easier, but this is true when the decision implementation
outcome is positive. When this outcome is negative, no one can be held responsible.
4. Groupthink. Groupthink is a type of thinking that occurs when reaching agreement becomes
more important to group members than arriving at a sound decision. Groupthink is more
likely to happen in cohesive groups because there is pressure for conformity to group norms
and members avoid being too harsh in their judgements of fellow members. They try to avoid
bickering and conflict, which they perceive as a threat to the team spirit.
5. Group shift – Group-shift is a special case of groupthink in which the group members tend to
take extreme view in decision making, either a conservative view of the least risk or

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 aggressive view of the extreme risk. However, the shift is towards extreme risk. The first term
for group-shift was 'risky shift' coined in 1960s and was used to describe the tendency for
a group to take more risk than the same individuals within the group would have taken had
they been faced the same problem alone. In group decision making, there tends to be a shift
from the group's initial position on an issue because of exaggeration of the position; the
conservative types become more cautious while aggressive types put stress on more risk.
While taking more risk as a consequence of exchange of views among group members is
positive feature as discussed earlier, it is the extreme view that is negative.

5.3 Methods of Group Decision Making

1. Decisions Made by Group Leader Without Group Discussion
2. Decision by Group Expert
3. Decision by Averaging Individuals' Opinions -
4. Decision Made by the Group Leader after Group Discussion.
5. Decision by Majority Vote
6. Decision by Consensus
7. Decision by Subgroup - For example, board of directors (a group) of a company appoints
different committees like appointment committee, compensation committee, etc.
consisting of three to four directors in each committee. These committees make decisions
which are ratified by board of directors.

5.4 Techniques of Decision Making

These techniques are brainstorming, nominal group technique, delphi technique, and dialectic
decision method

1. Brainstorming - Brainstorming is a technique to stimulate

idea generation for decision making. Originally applied by
Osborn in 1938 in an American company, the technique is
now widely used by many companies, educational
institutions, and other organizations for building ideas.
Osborn has defined brainstorming simply as 'using the brain
to storm the problem'.

2. Nominal Group Technique - Nominal group technique (NGT) is a structured group meeting
which restricts verbal communication among members during the decision-making process. It is
meant to resolve differences in group opinion by having individuals generate and then rank a
series of ideas in the problem exploration, alternative generation, or choice-making states of
group decision making

3. Delphi Technique - The name Delphi indicates a shrine at which the ancient Greeks used to
pray for information about the future. In Delphi technique of decision making, members do not
have face-to-face interaction for group decision. The decision is arrived at through written
communication in the form of filling up questionnaires often through mails
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 4. Dialectic Decision Method - The Dialectic Decisions Method is a technique used to overcome
the problem in the group-decision making, wherein the group members quickly agree to one
alternative proposal and might overlook more promising solutions than the chosen one. Thus, it
ensures a full consideration of alternatives.

6 Intergroup Behaviour
An organization consists of many groups created formally or informally: Since the organization is
a system, these groups cannot remain independent. Rather, each group depends on others for
raw materials, resources, information, or assistance in performing a task. Thus, there is
interdependence among groups. Higher the level of exchange of resources among groups, higher
would be the degree of interdependence. The nature of such interdependence varies in different
relationships and can be classified into four categories.

1. Pooled Interdependence. Groups that rely on each other only because they belong to the same
parent organization have pooled interdependence.

2. Sequential Interdependence. Sequential interdependence occurs when one group's

operations precede and act as prerequisite for the second group's, for example, assembly line
departments. In this relationship, the second group in sequence may experience difficulty in
accomplishing its tasks if it does not interact effectively with its predecessor. Where collaborative
relations do not exist between these groups, conflict and sabotage may occur.

3. Reciprocal Interdependence. Groups where the operations of each precede and act as
prerequisites to the functioning of the other have reciprocal relationship, such as union and
management relationship where both depend on each other.

4. Team Interdependence. Where multiple groups interact, reciprocal interdependencies may be

multiplied. In this case, each group's operations precede and act as prerequisites for every other
group's operations when their functioning is considered over time, for example, various
departments like sales, advertising, and market research in marketing division. Groups with team
interdependence have the greatest potential for conflict and the highest requirements of
coordination and integration.

Up-till this point, we have Covered various dimensions related to the Group and how groups
are formed, but now will shift our focus towards one more concept which is work teams.

7 Concept of Team
A team is a small group of individuals with unique features. Katzenbach and Smith have defined
a team as follows:

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 "A team is a small number of people with complementary skills who are committed to a
common purpose, performance goals, and approach for which they hold themselves mutually
accountable."

