| Management—concept, objectives, and importance | After going through this unit, the student/learner would be able to:■ Understand the concept of management.■ Explain the meaning of ‘Effectiveness and Efficiency’.■ Discuss the objectives of management.■ Describe the importance of management. |
| Management as Science, Art and Profession | ■ Examine the nature of management as a science, art and profession. |
| Levels of Management | ■ Understand the role of top, middle and lower levels of management. |
| Management functions—planning, organizing, staffing, directing and controlling | ■ Explain the functions of management. |
| Coordination—concept and importance | ■ Discuss the concept and characteristics of coordination.■ Explain the importance of coordination. |
Unit 2: Principles of Management
14 Periods
| Concept, importance and limitation | After going through this unit, the student/learner would be able to:■ Understand the concept of planning.■ Describe the importance of planning.■ Understand the limitations of planning. |
| Planning process | ■ Describe the steps in the process of planning. |
| Single use and standing plans. Objectives, Strategy, Policy, Procedure, Method, Rule, Budget and Programme | ■ Develop an understanding of single use and standing plans.■ Describe objectives, policies, strategy, procedure, method, rule, budget and programme as types of plans. |
Unit 5: Organising
15 Periods
| Concept and importance | After going through this unit, the student/learner would be able to:■ Understand the concept of organizing as a structure and as a process.■ Explain the importance of organising. |
| Organising Process | ■ Describe the steps in the process of organising. |
| Structure of organisation—functional and divisional concept. Formal and informal organisation—concept | ■ Describe functional and divisional structures of organisation.■ Explain the advantages, disadvantages and suitability of functional and divisional structure.■ Understand the concept of formal and informal organisation.■ Discuss the advantages, disadvantages of formal and informal organisation. |
| Delegation: concept, elements and importance | ■ Understand the concept of delegation.■ Describe the elements of delegation.■ Appreciate the importance of Delegation. |
| Decentralization: concept and importance | ■ Understand the concept of decentralisation.■ Explain the importance of decentralisation.■ Differentiate between delegation and decentralisation. |
Unit 6: Staffing
16 Periods
| Concept and importance of staffing | After going through this unit, the student/learner would be able to:■ Understand the concept of staffing.■ Explain the importance of staffing. |
| Staffing as a part of Human Resource Management—concept | ■ Understand the specialised duties and activities performed by Human Resource Management. |
| Staffing process | ■ Describe the steps in the process of staffing. |
| Recruitment process | ■ Understand the meaning of recruitment.■ Discuss the sources of recruitment.■ Explain the merits and demerits of internal and external sources of recruitment. |
| Selection process | ■ Understand the meaning of selection.■ Describe the steps involved in the process of selection. |
| Training and Development—Concept and importance, Methods of training—on the job and off the job—vestibule training, apprenticeship training and internship training | ■ Understand the concept of training and development.■ Appreciate the importance of training to the organisation and to the employees.■ Discuss the meaning of induction training, vestibule training, apprenticeship training and internship training.■ Differentiate between training and development.■ Discuss on the job and off the job methods of training. |
Unit 7: Directing
15 Periods
| Concept and importance | After going through this unit, the student/learner would be able to:■ Describe the concept of directing.■ Discuss the importance of directing |
| Elements of Directing | ■ Describe the various elements of directing |
| Motivation—concept, Maslow's hierarchy of needs, Financial and non financial incentives | ■ Understand the concept of motivation.■ Develop an understanding of Maslow's Hierarchy of needs.■ Discuss the various financial and non-financial incentives. |
| Leadership—concept, styles—authoritative, democratic and laissez faire | ■ Understand the concept of leadership.■ Understand the various styles of leadership. |
| Communication—concept, formal and informal communication; barriers to effective communication, how to overcome the barriers | ■ Understand the concept of communication.■ Understand the elements of the communication process.■ Discuss the concept of formal and informal communication.■ Discuss the various barriers to effective communication.■ Suggest measures to overcome barriers to communication. |
Unit 8: Controlling
| Concept, role and objectives of Financial Management | After going through this unit, the student/learner would be able to:■ Understand the concept of financial management.■ Explain the role of financial management in an organisation.■ Discuss the objectives of financial management. |
| Financial decisions: investment, financing and dividend—Meaning and factors affecting | ■ Discuss the three financial decisions and the factors affecting them. |
| Financial Planning—Concept and importance | ■ Describe the concept of financial planning and its objectives.■ Explain the importance of financial planning. |
| Capital Structure—Concept and factors affecting capital structure | ■ Understand the concept of capital structure.■ Describe the factors determining the choice of an appropriate capital structure of a company. |
| Fixed and Working Capital—Concept and factors affecting their requirements | ■ Understand the concept of fixed and working capital.■ Describe the factors determining the requirements of fixed and working capital. |
Unit 10: Financial Markets
18 Periods
| Financial Markets: Concept, functions and types | After going through this unit, the student/learner would be able to:■ Understand the concept of financial market.■ Explain the functions of financial market.■ Understand capital market and money market as types of financial markets. |
| Money market and its instruments | ■ Understand the concept of money market.■ Describe the various money market instruments. |
| Capital market and its types (primary and secondary), methods of floatation in the primary market | Discuss the concept of capital market.Explain primary and secondary markets as types of capital market.Differentiate between capital market and money market.Discuss the methods of floating new issues in the primary market.Distinguish between primary and secondary markets. |
| Stock Exchange—Functions and trading procedure | Give the meaning of a stock exchange.Explain the functions of a stock exchange.Discuss the trading procedure in a stock exchange.Give the meaning of depository services and demat account as used in the trading procedure of securities. |
| Securities and Exchange Board of India (SEBI)— objectives and functions | State the objectives of SEBI.Explain the functions of SEBI. |
Unit 11: Marketing
30 Periods
| Marketing—Concept functions and philosophies | After going through this unit, the student/learner would be able to:■ Understand the concept of marketing.■ Explain the features of marketing.■ Discuss the functions of marketing.■ Explain the marketing philosophies. |
| Marketing Mix—Concept and elements | ■ Understand the concept of marketing mix.■ Describe the elements of marketing mix. |
| Product— Branding, labelling and packaging— Concept | ■ Understand the concept of product as an element of marketing mix.■ Understand the concept of branding, labelling and packaging. |
| Price—Concept, Factors determining price | ■ Understand the concept of price as an element of marketing mix.■ Describe the factors determining price of a product. |
| Physical Distribution—Concept, components and channels of distribution. | ■ Understand the concept of physical distribution.■ Explain the components of physical distribution.■ Describe the various channels of distribution. |
| Promotion—Concept and elements; Advertising, Personal Selling, Sales Promotion and Public Relations. | ■ Understand the concept of promotion as an element of marketing mix.■ Describe the elements of promotion mix.■ Understand the concept of advertising.■ Understand the concept of sales promotion.■ Discuss the concept of public relations. |
Unit 12: Consumer Protection
12 Periods
| Time: 3 Hours Max. Marks: 80 |
| S. No. | Typology of Questions | Objective type/MCQ (1 mark) | Short Answer -I (3 marks) | Short Answer-II (4 marks) | Long Answer-I (5 marks) | Long Answer-II (6 marks) | Marks |
| 1. | Remembering:Exhibit memory of previously learned material by recalling facts, terms, basic concepts and answers. | 5 | 1 | 1 | 1 | 1 | 23 |
| 2. | Understanding:Demonstrate understanding of facts and ideas by organizing, comparing, translating, interpreting, giving descriptions and stating main ideas. | 5 | 2 | 1 | — | 1 | 21 |
| 3. | Applying:Solve problems to new situations by applying acquired knowledge, facts, techniques and rules in a different way. | 5 | 1 | — | 1 | 1 | 19 |
| 4. | Analysing and Evaluating:Examine and break information into parts by identifying motives or causes. Make inferences and find evidence to support generalizations.Present and defend opinions by making judgements about information, validity of ideas or quality of work based on a set of criteria.Creating:Compile information together in a different way by combining elements in a new pattern or proposing alternative solutions. | 5 | 1 | 1 | 1 | — | 17 |
| Total | 20×1=20 | 5×3=15 | 3×4=12 | 3×5=15 | 3×6=18 | 80(34) |
Note: There will be Internal Choice in questions of 3 marks (1 choice), 4 marks (1 choice), 5 marks (2 choices) and 6 marks (2 choices). In all, total 6 internal choices.
## PART: A PRINCIPLES AND FUNCTIONS OF MANAGEMENT
# NATURE AND SIGNIFICANCE OF MANAGEMENT
## Contents as per Latest CBSE Syllabus
■ Management—Concept, Objectives, and Importance
\- Concept includes Meaning and Features
■ Management as Science, Art and Profession
■ Levels of Management
■ Management Functions—Planning, Organizing, Staffing, Directing and Controlling
Coordination—Concept and Importance
## INTRODUCTION
Successful organisations do not achieve their goals by chance but by following a deliberate process called management.
Management is essential for all organisations big or small, profit or non-profit, service or manufacturing management is necessary so that individuals make their best contribution towards group objectives. Managers take decisions as to who will do what, when they will do it and what resources they will use. Basic job of a manager is the effective and efficient utilisation of physical, financial and human resources to achieve organisational objectives. No matter what the organisation is or what its goal might be, they all have something in common, i.e., Management and managers.
Management consists of a series of inter-related functions that are performed by all managers, for examples, managers have to plan the objective of the firm, organise resources to achieve that objective, recruit and select employees who can implement these objectives. Giving directions, communicating and motivating these employees to achieve objectives effectively and efficiently and ultimately checking whether everything is going as per plan or not.
However, the time spent by managers in different functions is different. Managers at top level spent more time in planning and organising than the managers at lower level.
If we see real life examples, Shiv Nadar of HCL Enterprise performs all these functions, so is Nusli Wadia of Bombay Dying, Bill Gates of Microsoft, Indra Nooyi of Pepsico and Principal of your school, etc.
## 1.1 MODERN CONCEPT OF MANAGEMENT/MEANING OF MANAGEMENT
According to modern concept “management is a process of getting things done with the aim of achieving goals effectively and efficiently.”
## The concept of Management insist on three terms:
1. Process. Process refers to series or sequence of steps, management is a process because it performs series of functions to get the things done. These functions are planning organising, staffing, directing and controlling.
(These functions are discussed in detail is the later part of chapter and book.)
2. Effectiveness. It is concerned with doing the right task, completing activities and achieving goal. In other words, it is concerned with end result. Being effective or doing work effectively means finishing the given task or achieving the goal on time.
3. Efficiency. It refers to do the task in the right way, i.e., with minimum cost and optimum utilisation of resources. Efficiency involve cost benefit analysis. It focus on deriving more benefits by using less resources. It insist on using less inputs such as money, materials, equipments persons to get more output. Management is concerned with efficient use of resources because reduction in cost leads to higher profit.