Based on this definition, we can derive the following characteristics of a team:

1. Small Number of Persons - A team consists of small number of persons because the interaction
and influence processes needed for the team to function can only occur when the number of
team members is small.

2. Complementary Skills - A team consists of people with complementary skills to get the things
done. Three types of skills are usually required in a team.

3. Common Purpose and Performance Goals - A team has common purpose and performance
goals which set the tone and direction of the team.

4. Common Approach. A team evolves a common approach which is followed by team members
in true spirit.

5. Mutual Accountability - A team holds itself mutually accountable for results, rather than
merely meeting a manager's demands for results.

7.1 Difference between Team and Group

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 7.2 Types of Teams
In an organization, there may be different types of teams: problem-solving, cross-functional,
self-managing and virtual.

Problem-solving Team - A problem-solving team, also known as corrective action team, is

constituted to solve specific problems which an organization may be facing, Team members for
such a team are drawn from those areas where the problems requiring solution exist.

Cross-functional Team - The basic objective of a cross-functional team is to make decisions and
solve problems in those areas which cannot be done by a particular functional department.

Self-managing Team - In today's context, more emphasis is given on self-managing teams, also
known as empowered or self-directed teams. A self-managing team has the following
characteristics:

1. It is empowered to share various management and leadership functions.

2. It plans, controls, and improves its own work processes.
3. It sets its own goals and inspects own work.
4. It often creates its own schedules and reviews its performance as a group.
5. It prepares its own budgets and coordinates its work with other departments.
6. It usually orders for materials, keeps inventories, and deals with suppliers.
7. It's frequently responsible for acquiring any new training it might need.

Virtual Team - In a virtual team, members interact

among themselves online- using communication links
like wide area networks, video conferencing
electronic malls whether they are located in the same
building, same city, or continents apart. Virtual teams
can do all the things that other teams can do - share
information, make decisions, and complete tasks.
Members of a virtual team may come either from the
same organization or there may be members drawn
from different organizations like customers, supplies, joint ventures, etc.

Multi-team System - Multi-team system is a collection of two or more teams that interface
directly and interdependently in response to environmental contingencies toward the
accomplishment of collective goals. In the multi-team system, all teams pursue their own goals
but share at least one common goal.

7.3 Effective Team and its characteristics

Since teams are important to an organization, it should create teams that are effective. An
effective team is one which contributes to the achievement of organizational objectives by
performing the task assigned to it and providing satisfaction to its members.

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 It can be said that an effective team has the following characteristics:

1. Skills and Role Clarity and Supportive Environment

3. Superordinate Goals - Superordinate goals are those which are above the goals of a single
team or a single individual.

4. Team Rewards - Team performance depends on how rewards are linked to team performance
and how members perceive this linkage. If team members perceive those rewards are contingent
on team performance, they will put their maximum effort.

7.4 Implementation of Team Creation Programme

A. The Start-up phase consists of two broad activities: selection of team members and initial
training.

Selection of Team Members - Team members are selected according to the guidelines provided
by the draft plan prepared before the team implementation..

Initial Training - Team members need training on continuous basis. Training at the initial stage is
informational or awareness training that sends the message that top management is firmly
committed to teams and that teams are not experimental.

B. Reality and Unrest - Sometime after the initial enthusiasm, team members and those
associated with team working start realizing reality of the situation and their initial
enthusiasm starts turning into frustration. For team members, unfamiliar tasks, more
responsibility, and worry about job security replace hope for the opportunities presented by
the team approach. Other personnel associated with the team working start feeling
ambiguity about their roles in the new environment.
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 C. Leader-centered Teams - In order to overcome frustration developed at the second phase,
managers start taking active part in the working of teams. They even give direction about
how team functioning is to proceed smoothly. This situation seems to be like reverting back
to manager-centered organization structure.
D. Tightly formed Teams - In this phase, teams start working as tightly formed teams and their
focus is on internal working.
E. Self-managing Teams - This phase is the end result of planning and implementation of team
creation. By this time, teams are able to meet or even exceed their performance goals.

8 Task Force
A task force is made up of a group of people with different backgrounds who are assigned a
specific task or mission: Since the tenure of a task force is over when the task or mission is over,
usually membership in the task group is temporary; each person remains part of it only so long
as his skills and knowledge are required and task force continues. The task force also differs from
a matrix organization in the sense that the latter appears almost on continuous basis and
personnel are assigned tasks in different projects at different periods of time

9 Quality Circle
Quality circle is a group of employees that meets
regularly to solve problems affecting its work
area. This group carries on continuously as part
of organization-wide control activities, self-
development and mutual development, and
control and improvement within the workplace
utilizing quality control techniques with all the
members participating. Generally, six to twelve
volunteers from the same work area make up
the circle.

9.1 Developing Quality Circle

Usually, a BC system in an organization is developed by going through the following phases:

1. Start-up Phase - QC requires an attempt just like an organizational change programme. An

organizational change programme can be made successful when people are convinced about
the utility of the change.
2. Constitution of QC - QCs may be constituted at different workplaces in the organization.
Members of a QC are from the same work area or doing similar type of work.
3. Initial Problem Solving - Once people in the circle are trained and officially sanctioned, they
turn to problem solving. This involves three stages: data collection, data analysis, and
problem solving.

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 4. Presentation and Approval of Suggestions. When the QC members get ready to show their
solution of a problem, they present it before the management. Presentation to management
may be in the form of oral presentation by the members, preparation of the project report,
or group assignments in project presentation.
5. Implementation . The final phase is implementation of suggestions. For this purpose, relevant
groups may be assigned activities depending on the nature of suggestions.

Till this point have covered various dimensions related to various group and teams and now
we will move forward to the last topic of this chapter, which is power and politics.

10 Concept of Power
Power may be defined as follows:

Power refers to the capacity that a person has to influence the behaviour of another person so
that the latter does something he or she would not otherwise do.

This definition implies that: (1) agent has potential to influence behaviour of target that may or
may not be actualized to be effective, (2) there is dependence relationship between agent and
target, and (3) target has some discretion over his or her behaviour, which can be used by him or
her in the absence of use of power by the agent.

10.1 Difference between power and politics

1. Authority is legitimized by certain rules, regulations, laws, and practices. In the case of
power, there may or may not be such legitimization.
2. Authority is institutional and originates because of structural relationships. Power
emerges because of personal factors and varies with the individuals. In the management
of an organization, authority is the central element of formal organization and
systematic communication. Power reflects the political realities within the organization
and relates to the subtler, more informal patterns of action and interaction that occur.
3. Authority exists in the context of organizational relationship, mostly in superior-
subordinate relationship either direct or otherwise. Power relationship may exist
between any two persons and organizational relationship may not be necessary.

10.2 Difference between Power and leadership

1. In exercising power, an agent may use methods that may result into forced compliance
of agent's wishes while in leadership, he gets this compliance from others
enthusiastically.
2. Power and leadership differ in terms of goal compatibility. Power does not require
compatibility between goals of influencer and influence. Leadership has some degree of
congruence between the goals of the leader and those being led.

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 3. Leadership focuses on the downward influence on one's followers. It minimizes the
importance of lateral and upward patterns. Power is not limited to downward direction
only; its effect may have downward, lateral, and upward directions.
4. Power can be exercised by individuals and groups while leadership is relevant for
individuals only.

10.3 Contingency approach to Power

Successful manager is one who is aware of the existence of multiple bases of power in work
situations.

The effectiveness of power types depends on the nature of managerial, subordinate, and
organizational variables. We have already identified the types of power that are available to an
agent (power holder). Therefore, let us discuss the contingent variables that affect power
effectiveness and all the variables of Contingency approach to Power are shown in the
following picture.

Agent's Characteristics

Two characteristics of an agent affect power effectiveness: his organizational position and his
personality characteristics.

Organizational Position - Organizational position of an agent determines his positional power

vis-a-vis others. In a traditionally designed organization structure with a large number of
hierarchical levels, a person at a higher-level command more power bases than a person at a
lower level. Thus, people at higher level can use positional power more effectively to get things
done. However, what type of positional power will be more effective cannot be determined by
considering the agent's organizational position.

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 Personality Characteristics - It has been observed that people working at the same hierarchical
level in the same organization differ in terms of power use; some people become more effective
in power use, others remain less effective. This difference is due to the differences in personality
characteristics. Following conclusions about personality characteristics and power effecti veness
can be drawn:

1. People with high mach score (high mach score means high willingness to twist and turn facts
to influence other) tend to use coercive power and information power more effectively than
those with low mach score.

2. More conscientious people use legitimate and reward power more effectively than less
conscientious people.

3. People with high self-esteem (a self-belief that they can make the things happen) rely more
on personal power than their positional power. This happens because such people develop
expertise and other relevant skills to protect their high self-esteem.