Difference between Effectiveness vs Efficiency
| S.No. | Point of Difference | Taylor | Fayol |
| 1. | Concern | Taylor's techniques and principles are concerned with worker's efficiency. | Fayol's principles are concerned with management efficiency. |
| 2. | Level/Perspective | Taylor started his studies and approach from lowest level in the organisation. | Fayol started his studies and approach from the highest level in the organisation. |
| 3. | Emphasis | Taylor laid great emphasis on standardisation of work. | Fayol laid great emphasis on functions of managers. |
| 4. | Focus | Taylor laid focus on eliminating wasteful movements and saving energy of workers. It forces on increase in productivity. | Fayol's focus was on development of principles for better management. It focuses on improving overall achieve station. |
| 5. | Major contribution | Taylor's main contribution was development of scientific techniques and scientific principles. | Fayol's main contribution was development of fourteen principles of general management. |
| 6. | Personality | Taylor developed a personality of scientist and became famous as father of scientific management. | Fayol developed the personality of a researcher and practitioner. He became famous as father of general management. |
| 7. | Unity of Command | Did not follow this principle as Taylor insisted on minimum 8 bosses. | Strictly followed this principle, i.e., only one boss for one employee. |
| 8. | Expression | Taylor's techniques are expressed as scientific management. | Fayol's techniques are expressed as general theory of administration. |
| 9. | Applicability | Applicable to specialised situation. | Applicable universally. |
Relevance of Taylor and Fayol's Principles (Similarities between Taylor and Fayol):
Taylor and Fayol's principles are complementary to each other because both have relevance in the business due to following reasons:
(1) The main aim of Taylor's as well as Fayol's principles is maximising the efficiency.
(2) Both insist on cooperation between employees and employers.
(3) Both give more importance to organisational interest over the individual interest.
(4) Both suggested division of work for specialisation.
(5) The principles of both are used as basis for research in the field of management studies.
## Quick Revision
Meaning. Management principles are the statements of fundamental truth which act as the guidelines for taking managerial actions and decisions.
Nature. Management principles are:
(a) Universal application,
(b) General guidelines,
(c) Evolutionary formed by practice and experiments,
(d) Flexibility,
(e) Behavioural in nature,
(f) Based on cause and effect relationship,
(g) Contingent.
Significance. Understanding of management principles helps the managers to:
(a) providing managers with useful insight into reality,
(b) optimum utilisation of resources,
(c) scientific decisions,
(d) meeting changing environment requirement,
(e) effective administration,
(f) fulfilling social responsibilities,
(g) management training, education and research.
Fayol's Principles of Management. Fayol the Father of Management Studies contributed a great research work in the field of management. He developed fourteen major principles which are:
(i) Division of work. Dividing the whole work into small segments to get specialisation.
(ii) Authority and responsibility. Match or balance between the authority and responsibility is must.
(iii) Discipline. Respect for agreements, which are directed at achieving obedience, applying full energy for achieving organisational goals.
(iv) Unity of command. Orders or commands from a single boss.
(v) Unity of direction. Efforts of all the employees to be directed towards common direction of achieving organisational goal.
(vi) Subordination of individual interest to general interest: Organisational interest must supersede over individual interest.
(vii) Remuneration of persons. Fair or adequate wages to workers.
(viii) Centralisation and decentralisation. Proper combination of centralisation and decentralisation at different levels.
(ix) Scalar chain. Line of authority to be followed in the organisation.
(x) Order. Orderly placement of men and materials in the organisation.
(xi) Equity. Kind, fair and just treatment to employees.
(xii) Stability of tenure of personnel. Avoid frequent turnover and rotation of employees.
(xiii) Initiative. Encouraging employees to give suggestions.
(xiv) Esprit de corps. Work with team spirit.
Scientific Management. Taylor, popularly known as Father of Scientific Management developed various scientific principles and scientific techniques. His scientific principles are:
(i) Science, not rule of thumb. Scientific approach to every element of management.
(ii) Harmony not discord. Working with team spirit and mutual co-operation.
(iii) Cooperation, not individualism. Workers and management must work with cooperation and mutual give and take.
(iv) Development of workers to their greatest efficiency and prosperity.
## Scientific Techniques of Taylor
(i) Functional foremanship. Appointment of eight functional experts to instruct, guide and observe the workers.
(ii) Standardisation. Maintaining quality standards.
(iii) Simplification of work. Cutting down unnecessary dimensions and varieties of one line of product.
(iv) Fatigue study. Technique conducted to fix up frequency and time period of rest intervals.
(v) Method study. Finding one best method to perform the job.
(vi) Time study. To find out the standard or average time to perform a job.
(vii) Motion study. To cut down the unnecessary and wasteful movements.
(viii) Work study. To ensure maximum production at minimum cost.
(ix) Differential piece wage system. Payment to efficient and inefficient workers with different rates.
(x) Mental revolution. Change of attitude of workers and managers for each other.
Difference between time study and motion study.
Difference between Taylor and Fayol. We can compare Taylor and Fayol on the following points: Concern, prospective, emphasis, focus of major contribution, personality, unity of command, expression and applicability.
## Exercise
## Objective Type Questions
## Multiple Choice Questions
1. When a superior does not fulfil the promise to raise the salary/wages of workers on achievement of target effectively and efficiency, it is violation of
(a) Principle of Renumeration (b) Principle of Discipline
(c) both (a) and (b) (d) None of the above
2. Management Principles provide
(a) Readymade solution to managerial problems
(b) Guidelines for managerial action
(c) Guarantee for success of an organisation
(d) All of the above
3. Gang Plank permits direct communication between
(a) Employees working at same level (b) Any employees irrespective of their level
(c) Employees of same department only (d) None of the above
4. Organisation Interest supersede employees interest is indicated in
(a) Principle of Subordination of Individual Interest to General Interest
(b) Principle of Espirit De Corps (c) Principle of Initiative
(d) Principle of Discipline
5. The employees should be judiciously penalised for their actions against the organisation is indicated in
(a) Principle of Equity
(b) Principle of Responsibility, Authority
(c) Principle of Discipline
(d) None of the above
6. Principle of Responsibility and Authority insists on
(a) Responsibility > Authority
(b) Authority > Responsibility
(c) Responsibility = Authority
(d) All of the above
7. Frequent transfer and turnover of employees lead to violation of
(a) Principle of Espirit De Corps (b) Principle of Discipline
(c) Principle of Initiative (d) Principle of Stability of Personnel
8. Principle of Initiative-
(a) Boosts up the morale of employees (b) Brings down the morale of employees
(c) Does not effect on morale of employees (d) None of the above
9. Unity of Command insists on
(a) One Boss One employee (b) Orders from a single superior
(c) Match between orders of different bosses (d) All of the above
10. If a manager is biased in dealing with people from different states, he is violating
(a) Principle of Discipline
(b) Principle of Espirit De Corps
(c) Principle of Renumeration
(d) Principle of Equity
11. Simplification technique insists on
(a) Using simple method of production (b) More varieties of product
(c) Elimination of unnecessary diversity of products, size and types
(d) All of the above
12. The main objective of Fatigue Study is
(a) To eliminate tiring movements of workers
(b) To decide number, duration and frequency of break intervals
(c) To differentiate productive and non-productive movements of workers
(d) All of the above
13. Unity of Direction insists on
(a) One unit one plan
(b) Efforts of all employees should be directed in one direction only
(c) No overlapping of different department
(d) All of the above
14. Technique of mental revolution is based on the principle of
(a) Harmony not discord (b) Science not rule of thumb
(c) Principle of responsibility and authority (d) All of the above
15. Principle of Order insists on
(a) Orders from single superior
(b) Fix and right place for every men and material
(c) Employees must work as per order of superior only
(d) One boss one command
16. According to Fayol
(a) Organisation must use policy of centralisation
(b) Organisation must use policy of decentralisation
(c) Organisation must use combination of centralisation and decentralisation
(d) None of the above
17. The principles of management can be changed according to the prevailing situation in organisation. This shows that management principles are
(a) Flexible
(b) Behavioral
(c) Scientific
(d) Universal
18. The principle which states that there should be good supervisors at all levels for smooth and systematic working of an organisation is:
(a) Equity (b) Initiative
(c) Discipline (d) Order
19. “Panchayats in our country have been given more powers to decide and spend funds granted to them by the government for welfare of villages”. Identify the principle of management highlighted in the statement:
(a) Equity (b) Centralisation and decentralisation
(c) Authority and responsibility (d) Espirit De Corps
20. Administrative principles were given by
(a) FW Taylor
(b) Henry Fayol
(c) Abraham Maslow
(d) WW Taylor
(Answers at Page no. 120)
## Fill in the Blanks
1. scientific technique insists on hiring specialised or expert for each job.
2. scientific technique brings uniformity in products and permits interchangeability.
3. Sharing of gain between employee and management is indicated in
4. Sharing of work is indicated in scientific principle
5. Sequence of steps to be followed is decided by functional expert.
6. scientific technique is the strongest motivator for workers to perform efficiently.
7. The purpose of time study is to find out to perform a job.
8. scientific technique help in finding one best way of doing a job.
9. Management principles can be modified as per the requirement of an organisation as they are \_\_\_\_.
10. \_\_\_\_ refers to taking first step with self motivation.
(Answers at Page no. 120)
## True or False
1. Management principles offer readymade solutions for managerial problems. (True/False)
2. Management principles are rigid statements like scientific principles. (True/False)
3. Management principles are useful for business as well as non-business organisation.
(True/False)
4. Management principles can be formed overnight.
(True/False)
5. The application and result of management principles remain same in all organisations.
(True/False)
6. Fayol focus on workers.
(True/False)
7. Espirit De Corps replace I with We.
(True/False)
8. Motion study improve speed of workers.
(True/False)
9. Differential piece wage system violates principle of equity. (True/False)
10. Workers should be given only responsibility.
(True/False)
(Answers at Page no. 120)
## Remembering and Understanding-based Questions with Answers
Q. 1. Explain the following principles of management given by Fayol:
(a) Unity of command
(b) Order.
[CBSE Sample Paper 2014]
## Ans. Unity of command
There should be one and only one boss for every individual employee.
If an employee gets orders from two supervisors at the same time, the principle is violated.
Consequences of violation-authority is undermined, discipline is in jeopardy, order disturbed, stability threatened.
## Order (3)
People and materials must be in suitable places at appropriate time for maximum efficiency.
A place for everything (everyone) and everything (everyone) in its (her/his) place i.e orderliness.
Benefits of the principle-no hindrance in the activities of business, increased productivity and efficiency.
Q. 2. Enumerate any two techniques of scientific management. [CBSE Sample Paper 2015]
## Ans. Techniques of Scientific Management (any two)
Functional Foremanship: The technique is to improve the performance of supervisor in the factory set up. Taylor suggested functional foremanship through eight persons. Functional Foremanship is an extension of principle of division of work and specialization at the shop floor.
Motion Study: It refers to the study of movements like lifting, putting objects, sitting & changing positions etc. Which are undertaken while doing a typical job. Unnecessary movements are eliminated so that it takes less time to complete the job efficiently.