4. People with high openness and extroversion tend to use personal power more effectively
than other people.

Target Characteristics

1. Dependency. Degree of dependency of the target on the agent determines the extent to which
power will be effective. As discussed earlier, dependency of the target depends on the resources
controlled by the agent. If this dependency is high, power influence will be high. In the alternative
case, it will be low.

2. Uncertainty. Certainty or uncertainty in the mind of the agent about appropriateness of his
behaviour determines his influenceability. Research studies show that more uncertain people are
about the appropriateness or correctness of their behaviour, more they are influenced by power.

3. Personality: There are various research studies which show relationship between personality
and influenceability: For example, people who cannot tolerate ambiguity or who are highly
anxious are more susceptible to influence. Similarly, people who have high need for affiliation
are more prone to be influenced by positional power. On the other hand, people with high self-
esteem are less prone to be influenced by positional power

4.Intelligence. Though there is no conclusive proof about direct relationship between

intelligence and influenceability, it has been observed that more intelligent people are less
susceptible to influence generated by positional power. A possible reason for this phenomenon
may be that more intelligent people have high self-esteem which works as resistant to influence.

5. Culture. Characteristics of culture to which targets belong affect their influenceability. For
example, people coming from a culture which is oriented to authority are highly susceptible to

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 influence. to influence while people coming from a culture having low authority orientation are
less susceptible to influence.

Organizational Characteristics

The major organizational factors that affect power relationship are organization structure, nature
of task, performance evaluation and reward system, and organizational culture.

1. Organization Structure. Organization structure prescribes relationship among different

positions. Since these positions are held by individuals, organization structure prescribes
relationship among different individuals. Dependency of one individual on another is affected
by prescription of this relationship.
2. Nature of Task - Nature of task in terms of autonomy and visibility affects power relationship.
Degree of autonomy indicates whether the task performance is autonomous or it is
dependent on others.
3. Performance Evaluation and Reward System - Everyone in an organization wants to show
good performance (whether actual or manipulated) to get good reward. Irony is that
performance evaluation is done not by those who perform but by those who have control
over reward distribution.
4. Organizational Culture - Organizational culture is the set of assumptions, beliefs, values, and
norms that are commonly shared by organizational members. Organizational culture is,
perhaps, the most important factor that affects management practices including power
relationship among
5. Organizational members - Every organization sets its culture, either explicitly or implicitly to
be identified by the behaviour of people, more particularly those who are at higher levels
Depending on the nature of various contingent factors - agent's characteristics, target's
characteristics, and organizational characteristics, the target's reaction to a particular power
will be resistance, obedience, compliance, conformity, and commitment
Response
1. Resistance - A person may resist the influence and may not agree to behave according to the
influencer's wishes.
2. Obedience - The person is influenced and behaves against their wishes in order to obey the
influencer.
3. Compliance - A person may comply with the influencer in expectation of reward or due to
fear of punishment.
4. Conformity - A person may behave according to the influencer's wish in order to gain
acceptance in a social group.
5. Commitment - The person shows commitment towards the influencer's wish due to his
passion for work and devotion for the influence.

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 Summary Sheet
–
Inventory and Operations
Management
Important Points

1. This Summary Sheet shall only be used for Quick Revision after you have read the Complete Notes
2. For Building Concepts along with examples/concept checks you should rely only on Complete Notes
3. It would be useful to go through this Summary sheet just before the exam or before any Mock Test
4. Questions in the exam are concept based and reading only summary sheets shall not be sufficient to
answer all the questions

1 Introduction to the Inventory Management

The term ‘Inventory’ refers to the stock of raw materials, spare parts and finished products held by a business
firm. It is the aggregate quality of materials, resources and goods that are idle at a given point of time.
Inventory management refers to the process of managing the stocks of finished products, semi-finished
products and raw materials by a firm. Inventory management, if done properly, can bring down cost and
increase the revenue of a firm.
There are various concepts which help an organization to excel the art of Inventory management, lets cover
them one-by-one.

2 Lean manufacturing

Lean manufacturing or lean production is a systematic method originating in the Japanese manufacturing
industry for the minimization of waste (muda) within a manufacturing system without sacrificing productivity,
which can cause problems. Lean also takes into account waste created through overburden (muri) and
unevenness in work-loads (mura).

Lean management philosophy is derived mostly from the Toyota Production System (TPS) (which was
developed by Taiichi Ohno and Eiji Toyo) and identified as "lean" only in the 1990s.