Standardisation and Simplification of Work: The process of setting standards for every business activity. These standards are bench marks which must be adhered during production process. The standards were set for every business activity standardisation of process, raw material, time, product etc. Simplification aims at eliminating superfluous varieties, sizes and dimension.
Method study the objective of method study is to find the one best way of doing the work
Time study it determines the standard time taken to perform a well defined job, the objective of time study is to determine the number of workers to be employed
Fatigue study. This study seeks to determine the amount and frequency of rest intervals in completion of a task.
Differential piece wage system. According to this there are different rate of wage payment, higher rate for the efficient members who performed above standard and lower rate for those who perform below standards.
Q. 3. What did Taylor want to communicate through mental revolution? [CBSE Sample Paper 2016]
Ans. Taylor emphasized that there should be complete transformation in the thinking / attitude of management and workers towards each other. Managers should share surplus with workers and the workers should work with full devotion.
Q. 4. Give any one point of difference between management principles and scientific principles.
Ans. The management principles are flexible but scientific principles are rigid.
Q. 5. Give any one difference between Management principle and values.
Ans. Management principles are guidelines for managerial actions whereas values are rules for behaviour of individual in society.
Q. 6. Give any one point of difference between management principles and techniques.
Ans. Management principles are guidelines for managerial actions whereas management techniques are methods and procedures which involve series of steps to be performed to accomplish the goal.
Q. 7. Give any two features of management principles.
Ans. (i) Management principles are solved by practice and experiments.
(ii) Management principles are general guidelines.
Q. 8. Are the principles of management static?
Ans. No, they are not static. These can be changed according to the nature of organisation.
Q. 9. List any two principles of 'scientific management' formulated by Taylor for managing any organisation scientifically?
[CBSE Sample Paper]
Ans. (i) Science, not rule of thumb, (ii) Harmony, not discord.
Q. 10. How are management principles derived?
Ans. Management principles are derived by:
(i) Deep observation, (ii) Repeated experiments.
Q. 11. Why are that management principles universal?
Ans. Management principles are said to be universal because these are applicable in all types of organisations, at all levels and at all times.
Q. 12. Which principle of management insists in orderly arrangement of men and material?
Ans. Principle of order.
Q. 13. An organisation is following the principle of scalar chain and principle of equity. What are the positive effects of these principles?
Ans. Positive effects of scalar chain:
(i) Smooth flow of communication (ii) No communication gap
Positive effects of equity:
(i) Satisfaction of employees (ii) Boosts up the morale of employees.
Q. 14. Name the foreman who arrange all the resources input and setup to start the work smoothly.
Ans. Gang boss.
Q. 15. In a company there are four departments for finance, marketing production and human resource development. Identify the principle of management used in this company.
Ans. Division of work.
Q. 16. Which principle of Fayol cannot be applied when organisation is following technique of functional foremanship?
Ans. Unity of command.
Q. 17. Describe the meaning of "replacement of rule of thumb with science."
Ans. Replacement of rule of thumb with science refers to making use of scientific approach for every element of management that means not relying on intuition, experience and wish of manager but taking decisions more scientifically.
Ans. The techniques of time and motion study help in improving efficiency by:
(i) Setting-up standard time required to perform a job.
(ii) Setting-up daily, weekly targets on the basis of standard time calculated scientifically.
(iii) By cutting down the wasteful and unproductive movements.
(iv) Saving the energy of employees spent on unproductive movements.
Q. 19. Which principle of management is violated in following situations:
(a) When a worker receives orders from more than one boss?
(b) When the employee is given responsibility to achieve target production of 500 units with no authority to access over raw materials?
(c) When worker is wasting time in search of tool box in the organisation?
(d) When manager grants one month medical leave to a supervisor with pay and only one week medical leave to accountant?
Ans. (a) Unity of command. (b) Authority and responsibility.
(c) Order. (d) Equity.
## Q. 20. Why does the principle of unity of command not hold good in an organisation using technique of functional foremanship?
Ans. Principle of unity of command insists on orders from one and only one boss.
The principle of functional foremanship insists on orders and instructions from minimum eight bosses. So, if an organisation has appointed eight functional experts, four each in planning and operational department, then it is not possible to allow only one boss to give orders.
So at a time organisation can apply only one of these principles as both are contradictory or in contrast to each other.
Q. 21. Taylor's techniques of management are universally applicable. Do you agree? Give four reasons to support your answer.
Ans. Yes, I agree with this statement because Taylor's techniques are developed through scientific approach and not by rule of thumb.
Any principle developed scientifically is universally applicable because these are not affected by personal feelings, intuitions of manager, these are based on pure scientific approach. The techniques which facilitate the universal applicability of Taylor's principles are:
(a) Time study
(b) Motion study
(c) Method study
(d) Standardisation
(e) Fatigue study
(f) Mental revolution
But some techniques of Taylor are not universally applicable under some situations. These are:
(i) Functional foremanship. This technique is not applicable in the organisations adopting principle of unity of command.
(ii) Differential piece rate system. This technique is not possible in organisations following principle of equity.
(iii) Simplification. This technique is not suitable for organisations having objective of diversification and expansion of line of products and varieties.
## HOTS (Higher Order Thinking Skills) and Case Studies
Q. 1. Briefly explain work study techniques that help in developing standards to be followed throughout the organization. [CBSE Sample Paper 2016]
Ans. Techniques of work study includes the following:
1. Time study
2. Motion study
3. Fatigue study
4. Method study
Q. 2. Which technique of Taylor insists on hiring specialist for every job? Explain that technique.
Ans. Functional foremanship. For explanation refer page no. 87
Q. 3. Which technique of Taylor insists in paying higher wages to efficient employees?
Ans. Differential piece rate system.
Q. 4. Which technique of Taylor insists in using most optimum way of doing a job?
Ans. Method study.
Q. 5. Fayol points out the danger and cost of unnecessary labour turnover in one of his principles of management. Name that principle.
Ans. Stability of tenure.
Q. 6. Identify the techniques of Taylor which bring uniformity and standardisation in work.
Ans. Technique of standardisation.
Q. 7. Name the device which permits direct communication between employees working at same level.
Ans. Gang plank.
Q. 8. Specify the consequence of violating principle of remuneration.
Ans. Employees will get demotivated.
Q. 9. Which principle of management insists "workers should be encouraged to develop and carry out their plans for development"? Explain that principle.
Ans. Principle of initiative.
For explanation refer page no. 79
Q. 10. The management of a company promises the workers to pay extra wages if they work overtime, but later on management refuses to pay extra wages. Which principle is violated in this case?
Ans. Principle of discipline.
Q. 11. 'A manager should replace "I" with "we" in all his conversation to encourage team spirit.' Identify the principle of management emphasised here.
Ans. Principle of 'Esprit de corps'.
Q. 12. Which technique of Taylor overlooks the principle of equity?
Ans. Differential piece rate system.
Q. 13. On which principle of Fayol, Taylor's technique of functional foremanship is based?
Ans. Division of work.
Q. 14. Purchase manager of ABC Ltd. gave order to supply raw material @ ₹ 1000 per quintal to his relative whereas same quality raw material is available @ ₹ 900 per quintal by another supplier. This is violation of which principle of management? Explain that principle.
Ans. It is violation of Principle of “subordination of individual interest to general interest.” For explanation refer to page no. 72.
Q. 15. Name the technique of Taylor which is the strongest motivator for workers to reach standard performance.
Ans. The technique of "differential piece rate system."
Q. 16. Which principle of management suggests that employees should not leave the organisation frequently? Give two adverse effects of this principle is violated.
Ans. The Principle of "Stability of Tenure." The two adverse effects of violation of this principle are:
(i) wastage of resources
(ii) demotivation and frustration of employees.
Q. 17. The management and workers have entered into an agreement that workers will do overtime to cover up losses of the company. In return the manager will increase the wages but management later refused to increase the wages. Name the principle related to above situation.
Ans. Principle of discipline. As managements fail to fulfill their commitment.
Q. 18. In one of the principles of scientific management, Taylor emphasises that there should be equal division of work and responsibility between workers and management and management should work almost side by side with workers helping them. Identify the principle.
Ans. "Cooperation not individualism" as management fail to fulfill their commitment.
Q. 19. Name any two companies who have successfully applied standardisation and simplification of work.
Ans. Nokia, Microsoft, Ford.
Q. 20. Explain the technique of scientific management that is the extension of principle of division of work and specialisation.
Ans. Functional foremanship explanation. (Refer page no. 87)
Q. 21. Beena, a student of management, likes to relate what she learnt in class to real life situations. She observed many situations while watching educational programmes on television that remind her of concepts of Scientific Management. In one such programme, factories manufacturing parts for products like automobiles, computers and mobile phones were being telecast. Name the technique of Scientific management that should be adhered to, while manufacturing parts for such products.
Ans. Standardisation and Simplification of work.
Q. 22. A sales person is asked to finalize a deal with customer. The marketing manager allows him to give a discount of up-to 10% but the Finance Manager allows him to give discount of upto 25%. Which principle is violated here?
Ans. Unity of command.
Q. 23. Principles of Taylor and Fayol are mutually complementary. One believed that the management should share the gain with the workers while the other suggested that employees compensation should depend upon the earning capacity of the company and should give them a reasonable standard of living. Identify and explain the principles of management by Tayol and Fayol referred to in para?
Ans. Fayol — Remuneration,
Taylor — Harmony not Discord (Mental Revolution).
Q. 24. A manager should have the right to punish a subordinate for wilfully not obeying a legitimate order but only after sufficient opportunity has been given to his/her case. Identify the principle of management highlighted here.
Ans. Authority and Responsibility.
Q. 25. Fayol insists that good sense and experience are needed to ensure fairness to all employees who should be treated as fairly as possible. Identify the principle of management.
Ans. Equity.
Q. 26. Voltech Ltd. is engaged in producing electricity from domestic garbage. There is almost equal division of work and responsibility between workers and management. The management even takes workers into confidence before taking important decisions. All the workers are satisfied as the behaviour of management is good.
State the principles of management described in above para.
Ans. "Authority & Responsibility" and "Initiative".
Q. 27. 90% staff of 'Work Well Ltd.' consists of male employees. The female employees are employed for very basic jobs like receptionists etc. The management is of opinion that female employees cannot contribute at par with male employees. They pay much lesser salaries to female staff despite the fact that they work for same number of hours.
(a) Name the principles of management that is being violated here.
(b) State the values ignored by management of Work Well Ltd. (Any two)
Ans. (a) Principles of "Equity" and "Remuneration".
(b) Right of Equality, gender equality, being humans.
Q. 28. Production manager of Beta Ltd. took special care of the interest and ability of his subordinates while distributing work among them. He was of the firm opinion that a worker should be given one work again and again so that he may become expert in it. One day he took round of his department and noticed that the workers were not doing their job quickly. On enquiry, he learnt that the workers worked non-stop which main cause of their slow speed. He immediately issued an order that during their working hours, the workers will have an interval to take rest.
(a) State the principle of management followed here? Explain.
(b) Which technique of scientific management is indicated in above para?
Ans. (a) Principle of Division of work. (b) Fatigue study.
Q. 29. Nowadays in schools, students or parents can file their complaints or requests to the respective class teachers and if needed class teacher may discuss the issue with head of department followed by Vice-Principal and if the issue is extremely serious it may taken to the Principal. Which principle of management is indicated here? Explain it with its exception.
Ans. Scalar chain.
This systematic chain is being followed here in the case of emergency gang plan may be followed.
Q. 30. In one of his principles, Taylor suggested that job performance should be based on scientific enquiry and not on will/wish or personal intuition of manager?
(i) Name that principle.
(ii) What values can be followed by using this principle?
Ans. (i) Principle of "Science not rule of thumb."
(ii) If manager is using this technique he can follow the value of objectivity it as when decisions are taken scientifically he cannot be biased.
Q. 31. In one of the principles of scientific management, Taylor emphasises that there should be equal division of work and responsibility between workers and management and management should work almost side by side with workers helping them:
(i) Identify the principle.
(ii) State any other two scientific principles.
Ans. (i) The principle referred in above para is "Cooperation not individualism."
(ii) Other scientific principles are:
(i) Science not rule of thumb,
(ii) Harmony not discord.
Q. 32. The management and workers have entered into an agreement that workers will do overtime to cover up losses of the company. In return the manager will increase the wages but management later refused to increase the wages.
Name the principle related to above situation.
Ans. Principle of discipline. As managements fail to fulfill their commitment.
Q. 33. The production department of Alpha Ltd. was not performing well on detailed analysis, it was observed that the workers of that department were overburdened. They were forced to work for longer hours without any break. So the management planned to replace the production manager. They appointed Mr. Hari as the new Production Manager. He observed the average worker and note down their times. He noted down the time they worked and the time they required to be fresh to join back the work. Based on this observation, he set the break intervals for workers. He gave small breaks to workers to recharge their energy.
Name and explain the technique of scientific management used by Mr. Hari.
Ans. Fatigue study.
Q. 34. One of the principles of Scientific management emphasizes to make the employee efficient, by training the workers. It further insists that each employee must be scientifically selected and work assigned to employees should suit their physical, mental and intellectual capabilities.
(i) Name and explain the principle of scientific management involved in above case.
(ii) Name the value emphasized by this principle.
Ans. (i) Principle of "Development of workers to their greatest efficiency."
(ii) Value of growth, prosperity of workers and company.
Q. 35. In the staff meeting the principal of the school raised objection that teachers start the teaching after 5 to 10 minutes in third floor classes. He warned them as students are complaining about this. The teachers explained the principal that when we climb steps from ground to third floor. We get some tiredness and need 5 to 10 minutes rest before starting the lecture. The principal planned to install a lift in school so that teachers do not waste their energy on wasteful activity of climbing steps.
1. State the techniques of scientific management used by principal.
2. State any other technique of scientific management.
Ans. 1. "Technique of motion study."
2. Other two techniques:
(a) Functional foremanship (b) Time study.
Q. 36. In a factory the toolbox was kept under the table of every worker, whenever worker needs tools he had to bend tape out tool from tool box and keep it back after use. The newly appointed supervisor observed it and suggested to keep a stool near every worker's chain where toolbox can be placed so that workers do not waste their energy in bending again and again.
1. Which technique of scientific management is used by New Supervisor.
2. State the objective of motion study.
Ans. 1. Motion study.
2. The objective of motion study is to eliminate unproductive movements of workers.
Q. 37. Mr. Mukesh used to manufacture shoes by employing labour who were easily available. When his son after completing his MBA joined the business, he analysed that if we use capital intensive method by using a machine it will reduce the cost and the quality of shoes will also improve.
1. Which technique of Scientific management is used by his son.
2. What is the objective of that technique.
Ans. 1. Method Study 2. Finding the best way of doing thing.
Q. 38. Neeraj is selected for the post of software developer in an IT Company. On the first day of his joining Mehul, his project manager tells Neeraj that during the course of his work he will come across many such opportunities which may temp him to misuse his powers for individual or family's benefit at the cost of larger general interest of the company. In such situations, he should rather exhibit exemplary behaviour as it will raisae his stature in the eyes of the company. Also, for interacting with anyone in the company on official matters, he should adopt the formal chain of authority and communication.
In context of the above case:
Identify the various principles of management that Mehul is advising Neeraj to follow while doing his job.
Ans. The various principles of management that Mehul is advising Neeraj to follow while doing his job are as follows:
1. Subordination of Individual Interest to General Interest
2. Scalar Chain
Q. 39. Pawan is working as a Production Manager in CFL Ltd. which manufactures CFL bulbs. There is no class-conflict between the management and workers. The working conditions are very good. The company is earning huge profits. As a policy, the management shares the profits earned with the workers because they believe in the prosperity of the employees. State the principle of management described in the above paragraph.
Ans. The principle of management described in the above paragraph is 'Harmony, not discord'.
Q. 40. Mr. Rajiv is the owner of 'Laxmi Dairy.' He is producing various milk products. He always tests various ways of producing different products and chooses the best and most economical way of production. He is also very particular about fixing a place for everything and he makes sure that all the employees are given a fixed place so that there is no wastage of time and delay in production.
1. Which technique of scientific management is applied by Mr. Rajiv?
2. Which principle of Henry Fayol is followed by him?
Ans. 1. Method Study 2. Principle of order
Q. 41. Mr. Rajiv the senior manager of Unique enterprise considered himself very wise and used to take all the decisions himself without consulting the employees, he never used to help any one nor he used to take help of anyone. The employees of unique enterprise were not working efficiently and company's profit margin started declining to tackle the problem, the company appointed a new manager from IIM Bangalore. The new manager after joining made a policy that all the decisions will be taken after consulting employees in the meeting. All employees must give some suggestions and best suggestions will be rewarded with financial and nonfinancial incentives. This policy had a very positive effects on company.
State and explain the principle of Henry Fayol used by new manager.
Ans. 1. Principle of initiative 2. "Cooperation not individualism."
Q. 42. In a school principal makes sure that every instruction, order or information given by him must be passed to vice-principal then Head of the department and then to teachers and students must be informed by respective teachers only. He never allows teachers to directly communicate with him.
1. State the Principle of Henry Fayol followed by the school principal.
2. In case of emergency which concept of Scalar Chain can be used by teacher to pass urgent message directly to principal.
Ans. 1. Scalar Chain. 2. Gang-plank.
## Guidelines to NCERT Questions
## Multiple Choice Questions
1. Principles of management are not
(a) Universal
(b) Flexible
(c) Absolute
(d) Behavioural
2. How are principles of management formed?
(a) In a laboratory
(b) By experience of a manager
(c) By experience of customers
(d) Adaptation to changing technology
3. The principles of management are significant because of
(a) increase in efficiency
(b) Initiative
(c) Optimum utilisation of resources
(d) Adaptation to changing technology
4. Henry Fayol was a
(a) Social Scientist
(b) Mining engineer
(c) Accountant
(d) Production engineer
5. Which of the following statements best describes the principle of 'Division of Work'? (a) Work should be divided into small tasks. (b) Labour should be divided. (c) Resources should be divided among jobs. (d) It leads to specialisation.
6. She/he keeps machines, materials, tools, etc., ready for operations by different workers. Whose work is described by this sentence under functional foremanship?
(a) Instruction card clerk (b) Repair boss
(c) Gang boss (d) Route clerk
7. Which of the following is NOT a Principle of Management given by Taylor?
(a) Science, not rule of the Thumb (b) Functional foremanship
(c) Maximum not restricted output (d) Harmony not discord.
8. Management should and 'one best way' to perform. Which technique of scientific management is defined in this sentence?
(a) Time study
(b) Motion study
(c) Fatigue study
(d) Method study
9. Which of the following statements best describes 'Mental Revolution'?
(a) It implies change of attitude.
(b) The management and workers should not play the game of one upmanship.
(c) Both management and workers require each other.
(d) Workers should be paid more wages.
## 10. Which of the following statements is false about Taylor and Fayol?
(a) Fayol was a mining whereas Taylor was a mechanical engineer.
(b) Fayol's principles are applicable in specialised situation whereas Taylor's principles have universal application.
(c) Fayol's principles were formed through personal experience whereas Taylor's principles were formed through experimentations.
(d) Fayol's principles are applicable at the top level of management whereas Taylor's principles are applicable at the shop floor.
## Short Answer Type Questions
1. How is the principle of 'Unity of Command' useful management? Explain briefly.
2. Define scientific management. State any three of its principles. [Refer on Page Nos. 82-86]
3. If an organisation does not provide the right place for physical and human resources in an organisation, which principle is violated? What are the consequences of it? [Ans. Principle of order.] [Refer on Page No. 76]
4. Explain any four points regarding significance of Principle of Management.
5. Explain the principle of 'Scalar Chain' and gang plank. [Refer on Page No. 75]
## Long Answer Type Questions
1. Explain the Principle of Scientific management given by Taylor. [Refer on Page Nos. 82-86]
2. Explain the following Principle of Management by Fayol with examples:
(a) Unity of direction [Refer on Page Nos. 70-71]
(b) Equity [Refer on Page No. 77]
(c) Esprit De Corps [Refer on Page No. 80]
(d) Order [Refer on Page No. 76] (e) Centralisation and Decentralisation [Refer on Page No. 74]
(f) Initiative. [Refer on Page No. 78-79]
3. Explain the technique of 'Functional Foremanship' and the concept of 'Mental Revolution' as enunciated by Taylor.
[Refer on Page Nos. 87 and 94]
4. Discuss the following techniques of Scientific work study:
(a) Time study [Refer on Page No. 91-92]
(b) Motion study [Refer on Page No. 92]
(c) Fatigue study [Refer on Page No. 90-91]
(d) Method study [Refer on Page No. 91]
(e) Standardisation and simplification of work. [Refer on Page No. 89-90]
5. Discuss the relevance of Taylor and Fayol's contribution in the contemporary business environment. [Refer on Page No. 96]
## Previous Years' Examination Questions (2014-2019)
## One Mark Questions
1. What is determined by 'Time-Study'? [CBSE 2014]
2. How do principles of management help managers in taking decisions scientifically? State.
3. How do principles of management help managers in fulfilling social responsibility? State.
4. How do principles of management help managers in meeting the requirements of the changing environment? State. [CBSE (D) 2017(C)]
5. State the role of 'route clerk' in functional foremanship. [CBSE (AI) 2016]
6. Why is it said that principles of management are mainly behavioural in nature? [CBSE (F) 2015]
7. State the role of 'gang boss' in functional foremanship. [CBSE (D) 2016]
8. State the role of Inspector in functional foremanship. [CBSE (F) 2016]
9. Appliances India Ltd is engaged in manufacturing and distribution of home appliances since 1987. It has a good name in the market as the company is producing good quality appliances. It has separate departments for manufacturing, finance, sales, maintenance services and technical services to achieve specialisation.