2.1 Toyota SEVEN wastes

Toyota SEVEN Wastes given by Taiichi Ohno (discussed briefly, as not required in detail from exam point of
view) are as follows

1. Transport (moving products that are not actually required to perform the processing)
2. Inventory (all components, work in process, and finished product not being processed)
3. Motion (people or equipment moving or walking more than is required to perform the processing)
4. Waiting (waiting for the next production step, interruptions of production during shift change)
5. Overproduction (production ahead of demand)
6. Over Processing (resulting from poor tool or product design creating activity)
7. Defects (the effort involved in inspecting for and fixing defects)

Lately when Lean Manufacturing become popular, 8th Waste was included by experts as “Unutilized Talent”
 8. Unutilized Talent: The waste of unutilized talent refers to underutilizing or engaging employees in a
process.

2.2 Techniques of Lean Management

2.2.1 Andon
Visual feedback system for the plant floor that indicates production status, alerts whenassistance is
needed, and empowers operators to stop the production process.
2.2.2 Bottleneck Analysis
Identify which part of the manufacturing process limits the overall throughput and improve the performance
of that part of the process.
2.2.3 Continuous Flow
Manufacturing where work-in-process smoothly flows through production with minimal (or no) buffers
between steps of the manufacturing process.
2.2.4 Gemba (The Real Place)
A philosophy that reminds us to get out of our offices and spend time on the plant floor –
the place where real action occurs.

2.2.5 Heijunka (Poduction Scheduling)

A form of production scheduling/levelling that purposely manufactures in much smaller batches by
sequencing (mixing) product variants within the same process.

2.2.6 Hoshin Kanri (Policy Deployment) and Jidoka (Autonomation)

Align the goals of the company (Strategy), with the plans of middle management (Tactics) and the work
performed on the plant floor (Action). Where is Jidoka is Design equipment to partially automate the
manufacturing process (partial automation is typically much less expensive than full automation) and to
automatically stop when defects are detected.

2.2.7 Just-In-Time (JIT)

Pull parts through production based on customer demand, instead of pushing parts through production
based on projected demand. Relies on many lean tools, such as Continuous Flow, Heijunka, Kanban,
Standardized Work and Takt Time.

2.2.8 Kaizen (Continuous Improvement)

A strategy where all employees work together proactively to achieve regular, incremental and continuous
improvements in the manufacturing process.

2.2.9 Kanban (Pull System)

A method of regulating the flow of goods both within the factory and with outside suppliersand customers.
Based on automatic replenishment through signal cards (Kanban cards) that indicate when more goods are
needed.
2.2.10 KPIs (Key Performance Indicators)
Metrics designed to track and encourage progress towards critical goals of the organization. Strongly
promoted KPIs can be extremely powerful drivers of behavior – so it is important to carefully select)

2.2.11 Overall Equipment Effectiveness (OEE)

Framework for measuring as to how well a manufacturing operation is utilized (facilities, time and material)
compared to its full potential, during the periods when it isscheduled to run. it identifies the percentage of
manufacturing time that is truly productive.

2.2.12 Poka-Yoke (Error Proofing) and Root Cause Analysis

A poka-yoke is any mechanism in any process that helps an equipment operator avoid (yokeru) mistakes
(poka). Its purpose is to eliminate product defects by preventing, correcting, or drawing attention to human
errors as they occur. Whereas, Root Cause Analysis is a problem-solving methodology that focuses on
resolving the underlying problem instead of applying quick fixes that only treat immediate symptoms of the
problem. A common approach is to ask why five times – each time moving a step closer to discovering the
true underlying problem.

2.2.13 Single-Minute Exchange of Dies (SMED)

What is Single-Minute Exchange of Dies? Single-minute Digit exchange of die (SMED) is one of the many lean
production methods for reducing waste in a manufacturing process. It provides a rapid and efficient way of
converting a manufacturing process from running the current product to running the next product. This
reduces setup (changeover) time to less than 10 minutes.

2.2.14 Standardized Work

Documented procedures for manufacturing that capture best practices (including the time to complete
each task). Must be “living” documentation that is easy to change.

2.2.15 Takt Time

The pace of production (e.g. manufacturing one piece every 34 seconds) that alignsproduction with
customer demand. Calculated as Planned Production Time / Customer Demand.

2.2.16 Total Productive Maintenance (TPM)

A holistic approach to maintenance that focuses on proactive andpreventative maintenance to maximize
the operational time of equipment.
• System of maintaining and improving the integrity of production, safety and quality systems through
the machines, equipment, processes, and employees that add business value to an organization.
• TPM blurs the distinction between maintenance and production by placing a strong emphasis on
empowering operators to help maintain their equipment.

2.2.17 Value Stream Mapping

A tool used to visually map the flow of production. Shows the current andfuture state of processes in a way
that highlights opportunities for improvement.
2.3 Related Topics to Lean Manufacturing

2.3.1 Toyota Production System (TPS)

Originally called " Just-In-Time (JIT) Production", it builds on the approach created by the founder of Toyota,
Sakichi Toyoda, his son Kiichiro Toyoda, and the engineer Taiichi Ohno. The principles underlying the TPS
are embodied in its management philosophy and practices.

The main objectives of the TPS are to design out overburden (muri) and inconsistency (mura), and to
eliminate waste (muda).

2.3.2 Agile manufacturing

In lean manufacturing, the company aims to cut all costs which are not directly related to the production of
a product for the consumer. Agile manufacturing can include this concept, but it also adds an additional
dimension, the idea that customer demands need to be met rapidly and effectively. In situations where
companies integrate both approaches, they are sometimes said to be using "agile and lean manufacturing".

2.3.3 Pull production & Kanban & CONWIP

Push & Pull Production System
Before going any further let us discuss difference between Push & Pull Production:
1. Push Production System: Control information flow is in the same direction of goods flow; the production
order is scheduled, and the material is pushed into the production line.
2. Pull Production System: Succeeding node makes order request for preceding node. Preceding node reacts
by producing the order, which involves all internal operations, and replenishes when finished;

2.3.4 Kanban
Kanban (signboard or billboard in Japanese) is a scheduling system for lean manufacturing and just-in-time
manufacturing (JIT).
• For many in the automotive sector, kanban is known as the "Toyota nameplate system" and as such
the term is not used by some other automakers.
• Goal of the kanban system is to limit the buildup of excess inventory at any point in production.
• Limits on the number of items waiting at supply points are established and then reduced as
inefficiencies are identified and removed.
• Kanban cards are a key component of kanban and they signal the need to move materials within a
production facility or to move materials from an outside supplier into the production facility.

2.3.5 CONWIP (Constant Work In Progress)

CONWIP (CONstant Work In Process) are pull-oriented production control systems. CONWIP is a kind of
single-stage kanban system and is also a hybrid push-pull system.

• While Kanban systems maintain tighter control of system Work In Progress (WIP) through the
individual cards at each workstation, CONWIP systems are easier to implement and adjust, since only
one set of system cards is used to manage system WIP.
 • CONWIP uses cards to control the number of WIPs.

2.3.6 Lean Six Sigma

Lean Six Sigma "L6s" is a method that relies on a collaborative team effort to improve performance by
systematically removing waste and reducing variation. It combines lean manufacturing/lean enterprise and
Six Sigma to eliminate the eight kinds of waste (muda):
1. Defects
2. Over-Production
3. Waiting
4. Non-Utilized Talent
5. Transportation
6. Inventory
7. Motion
8. Extra-Processing

3 Enterprise Resource Planning (ERP)

“An enterprise planning system is an integrated computer-based application used to manage internal and
external resources, including tangible assets, financial resources, material and human resources”.

Figure below shows how information is integrated into a typical organization using an ERP system.

4 Business Process Management (BPM)

“A business process or business method is a collection of related, structured activities or tasks that produce a
specific service or product (serve a particular goal) for a particular customer or customers”. BPM can be
defined as a discipline in operations management in which people use various methods to discover, model,
analyse, measure, improve, optimize, and automate business processes.
4.1 Life Cycle of Business Process Management.

Business process management activities can be arbitrarily grouped into categories such as design,
modeling, execution, monitoring, and optimization.

1. Design: Process design encompasses both the identification of existing processes and the design of "to-
be" processes
2. Modeling – Modeling takes the theoretical design and introduces combinations of variables (e.g., changes
in rent or materials costs, which determine how the process might operate under different
circumstances).
3. Execution: Business process execution is broadly about enacting a discovered and modeled business
process. Enacting a business process is done manually or automatically or with a combination of manual
and automated business tasks.
4. Monitoring: Monitoring encompasses the tracking of individual processes, so that information on their
state can be easily seen, and statistics on the performance of one or more processes can be provided.
5. Optimization: Process optimization includes retrieving process performance information from modeling
or monitoring phase; identifying the potential or actual bottlenecks and the potential opportunities for
cost savings or other improvements; and then, applying those enhancements in the design of the process.