Since the areas of operation of the company have increased and customers have become more demanding, the company decided to modify the existing principle of management to meet the changing requirements of the environment. State the general principle of management which the company wants to modify to meet the changing requirements.[CBSE 2019 (66/1/1)]
10. Principles of management equip the managers to foresee the cause and effect relationships of their decisions and actions so that the wastages associated with a trial and error approach can be overcome.
Identify the point of significance of principles of management highlighted here.
[CBSE 2019 (66/4/1)]
## Three Marks Questions
11. Explain briefly 'Unity of Direction' and 'Order' as principles of general management.
[CBSE (AI) 2017]
12. Explain 'unity of command' and 'equity' as principles of general management. [CBSE (D) 2017]
13. Explain briefly 'discipline' and 'scalar chain' as principles of general management.
14. Explain 'order' and 'initiative' as principles of general management. [CBSE (D) 2017]
15. Explain briefly 'Initiative' and 'Esprit de Corps' as principles of general management.
[CBSE (AI) 2017]
16. Explain briefly ‘Remuneration of Employees’ and ‘Scalar Chain’ as principles of general management.
[CBSE (D) 2017]
## Four Marks Questions
17. State any four features of 'Principles of Management'. [CBSE 2015]
18. What is meant by principles of management? State any three points of their importance.
[CBSE 2015]
19. 'Aapka Vidyalaya' believes in holistic development of students and encourages team building through a mix of curricular, co-curricular and sports activities. On its founders day a stage performance had to be put up. A committee of ten prefects was constituted to plan different aspects of the function. They all decided to use recycled paper for decoration. There was a spirit of unity and harmony and all members supported each other. With mutual trust and belongingness the programme was systematically planned and executed. Kartik, one of the prefects realized that unknowingly the group had applied one of the principles of management while planning and executing the programme. He was so inspired by the success of the function that he asked his father to apply the same principle in his business. His father replied that he was already using this principle.
(a) Identify the principle of management applied for the success of the programme.
(b) State any two features of management highlighted in the above para. [CBSE (D) 2015]
20. Damini D'souza took over the reins of 'Kinsa Retail' as its Managing Director in India. Kinsa Retail with its headquarters at Japan has been in retail business for the last 40 years. It has regional offices in many countries with each regional office taking care of the shops in that particular region. As it is a large organisation, the regional officers have been given the powers to decide and spend funds sanctioned to them by the headquarter for the welfare of the customers of their region. Kinsa Retail wants the highest possible standards of ethical conduct being followed for which a code of conduct is in place for putting values into practice. All employees as well as Board members are required to act in accordance with the highest standards of personal and professional integrity when acting on behalf of the company. Non-compliance involves a heavy penalty including termination of employment.
State two principles of general management being followed by Kinsa Retail.
[CBSE 2019 (66/3/1)]
21. Define 'Management'. Explain how management is a multidimensional activity.
[CBSE 2019 (66/5/1)]
## Five/Six Marks Questions
22. Explain the following principles of management:
(i) Scalar chain.
(ii) Harmony, not discord.
[CBSE 2015]
23. Karan Nath took over 'D'north Motor Company' from his ailing father three months ago. In the past the company was not performing well. Karan was determined to improve the company's performance. He observed that the methods of production as well as selection of employees in the company were not scientific.
He believed that there was only one best method to maximize efficiency. He also felt that once the method is developed, the workers of the company should be trained to learn that 'best method'.
He asked the Production Manager to develop the best method and carry out the necessary training. The Production Manager developed this method using several parameters right from deciding the sequence of operations, place for men, machines and raw materials till the delivery of the product to the customers. This method was implemented throughout the organization. It helped in increasing the output, improving the quality and reducing the cost and wastage.
Identify and explain the principles and the technique of scientific management followed by the Production Manager in the above case.
[CBSE 2018]
24. Explain the following principles of management :
(a) Harmony, not discord (b) Discipline. [CBSE (F) 2015]
25. With the help of a diagram explain ‘Functional Foremanship’ as a technique of scientific management.
[CBSE (D) 2015]
26. Explain any four characteristics of 'principles of management.' [CBSE (D) 2016]
27. Explain the following principles of management:
(a) Science, not rule-of-thumb. (b) Discipline. [CBSE (AI) 2015]
28. Explain any four points that highlight the importance of principles of management.
29. Explain any five points of significance of Principles of Management. [CBSE 2019 (66/1/1)]
OR
Explain the following Techniques of Scientific Management:
(a) Fatigue Study
(b) Differential Piece Wage System [CBSE 2019 (66/1/1)]
30. Explain the following techniques of scientific management:
(a) Time Study; (b) Motion Study; and
(c) Functional Foremanship. [CBSE 2019 (66/2/1)]
## OR
Explain the following principles of general management:
(a) Division of Work; (b) Authority and Responsibility; and
(c) Discipline [CBSE 2019 (66/2/1)]
31. Vishesh completed his MBA at a reputed business school in Lucknow. He was impressed by the Principles and Techniques of Scientific Management developed by F.W. Taylor. On completing his MBA, he wanted to apply scientific Management in his family's business of fast food chain of restaurants named 'Burger Mania'.
His main goal was to reduce costs with increased output. To begin with, he wanted to develop a standard method which would be followed throughout the organisation. So, he investigated traditional methods through work study and unified the best practices. The standard method, i.e. the best way of doing the job was then developed taking into account all parameters right from the procurement of raw materials till the delivery of the final product to the customer. Vishesh also believed that each person should not only be scientifically selected but should also be given the required training to increase efficiency. For this, he set up a Special Training Unit called 'Hamburger' in Bengaluru where the workers were given the required training to increase efficiency. For this, he set up a workers were given the required training to learn the best method. At the factory, the ingredients making up a burger were strategically placed to reduce the time taken for excess movements. The standard time and other parameters were determined on the basis of work study and Vishesh rewarded the workers for meeting the standard output.
Now, ‘Burger Mania’ has standardised processes, raw material, time, machinery, product and working conditions that ensure the food they send out to their customers has the same high standards of excellence and level of quality in every chain or franchise. The application of Scientific Management to every aspect of restaurant operations led to “Burger Mania’s” widespread success. Quoting the lines from the above, explain the Principles and Techniques of ‘Scientific Management’ used by ‘Burger Mania’. [CBSE 2019 (66/4/1)]
32. 'Scientific Management means knowing exactly what you want men to do and seeing that they do it in the best and the cheapest way.' Taylor developed various techniques for application of Scientific Management principles and was able to achieve a three-fold increase in productivity in Bethlehem Steel Company, where he worked. One of the techniques helps to determine the number of workers to be employed; frame suitable incentive schemes and labour costs. Another technique recognises those workers who are able to accomplish/exceed the fair day's work and is based on the premise that efficiency is the result of the joint efforts of the managers and the workers.
Quoting the lines from the above paragraph, identify and explain the two techniques of Scientific Management.
[CBSE 2019 (66/5/1)]
33. Explain any four points highlighting the nature of principles of management.
[CBSE 2019 (66/5/1)]
## Hints of the Answers for Case Studies
9. The general principle of management which the company wants to modify is the Principle of Division of work which states that the work should be divided into small tasks/ jobs each performed by a specialist.
10. Optimum utilization of resources and effective administration.
19. (a) Principle of management - Espirit de corps.
(b) Features of management: - (Any two)
(i) MANAGEMENT IS PERVASIVE.
(ii) MANAGEMENT IS A GROUP ACTIVITY
(iii) MANAGEMENT IS GOAL-ORIENTED.
(iv) MANAGEMENT IS MULTI-DIMENSIONAL
(v) MANAGEMENT IS INTANGIBLE
20. Principles of General management being followed by Kinsa Retail are:
(i) Discipline which refers to obedience to organizational rules and employment agreement that are necessary for the working of the organization. It requires good superiors at all levels, clear and fair agreement and judicious application of penalties.
(ii) Centralisation and Decentralisation which suggests that there is a need to balance subordinate involvement through decentralisation with managers retention of final authority through centralisation.
23. Principles of management followed in the above case:
(a) Science not rule of thumb
\- It states that there was only one best method to maximise efficiency.
\- This method can be developed through scientific study and analysis of each element of a job and should substitute ‘Rule of Thumb’.
\- This standard method then should be followed throughout the organisation.
(b) Development of each and every person to his greatest efficiency and prosperity
\- This principle is concerned with efficiency of employees which could be built in right from the process of employee selection.
\- The work assigned to employees should suit their capabilities. They should be given the required training to increase their efficiency.
\- Efficient employees would produce more and earn more. This will ensure their greatest efficiency and prosperity for both the company and the workers.
Technique of scientific management followed in the above case:
## Method Study
\- It is a study to find out one best way of doing the job.
\- It helps to minimize the cost of production, improve the quality and maximize satisfaction of the customer.
\- It includes all activities from procurement of raw materials till the final product is delivered to the customer.
31. The Principles and Techniques of 'Scientific Management' used by 'Burger Mania' are: (Any six)
## Principles of scientific management
● Science, not rule of thumb
"To begin with, he wanted to develop a standard method which would be followed throughout the organisation. So, he investigated traditional methods through work study and unified the best practices."
● Development of each and every person to his/her greatest efficiency and prosperity
"Vishesh also believed that each person should not only be scientifically selected but should also be given the required training to increase efficiency."
## Techniques of scientific management
## Method study
"The standard method, i.e. the best way of doing the job was then developed taking into account all parameters right from the procurement of raw materials till the delivery of the final product to the customer."
## Motion study
"At the factory, the ingredients making up a burger were strategically placed to reduce the time taken for excess movements."
## Time study
"The standard time and other parameters were determined on the basis of work study
## Standardization (Standardization and Simplification of Work)
"Now, 'Burger Mania' has standardised processes, raw material, time, machinery, product and working conditions that ensure the food they send out to their customers has the same high standards of excellence and level of quality in every chain or franchise."
## Differential piece wage system
"Vishesh rewarded the workers for meeting the standard output."
## 32. Time Study
'One of the techniques helps to determine labour costs'
\- It is a technique to determine the standard time taken by a worker of reasonable skill and efficiency to perform a well-defined job.
\- It helps in deciding the number of workers to be employed, frame suitable incentive schemes and determine labour costs.
## Differential Piece Wage System
'Another technique recognises those workers who are able to accomplish/exceed the fair day's work and is based on the premise that efficiency is the result of the joint efforts of the managers and the workers'
\- Differential Piece Wage System is a technique which differentiates between efficient and less efficient workers. It rewards the efficient workers and motivates the less efficient ones to improve their efficiency.
\- In this plan, there are two piece rates – a higher piece rate for those workers who produce the standard output or more, and a lower one for those who produce less than the standard output.
## ANSWERS OF MCQs AND CASE STUDIES
## Page 62-63
1. (b) Guidelines for managerial action
2. (c) Contingent
3. (i) Feature highlighted in above situation is "Management Principles are pervasive".
(ii) Management principles are flexible whereas scientific principles are regid.
(iii) Management principles are formed by deep observation and repeated experiments.
4. (i) The two features of principles of management mentioned in the above paragraph are as follows:
(a) General guidelines (b) Flexible
(ii) As the real business situations are very complex and dynamic and are a result of many factors, the principles of management not provide readymade, straitjacket solutions to all managerial problems.
## Page 67
1. Principle of Division of Work
2. Principle of Division of work.
## Page 68
1. Authority and Responsibility
2. Principle of authority and responsibility.
## Page 69
1. The principle of management described in the above para is Discipline.
Discipline is the obedience to organizational rules and employment agreement which are necessary for the working of the organization.
## Page 70
1. Principle of unity of Command.
## Page 71
1. Unity of Direction.
## Page 72
1. Principle of subordination of individual interest to general interest.
## Page 73
1. Principle of remuneration as it states the compensation of employees depend on the earning capacity of the company and should give them reasonable standard of living.
## Page 74
1. Principle of centralisation and decentralisation.
Page 76
1. (i) Scalar Chain.
(ii) Gang-plank.
Page 77
1. Principle of Order
## Page 78
1. Company is violating the "Principle of Equity."
## Page 80
1. Principle of initiative
## Page 81-82
1. (d) Stability of Tenure of Personnel.
2. (c) Unity of Direction
3. (a) Principle of order
4. (b) Principle of Equity
5. (c) Stability of Personnel
6. Principle of "Espirit De Corps".
5. (c) Stability of Personnel
6. Principle of "Esp
7.Principles of management
(i) Stability of Personnel
(ii) Initiative
(iii) Discipline
(iv) Espirit de corps
8. In the above case following principles of management are violated:
(i) Division of work
(ii) Discipline
(iii) Unity of command
(iv) Initiative
(v) Esprit de Corps.
## Page 84
1. 'Science not rule of Thumb'
## Page 85
1. Harmony, not Discord
## Page 86
1. The principles of Fayol and Taylor referred to in the above paragraph respectively are
(i) Initiative
(ii) Cooperation and Not Individualism
## Page 87
1. (b) Cooperation not Individualism
2. (a) Harmony not Discord
3. Principle of Development of each and every person to their greatest efficiency and prosperity.
## Page 94-95
1. (c) Inspector
2. (b) Fatigue Study
3. (c) Standardisation
4. (a) Division of Work
5. Techniques of Scientific management used by Sandhya to solve the problem were:
## (i) Motion Study
Meaning: It is a technique to study the movements that are necessary for doing a well defined job.
It seeks to eliminate unnecessary and wasteful movements so that it takes less time to complete a job efficiently.
## (ii) Time Study
Meaning: It is a technique to determine the standard time taken by a worker of reasonable skill and efficiency to perform a well-defined job.
It helps in deciding the number of workers to be employed, frame suitable incentive schemes and determine labour costs.
## (iii) Simplification of Work
Meaning: It is a technique to eliminate superfluous varieties, sizes and dimensions of products.
It leads to reduced inventories, fuller utilization of equipment and increased turnover to reduce costs.
## ANSWERS OF OBJECTIVE TYPE QUESTIONS
## Multiple Choice Questions
| Policies | Objectives |
| (a) | Policies are organisation's own way of solving a particular problem. | Objectives are end results of an organisation. |
| (b) | Policies describe how the work is to be done. | Objectives describe what is to be done. |
| (c) | Policies explain the mode of achieving the objectives. | Objectives are end points of planning. |
| (d) | Policies are framed by top, middle and lower level managers. | Objectives are generally formed by top level managers only. |
| Policies | Procedures |
| (a) | Policies are organisation's own way of tackling the problem. | Procedures are step by step way of doing a job. |
| (b) | Policies are guide to think for decision-making. | Procedures are guide to actions. |
| (c) | Policies are derived from objectives of the company. | Procedures are required for implementation of policy. |
| (d) | Policies are more rigid. | Procedures are less rigid. |
| (e) | Policies are expressed in general terms. | Procedures are expressed in specific terms. |
| (f) | Example: School's policy to give admission to students securing more than 60% marks. | Example: Procedure for maintaining admission can be: 1. Separate file, 2. Keeping admission forms in file, 3. Checking data, filled in form with original document, etc. |
| Procedures | Methods |
| (a) | Procedures are sequences of steps to be followed for performing some important jobs. | Methods are formalised way of doing a routine and repetitive jobs. |
| (b) | Procedures are more rigid. | Methods are less rigid or flexible. |
| (c) | Procedures help in implementation of policy. | Methods help for standardisation and co-ordination of activity. |
| (d) | Example: Procedure for giving admission in school or giving contracts to an outside agency. | Example: Methods of valuation of stock or method of production. |
| Policies | Rules |
| (a) | Policies are organisation's own way of handling a problem. | Rules are norms regarding actions and non-actions of employees. |
| (b) | Policy is a general statement. | Rule is a specific statement. |
| (c) | Policy is a guide for decision making and thinking. | Rule is a guide to behaviour of employees. |
| (d) | Policy describes what is to be done under different situations. | Rules describe what is to be done and what is not to be done by the employees. |
| (e) | Policies are less rigid. | Rules are very rigid. |
| (f) | Example: Policy of giving admission to students securing more than 60% marks. | Example: No smoking in office premises. |
| Rules | Methods |
| (a) | Rules are norms for action and non-action of employees. | Methods are formalised way of doing routine and repetitive jobs. |
| (b) | Rules are very specific or very rigid also. | Methods are specific but flexible. |
| (c) | Rules improve the behaviour of the employees. | Methods bring quantity improvement and standardisation. |
| (d) | If rules are not followed then there is strict penalty for it. | If methods are changed then there can be warning but no penalty. |
| (e) | Example: Rule-No Smoking | Example: Follow straight line method of depreciation. |
| Strategy | Policy |
| (a) | It is a comprehensive plan which includes various steps. | It is a single plan. |
| (b) | It is formulated for solving challenging and unforeseen problems. | It is formed to carry out routine function. |
| (c) | Every time a new strategy is prepared to solve different problems. | Common policy is used for all the routine problems. |
| (d) | It is adhoc or temporary in nature. | It is permanent in nature. |
| (e) | It allocates human and other resources. | It uses the resources for decision-making |
## Quick Revision
Meaning. Planning can be defined as thinking in advance what is to be done, when it is to be done, how it is to be done, and by whom it should be done. It bridges the gap between where organisation is standing today and where it wants to reach.
## Features of Planning
1. Planning contributes to objectives.
2. Planning is primary function of management.
3. Pervasive.
4. Planning is futuristic/forward looking.
5. Planning is continuous.
6. Planning involves decision-making.
7. Planning is a mental exercise.
## Importance of Planning
1. Planning provides direction.
2. Planning reduces the risk of uncertainties.
3. Planning reduces overlapping and wasteful activities.
4. Planning promotes innovative ideas. 5. Planning facilitates decision-making.
6. Planning establishes standard for controlling.
7. Focuses attention on objectives of the company.
## Limitations of Planning
1. Planning leads to rigidity.
2. Planning may not work in dynamic environment.
3. It reduces creativity.
4. Planning involves huge cost.
5. It is a time consuming process.
6. Planning does not give guarantee success.
7. Lack of accuracy.
## Planning Process. Planning process involves
1. Setting-up of the objectives.
2. Developing premises.
3. Listing the various alternatives for achieving the objectives.
4. Evaluation of different alternatives. 5. Selecting an alternative.
6. Implementing the plan.
7. Follow-up.
## Types of Plans
1. Objectives
2. Strategy
3. Policies
4. Procedures
5. Methods
6. Rules
7. Programmes
8. Budgets
## Exercise
## Objective Type Questions
## Multiple Choice Questions
1. Planning is the
(a) Primary/First function of manager (b) Last function of manager
(c) Both (a) and (b) (d) None of the above
2. Making assumptions for future is called
(a) Making derivative plans (b) Making policy
(c) Setting planning premises (d) All of the above
3. The composite plan which involves setting up of long term objective finding course of action and allocation of resources is called
(a) Policy
(b) Strategy
(c) Programme
(d) Procedure
4. The plan which includes objective, policy, procedure and rule is called
(a) Strategy
(b) Budget
(c) Programme
(d) All of the above
5. Standardised way in which a task has to be performed is called
(a) Policy
(b) Procedure
(c) Strategy
(d) Method
6. The sequence of steps or actions to be taken to enforce a policy and attain pre-determined objectives is called
(a) Objective (b) Policy
(c) Procedure (d) Strategy
7. Organisations own customised way of handling problems or taking decisions is called
(a) Strategy
(b) Policy
(c) Budget
(d) Rule
8. End Results towards which all the activities are directed is called
(a) Policy
(b) Strategy
(c) Objective
(d) Programme
9. Controlling device from which deviations can be taken care of is
(a) Procedure
(b) Strategy
(c) Policy
(d) Budget
10. Planning is performed at
(a) Top Level
(b) Middle Level
(c) Supervising Level
(d) All Level
11. Planning is
(a) Routine Activity (b) Mental exercise
(c) None of the above (d) All of the above
12. After implementation of plan
(a) Planning ends
(b) New plan is made
(c) Follow up is done
(d) None of the above
13. Standing Plan
(a) Stands as an example for other planner (b) Recurring plans
(c) Discarded after use (d) All of the above
14. Single use plan
(a) Used only once
(b) Used for one single department
(c) Used by single individual
(d) All of the above
15. Planning establish base or standard for
(a) Organising (b) Staffing
(c) Directing (d) Controlling
16. A company is manufacturing garments. The manager wants to increase profits by purchasing new high speed machines or increasing the sale price or using waste materials in manufacturing stuffed toys. He decided that "using waste material" is the best solution for him.
Identify the concept of management involved.
(a) Directing
(b) Coordination
(c) Planning
(d) Organising
17. Rahim wanted to start with a stationery app. to help students of schools and college to provide stationery to them. He felt that students were not able to get the needed stationery easily and hence wanted to provide the stationery directly to students in the school. He list out the various ways of setting up this business and finally selected the best way to set up this business is by developing an app. Suggest what should be the next step of him:
(a) Developing premises
(b) Identifying the alternative course of action
(c) Implementation of plan
(d) Follow up action
18. What are certain assumptions about the future on the basis of which the plan will be ultimately formulated?
(a) Method premises (b) Planning premises
(c) Esteem needs (d) Management premises
(Answers at Page no. 196)
## Fill in the Blanks
1. Planning contributed to
2. Planning involves
3. Once plans are made, it is difficult to change them, so planning leads to \_\_\_\_.
4. Employees become blind followers of plans, so planning reduces \_\_\_\_.
5. Plans work successfully in past, may not work successfully in future also as planning does not give .
6. The blue print of business is called
7. \_\_\_\_ spell out actions and non actions of employees.
8. \_\_\_\_ includes entire gamut of activities.