4.2 Japanese View on Business Process Management

While Fredrick Taylor’s scientific management (that analyzes and synthesizes workflows with objective of
improving economic efficiency, especially labor productivity) had help create huge American corporations
that were quick to adopt the viewpoint, the 1970’s saw the emergence of Japanese corporations.

4.2.1 Principles of Japanese Way of Business Process Management

Lean: Japanese believe that quality is that which is right for the purpose. Anything less brings dissatisfaction,
anything more increases costs and makes products unaffordable.

Kaizen: The Japanese built the concept of small improvement in their business.

Six-Sigma: The focus here was on doing things right.

4.3 Business Process Re-engineering (BPR)

The BPR philosophy propounded by Hammer and Champy advocated a fundamental rethinking and redesign
in the business process.

o This was implemented when the business found itself in a state when their processes were no longer
relevant to the environment that they were in.
o The whole process will be redesigned from the customer point of view and new technologies will be
implemented.

4.4 RACI Matrix

The RACI matrix is a responsibility assignment chart that maps out every task, milestone or key decision
involved in completing a project and assigns which roles are Responsible for each action item, which
personnel are Accountable, and, where appropriate, who needs to be Consulted or Informed.

Here is how the RACI matrix can be utilized:

Responsible: This is the class of people who are ultimately responsible for getting the work done. This may
refer to the individual workers that perform the given task or it could refer to the system in case the task is
automated.

Accountable: This is the class of people that are accountable to oversee that the work gets done. This usually
means the immediate manager overseeing the work.

Consulted: These may be subject matter exerts who need to be consulted at the time of an exception. There
is a possibility that am unanticipated scenario arises in a process. These are the people who will do the
thinking and suggest any deviations from the Standard Operating Procedure (SOP).

Informed: This is the class of people who have some interest in the performance of a given task. This may be
a manager trying to control the execution of the task at hand. Also, this could be an input signal to the other
process.

4.5 Key Performance Indicator (KPI)

A KPI is a great tool to measure and control the performance of any given process. In management jargon,
there is a famous saying which says, “That which cannot be measured cannot be managed”. The whole
process of control, therefore, relies on real time measurement and transfer of information from the site
where the task is actually being performed, to the control room i.e. the management.

5 Total Quality Management

Total quality management (TQM) consists of organization-wide efforts to "install and make permanent climate
where employees continuously improve their ability to provide on demand products and services that
customers will find of particular value.

W. Edwards Deming, Joseph M. Juran, and Armand V. Feigenbaum jointly developed the concept oftotal
quality management.

In TQM:
• Total means involvement of top management as well as workers
• Quality means meeting expectation of the customers
• Management means management of quality across the organization

Total Quality Management is implemented through a set of FOUR continuous processes namely: PLAN, DO,
CHECK, AND ACT; These processes is also known as PDCA Cycle.
5.1 PDCA cycle (the "Deming Wheel," also "Shewhart Cycle)
PDCA (plan–do–check–act or plan–do–check–adjust) is an iterative, four-stage approach for continually
improving processes, products or services, and for resolving problems. It involves systematically testing
possible solutions, assessing the results, and implementing the ones that are shown to work.
The four phases are:
1. Plan: Identify and analyse the problem or opportunity, develop hypotheses about what the issues may
be, and decide which one to test.
2. Do: Test the potential solution, ideally on a small scale, and measure the results.
3. Check/Study: Study the result, measure effectiveness, and decide whether the hypothesis is supported
or not
4. Act: If the solution was successful, implement it

5.2 Quality Management Tools

Quality Management tools help employees identify the common problems which are occurring repeatedly
and also their root causes.

5.2.1.1 Following are the quality management tools:

▪ Check List - Check lists are useful in collecting data and information easily.
▪ Control Chart: Control charts, also known as Shewhart charts (after Walter A. Shewhart) or process-
behavior charts, are a statistical process control tool used to determine if a manufacturing or business
process is in a state of control.
▪ Pareto Chart: The credit for Pareto Chart goes to Italian Economist - Wilfredo Pareto. Pareto Chart
often represented by both bars and a line graph identifies the most common causes of problems and
the most frequently occurring defects.
▪ The Cause and Effect Diagram or Ishikawa Diagram: Also referred to as “Fishbone Chart” (because
of its shape which resembles the side view of a fish skeleton) and Ishikawa diagrams after its creator
Kaoru Ishikawa.
▪ Histogram Bar Chart: Histogram, introduced by Karl Pearson is a graphical representation showing
intensity of a particular problem. Histogram helps identify the cause of problems in the system by the
shape as well as width of the distribution.
▪ Flow Chart or Stratification Diagram: This represents how different factors join in a process.
▪ Graphs - Graphs are the simplest and most commonly used quality management tools. Graphs help
to identify whether processes and systems are as per the expected level or not and if not also record
the level of deviation from the standard specifications.