9. Planning bridges the gap between where we are standing and where we want to
10. Repeat use plans are known as
(Answers at Page no. 196)
## True or False
1. Planning involves choice.
2. Planning is a function of Top Level managers.
(True/False)
(True/False)
3. Planning gives guarantee of success.
(True/False)
4. Planning is time consuming and involves huge cost.
(True/False)
5. Supportive plans are derived from main plan.
(True/False)
6. Budget is a standing plan.
(True/False)
7. Policy is the organisation's way of working.
(True/False)
8. Planning provides base/standard for controlling.
(True/False)
9. Methods and procedures are same type of plan.
(True/False)
10. Programme is a comprehensive plan including objective, policy, procedure, etc. (True/False)
(Answers at Page no. 196)
## Remembering and Understanding-based Questions with Answers
Q. 1. Define 'Planning premises'. [CBSE Sample Paper 2014]
Ans. The Manager is required to make certain assumptions about the future, which are the base material upon which plans are to be drawn. These assumptions are called planning premises.
Q. 2. What is meant by single use plan? [CBSE Sample Paper 2015]
Ans. A single use plan is developed for a one time event. Such a course of action is not likely to be repeated in future.
Q. 3. State the main aspects in the concept of planning. [CBSE Sample Paper 2016]
Ans. (1) Setting objectives for a given time period.
(2) Formulating various courses of action to achieve them.
(3) Selecting the best possible alternative from among the various courses of action available.
Q. 4. A company needs a detailed plan for its new project—construction of shopping mall. What type of plan is it?
[CBSE Sample Paper]
Q. 5. Which function of management is considered as the base of all other functions?
Ans. Planning.
Q. 6. Name any two features of planning.
Ans. (i) Goal-oriented (ii) Forward looking
Ans. Policy refers to organisation's own style of tackling the problems.
Q. 8. Which limitation of planning suggests that the employees stop thinking and become the blind followers of plan?
Ans. Reduces creativity or adverse effect on initiative, suggests that employees become the blind followers of plan.
Q. 9. State any two types of plans.
Ans. (i) Objectives (ii) Policy
Q. 10. In which type of plan the sequences to perform a job are determined?
Ans. Procedure.
Q. 11. Which plan suggests actions and non-actions of employees?
Ans. Rules.
Q. 12. No smoking—this statement is related to which type of plan?
Ans. Rule.
Q. 13. McDonald co. does not give its franchise to any other co. which is running food business. This is related to which type of plan?
Ans. It is related to policy of the company.
Q. 14. In which step of planning process the planners make predictions and assumptions regarding future?
Ans. Setting up of planning premises for all the alternatives predictions are made.
Q. 15. Define derivative plans.
Ans. Small plans which are derived from main plan to give support to main plan are known as derivative plans.
Q. 16. A company wants to introduce a new product. What type of plan should it prepare? Ans. Strategy.
Q. 17. Which plan helps in analysing competitor's policy?
Ans. Strategy.
Q. 18. At which level of management more time is consumed on planning as compared to other levels? Ans. Top level.
Q. 19. Planning function of management is conducted at which level of management?
Ans. At all the three levels.
Q. 20. Give two examples of limitations of planning, which are beyond the control of an organisation.
Ans. (i) Natural calamity,
(ii) Change in taste, fashion or trend in the market.
Q. 21. 'No enterprise can achieve its objectives without systematic planning.' Do you agree with this statement? Give any five reasons in support of your answer.
Ans. Yes, I agree with the statement. The planning is a primary function of every organisation. The objectives of the organisations are set up in planning function and steps are taken in planning function to achieve the set objectives. Planning function is necessary to get the objective achieved because of following reasons. Give five reasons for importance of planning?
[Refer to page nos. 161-162]
## Q. 22. "Planning is not a guarantee of success of a business." Comment.
Ans. It is right to say that planning is not a guarantee of success of a business because planning function is based on certain assumptions regarding future and no one can give guarantee that assumptions regarding future are hundred per cent accurate. The planning function suffers from certain limitations which is any five limitations of planning.
Q. 23. 'Sometimes planning fails in spite of the best efforts of management.' Do you agree? Give any five reasons in support of your answer.
Ans. Yes, I agree with the statement that planning fails inspite of the best efforts of management. The planning may fail because of following reasons. Give five limitations of planning.
[Refer to page nos. 163-164]
Q. 24. Describe the features of an ideal plan.
Ans. The features of an ideal plan are:
(i) It should be goal-oriented.
(ii) It must be futuristic.
(iii) It should be flexible.
(iv) It should be a continuous process.
(v) It must involve choice.
[Hint: Give explanation from the features of planning; only little variations in headings has to be done.]
Q. 25. Give two examples of objective and policy.
Ans. Objective:
1. Increase in production by 10% in six months, 2. Increase in sale by 5%.
## Policy:
1. Policy of school to give admission to students securing more than 60% marks.
2. Policy of McDonald, not to give franchise to a businessman, who is already having a restaurant.
## HOTS (Higher Order Thinking Skills) and Case Studies
Q. 1. On the introduction of Goods and Services Tax Act, experts in the field of business started analysing and forecasting its impact on various sectors and industries. Vivek, an established businessman, attended a few seminars and conferences organised by such experts to familiarise himself with this information. He wanted to use these forecasts to reduce the uncertainty in making decisions for the future in his business.
Name the step in the planning process that is being discussed in the above paragraph.
Ans. Developing premises
Q. 2. Does mere planning ensure success? Explain why?
Ans. 'No'.
[For explanation of limitation of planning refer page nos. 163-164.]
Q. 3. Give two examples of internal premises.
Ans. (i) Premises related to requirement of capital, (ii) Requirement of raw materials.
Q. 4. Give two examples of external premises.
Ans. (i) Assumption regarding government policy, (ii) Assumption regarding competitor.
Q. 5. Name the type of plan which serves as guide for overall business planning and defines the end result which organisation strives to achieve. Also give difference between this plan and policy.
Ans. Objective. For difference refer page no. 176.
Q. 6. 'ABC Ltd.' decides to advertise their product on T.V. and radio. What type of plan should it prepare? Ans. Strategy.
Q. 7. 'Infosys Ltd. decided to give 20% of jobs to women'. What type of plan is it? Explain this plan.
Ans. Policy. For explanation refer page no. 172.
Q. 8. An employee will retire at the age of 60 years. What type of plan is it?
Ans. Policy.
Q. 9. What type of plan is defined as long range blue print of an organisation's desired image, direction and destination?
Ans. Strategy.
Q. 10. A firm wants to increase its sales by 25% for the coming year. Which type of plan is involved in it? Ans. Objective.
Q. 11. ABC Ltd. gives promotion on the basis of seniority. Which type of plan is it?
Ans. Policy.
Q. 12. Name the type of plan in which minutest details are worked out, i.e., procedures, rules, budgets, etc.
Ans. Programme.
Q. 13. Name the type of plan which provides the basis for interpreting the strategy.
Ans. Policy.
Q. 14. Name the type of plan which provides directions for all decisions, and actions.
Ans. Objective.
Q. 15. Which type of plan has least flexibility?
Ans. Rules.
Q. 16. Name the type of plan which is time bound and linked with measurable outcome.[CBSE (D) 2012]
Ans. Objective.
Q. 17. "Swachh Bharat Abhiyan" started by government of India is an example of which type of plan? Explain it.
Ans. Programme for explanation refer page no. 174
Q. 18. Laxmi Chemicals Ltd., a soap manufacturing company wanted to increase its market share from 30% to 55% in the long run. A recent report submitted by the Research & Development Department of the company had predicted a growing trend of herbal and organic products. On the basis of this report the company decided to diversify into new variety of soaps with natural ingredients having benefits and fragrances of Jasmine, Rose, Lavender, Mogra, Lemon Grass, Green Apple, Strawberry, etc. The Unique Selling Proposition (USP) was to promote eco-friendly living in the contemporary lifestyle. The company decided to allocate ₹ 30 crores to achieve the objective.
Identify the type of one of the functions of management mentioned above which will help the company to acquire dominant position in the market. [CBSE Sample Paper 2015]
Ans. Strategy
Q. 19. After completing her studies in product design, Sarita wishes to start her own business to design products to cater to the mobility and communication requirements of persons with special needs. She told her friend that she wanted to focus on supplying high-quality products at affordable prices. The Unique Selling Proposition (U.S.P) of the products would be sensitivity to the challenges and needs of the differently abled people. She wants to employ only differently abled persons in her factory and sales offices across the country. This decision of Sarita provides the base for interpreting her strategy. This also defines the broad parameters within which the company may recruit the persons. Sarita has also to decide about the exact manner and the chronological order of how the selection of the differently abled applicants will be done. In the above lines, Sarita is discussing about one of the functions of management. This function has several types. Identify and explain the types Sarita is discussing in the above lines. [CBSE (D) 2017(C)]
Ans. Types of plans Sarita is discussing in the above lines are:
(a) Policy: Policy is a general guideline which brings uniformity in decision-making for the achievement of predetermined objectives.
(b) Procedure: It consists of sequence of routine steps on how to carry out activities. It details the exact manner in which any work is to be performed.
Q. 20. Rajeev, the owner of Pathways Constructions decided to start a campaign to create awareness among people for developing clean surroundings in their area. He formed a team of 10 members to list the different ways for cleaning the surroundings. One suggested to take the help of local residents, another suggested that they may involve school-going children in their venture. One more suggestion was to take the help of unemployed youth. On evaluation of different ways, it was decided to take the help of local residents. To achieve the desired goal various activities were identified like:
(a) Purchase of necessary items like dustbins, garbage bags, brooms, etc.;
(b) Collection of garbage;
(c) Disposal of garbage, etc.
After identification of different activities the work was allocated to different members.
(i) Identify the concepts of management involved in the above situation and quote the lines which help in their identification.
(ii) Also identify the values which the company wants to communicate to the society.
[CBSE Sample Paper 2014]
Ans. (i) Concepts involved: Planning and organising.
Lines for planning:
'one suggested......unemployed youth'
'on evaluation...... local residents'
'campaign to create awareness......surroundings'
Lines for organising:
'to achieve...... disposal of garbage, etc.'
'after identification of different activities...... different members'
(ii) Values: (any two)
Respect for environment:
Team work
Fulfilling social responsibility
## Q. 21. Suhasini a home science graduate from a reputed college has recently done a cookery course. She wished to start her own venture with a goal to provide 'health food' at reasonable price. She discussed her idea with her teacher (mentor) who encouraged her. After analysing various options for starting her business venture, they shortlisted the option to sell readymade and 'ready to make' vegetable shakes and sattu milk shakes. Then, they both weighed the pros and cons of both the shortlisted options.
(a) Name the function of management being discussed above and give any one of its characteristics.
[CBSE Sample Paper 2016]
(b) Also briefly discuss any three limitations of the function discussed in the case.
Ans. (a) Planning.
Characteristics of planning (any one)
(i) Planning focuses on achieving objectives.
(ii) Planning is a primary function of management.
(iii) Planning is pervasive.(iv)Planning is continuous.
(v) Planning is futuristic.
(vi) Planning involves decision-making.
(vii) Planning is a mental exercise.