6 Six Sigma and Quality Management

Six Sigma is a business management strategy which aims at improving the quality of processes by minimizing
and eventually removing the errors and variations (variation describes how consistent a process' output is).

• It requires thorough understanding of product and process knowledge and is completely driven by
customer expectations.
 • In other words, it is a methodology to achieve 3.4 defects per million opportunities.

o The concept of Six Sigma came into existence when one of Motorola’s senior executives complained of
Motorola’s bad quality. Bill Smith eventually formulated the methodology in 1986.
o Thus, concept of Six Sigma was introduced by Motorola in 1986, but was popularized by Jack Welch who
incorporated the strategy in his business processes at General Electric.

6.1 Six Sigma methods:

Following are the two methods for the implementation of Six Sigma: DMAIC & DMADV. DMAIC focuses on
improving existing business practices. DMADV, on the other hand focuses on creating new strategies and
policies.

6.1.1 DMAIC Method

DMAIC has 5 Phases:

1. D - Define the Problem.

2. M - Measure and find out the key points of the current process.
3. A - Analyze the data.
4. I - Improve the current processes
5. C - Control the processes so that they do not lead to defects.

Some organizations add a Recognize step at the beginning, which is to recognize the right problem to work
on, thus yielding an RDMAIC methodology
6.1.2 DMADV Method

DMADV is a Six Sigma framework that focuses primarily on the development of a new service, product or
process as opposed to improving a previously existing one. The DMADV project methodology, also known as
DFSS ("Design For Six Sigma"), features five phases:

6.1.2.1 DMADV– Define, Measure, Analyse, Design, Verify.

o This approach is especially useful when implementing new strategies.
1. D - Define goals
2. M - Measure
3. A - Analyse and develop high level alternatives to ensure superior quality.
4. D - Design an improved alternative, best suited per analysis in the previous step
5. V - Verify the design, set up pilot runs, implement the production process and hand it over to
the process owner(s).

6.2 Comparison of Six Sigma and Total Quality Management

1. Six-Sigma is a relatively newer concept than Total Quality Management but not exactly its
replacement.
2. The basic difference between Total Quality Management and Six Sigma is that TQM delivers superior
quality manufactured goods whereas Six-Sigma on the other hand results in better results.
3. Total Quality management refers to continuous effort by employees in designing and developing new
systems and processes to ensure high quality products. The process of Six Sigma incorporates many
small changes in the systems to ensure effective results and better customer satisfaction.
4. The main focus of Total quality management is to maintain existing quality standards whereas Six
Sigma primarily focuses on making small necessary changes in the processes and systems to ensure
high quality.
5. The process of Total quality management does reach to a saturation level after a certain period of
time. After reaching the saturation stage, no further improvements in quality can be made. Six Sigma
on the other hand seldom reaches the saturation stage by initiating a next level quality process.
7 Kaizen & Quality Management

“Kaizen” refers to a Japanese word which means “improvement” or “change for the better”. Kaizen is defined
as a continuous effort by each and every employee (from the CEO to field staff) to ensure improvement of all

processes and systems of a particular organization.

Kaizen works on the following basic principle: “Change is for good”

7.1 Five S of Kaizen

Five S of Kaizen” is a systematic approach which leads to fool-proof systems, standard policies, rules and
regulations to give rise to a healthy work culture at the organization. Let us understand the five S in Detail:

1. SEIRI - SEIRI stands for Sort Out. According to Seiri, employees should sort out and organize things
well. Label the items as Necessary, Critical, Most Important, Not needed now, Useless and so on.

2. SEITION - Seition means to Organize. Research

says that employees waste half of their precious
time searching for items and important
documents. Every item should have its own space
and must be kept at its place only.

3. SEISO - The word “SEISO” means shine the

workplace. The workplace ought to be kept clean.
De- clutter your workstation. Necessary
documents should be kept in proper folders and
files.

4. SEIKETSU-SEIKETSU refers to Standardization.

Every organization needs to have certain standard
rules and set policies to ensure superior quality.

5. SHITSUKE or (Sustained Discipline) - Employees

need to respect organization’s policies and adhere
to rules and regulations. Self-discipline is essential