(b) Limitations of planning (Any three)
(i) Planning leads to rigidity. (ii) Planning may not work in a dynamic environment.
(iii) Planning reduces creativity. (iv) Planning involves huge cost.
(v) Planning is a time consuming process.
(vi) Planning does not guarantee success.
Q. 22. A company is manufacturing garments. The manager wants to increase profits by purchasing new high speed machines or increasing the sale price or using waste materials in manufacturing stuffed toys. He decided that “using waste material” is the best solution for him.
(a) Identify the concept of management involved.
(b) Mention the steps involved in the above process by quoting the lines from the question.
Ans. (a) Planning.
(b) Steps (Refer page nos. 166-167)
Q. 23. In 'Chak De' movie, Shah Rukh Khan becomes the coach of the girl's hockey team. He knows that he has to prepare the girls for the international hockey match and win the cup. For this, he prepares a long term plan and thinks of ways of how to beat the opponent team. He coaches the girls to play in different ways like defensive, offensive, etc.
At the outset of the match, he explains who will open the match, and how the ball will be passed by one player to another step by step.
Identify all the types of plans mentioned above. State them along with lines which refer to them in the above paragraph.
Ans. Objective, strategy, procedure, method.
Q. 24. The production manager of a company received the complaint that the quality of the goods was not good. After investigation, it came to light that the machines had become very old. That is why, they were unable to achieve standardised quality. The production manager developed several options by way of solution to this problem. Example, getting the machines repaired, purchasing new local machines, purchasing new imported machines, if possible taking machines on rent, etc. The CEO of the company wanted the list of options to be smaller, so that a thorough study could be made for them. In order to make the list of optional ways smaller, he decided to give up all those options which required the investment of more than ₹10 crores.
(a) Identify the concept described in the paragraph given above.
(b) What do you understand from the fact of company fixing the maximum investment limit on options?
Ans. (a) Planning Process (b) Developing Premises
Q. 25. Procter and Gamble Ltd. is offering a free bucket on every purchase of Tide Washing Powder. In response to this Hindustan Unilever Ltd. started a new scheme of giving free one kg of Rin Washing Powder with every purchase of five kg of Rin Washing Powder. Identify the plan stated in the above paragraph and explain it.
Ans. Strategy (Refer page no. 171)
Ans. Strategy. (Refer page no. 171)
Q. 26. "KOHINOOR FOODS Ltd. has banned smoking in the factory premises."
(a) Identify the plan stated in above lines.
(b) State the features of this plan.
(c) Differentiate between policy and this plan.
Ans. (a) Rule (b) (Refer page nos. 173)
(c) (Refer page no. 177)
Q. 27. PK Ltd. has been well-known for delay in decision-making and overlapping of work done. Identify the management function lacking in the organisation and state the importance of this function.
Ans. Planning. (Refer page nos. 161-162)
Q. 28. Rahul, a worker is given a target of assembling two computers per day. Due to his habit of doing things differently, an idea struck him, which would not only reduce the assembling time of computer but also reduce the cost of production. But instead of appreciating his idea, his supervisor scolded him and asked him to complete the work as per the prescribed technique. Identify and describe the limitations of planning stated here.
Ans. Reduce creativity limitation. (Refer page nos. 163-164)
Q. 29. A company gave its sales executives, the directives that they would sell goods on credit but told the employees to strictly inform the customer that if they will not make payment within one month they will have to pay an interest of 10% per annum. In the above given paragraph, two types of plans have been mentioned. Identify them and explain them with their features.
Ans. Policy and Rule (Refer page no. 172-173)
Q 30. Bhuvan Ltd. is a garment manufacturing company. The company regularly scans business environment and constantly adapts itself to the changes in environment. With all these efforts also it became difficult for company to foresee future trends. Competition in the market effects the financial plan of the company, sales targets have to be revised which in turn effect the cash budget.
(i) Name and explain the limitation of planning highlighted in the above para.
(ii) Identify the two types of plans mentioned in above para.
Ans. (i) Planning may not work in dynamic environment.
(ii) Plans: (a) Strategy (b) Budget
Q. 31. A company is manufacturing garments. The manager wants to increase the profit by:
(a) Purchasing new high speed machine
(b) Increasing the sale price
(c) Using waste material in manufacturing stuff toys
He decided that using waste material to increase the profit is the best solution for him.
(i) Identify the concept of management involved
(ii) State any four features of that concept.
Ans. (i) Planning (ii) Features (Refer page nos. 158-160)
## Q. 32. An electronic company is facing a problem of declining market share due to increased competition from other new and existing players in the market. Its competitors are introducing lower price models for mass consumers. Who are price sensitive? For quality conscious consumers company is introducing new model with added features and new technological advancements.
(i) Prepare a model business plan for this company. Specify which type of plan you are preparing.
Ans. The type of plan needed to be prepared under this situation is strategy and the steps involved in preparing this plan are:
(a) Setting-up of objective. The company may set up a long term objective of capturing more and more quality conscious consumers or becoming a leader in quality and trend setter in market by one year time.
(b) Adopting a particular course of action. The company must import latest technology or spend more on research and development department to innovate latest technology to make their goods superior than competitor's goods.
(c) Allocating resources for achieving the objectives. Company must take permission for importing technology and must allocate extra funds to their R and D section and appoint people with latest knowledge to innovate new technology.
(ii) Identify the limitations of such plans.
Ans. The common limitations of these plans are:
(a) It may involve huge cost.
(b) It is a time-consuming process.
(iii) How will you remove these limitations?
(iii) How will you remove these limitations?
Ans. To overcome these problems, we may take the following steps:
(a) Prepare budget to carry on this plan and function within the revenue allocated in the budget.
(b) Fix a time limit to achieve the plan and then to execute the plan within that time limit only.
(c) Scan the environment properly before implementing the plan.
(d) Use the plan with caution and care.
## Q. 33. Palvinder, is working as a supervisor in Alpha Ltd. To achieve the target, he wants to try a new method and a different way of allocating the work. His superior did not permit him and forced him to do the work strictly as per the plan.
(i) Name the limitation of planning indicated in the above para.
(ii) Name the value overlook by Palvinder's superior.
Ans. (i) 'Planning reduces creativity.'
(ii) Value of motivating and encouraging employee to increase initiative level.
Q. 34. The management of ABC Ltd. set up the target of selling 10,000 units per week and made all their plans based on this target. But due to change in technology adapted by competitors which reduced their cost, the ABC Ltd. could not achieve their target.
(i) Identify the limitation of planning discussed in the above para.
(ii) State any other two limitations.
Ans. (i) Planning may not work in dynamic environment.
(ii) Any two limitations:
1. Planning reduces creativity
2. Planning involve huge cost
Q. 35. Alpha Ltd. spent a lot of money to hire specialised people for framing their plans and collecting important facts from environment. The company cut down their cost by cancelling the employee's trip for recreation.
(i) Name the limitation of planning mentioned in above para.
(ii) Name the value overlook by management.
Ans. (i) Limitation: 'Planning involves huge cost'
(ii) Value overlook: Psychological need of employees.
Q. 36. ABC Ltd. announced a plan that nobody would smoke in the organisation premises and they further added that certain penalty will be imposed on employees, overlooking this.
(i) Name the type of plan related to above para.
(ii) Name the feature of that plan.
(iii) Name the values emphasised by the company.
Ans. (i) 'Rule' is the type of plan. (ii) Rules are very rigid.
(iii) Values: (a) Respect towards environment
(b) Follow discipline and order
## Guidelines to NCERT Questions
## Short Answer Type Questions
1. What are the main points in the definition of planning? [Refer on Page Nos. 157-158]
2. How does planning provide direction?
[Refer on Page No. 161]
3. Do you think planning can work in a changing environment? [Refer on Page No. 164]
4. If planning involves working out details for the future, why does it not ensure success?
[Refer on Page No. 164]
5. Why are rules considered to be plans?
[Rules are considered as plan because they are made in advance for smooth functioning of an organisation]
6. What kind of strategic decisions are taken by business organisations? [Refer on Page Nos. 171-172]
## Long Answer Type Questions
1. Why is it that organisations are not always able to accomplish all their objectives?
[Refer on Page No. 163-164]
2. What are the main features to be considered by the management while planning?
[Refer on Page Nos. 158-160]
3. What are the steps taken by management in the planning process?
4. Is planning actually worth the huge costs involved? Explain. [Refer on Page No. 164]
## Previous Years' Examination Questions (2014-2019)
## One Mark Questions:
1. Give the meaning of 'Policy' as a type of plan. [CBSE (D) 2014]
2. Give the meaning of 'Objective' as a type of plan. [CBSE 2015]
3. Define Planning.
[CBSE 2015]
4. Give the meaning of 'Programme' as a type of plan. [CBSE 2015]
5. Give the meaning of 'Method' as a type of plan. [CBSE 2014, (AI) 2018]
6. Saurabh decided to start a chocolates manufacturing business. He set the target of earning 10% profit on sales in the first year. As a good businessman, he was concerned about the future of the business, which was uncertain. He gathered information that the demand for chocolates is increasing day by day. He used this information as the base for future planning and shared it with his team. On the basis of the gathered information, he scheduled a meeting in the following week to find innovative ways to achieve the objectives. List the first two steps, which have been followed by Saurabh that are related to the process of one of the functions of management.
7. Define 'method' as a type of plan.
[CBSE (F) 2015]
8. Define 'Planning Premises'. [CBSE (D) 2015]
9. Varsha Jain after completing her fashion designing course from Indian Institute of Fashion Technology planned to enter into designer clothing venture. She had to address issues like her target customers, channel of distribution to be used, pricing policy etc. Identify the type of plan that Varsha Jain needs to develop to provide direction and scope to her organisation in the long run.
[CBSE 2019 (66/1/1)]
10. What is meant by 'Rule'? [CBSE 2019 (66/2/1)]
11. Differentiate between ‘Single Use Plan’ and ‘Standing Plan’ on the basis of meaning.
[CBSE 2019 (66/3/1)]
12. As a part of its comprehensive plan 'Neerja Ltd.' decided to combine a new line of activity with its existing footwear business. Identify the type of plan. [CBSE 2019 (66/3/1)]
13. How are 'Policies' and 'Procedures' interlinked? [CBSE 2019 (66/4/1)]
## OR
What is meant by 'Developing Premises' in the process of planning? [CBSE 2019 (66/4/1)]
14. All business firms would like to increase their sales and earn profits to be successful. All managers dream of these. To turn their dreams into reality, managers need to work hard in thinking about the future, in making business predictions and achieving targets. The above lines describe one of the functions of management. Identify and define this function.
[CBSE 2019 (66/5/1)]
## Three Marks Questions:
15. Define 'Planning.' Explain the first two steps in the process of planning. [CBSE (AI) 2016]
16. State any three features of 'Planning.' [CBSE (D) 2017]
17. Explain any three points of importance of planning function of management.
18. Explain any three limitations of planning function of management. [CBSE 2019 (66/2/1)]
19. How is ‘planning a pervasive function of management’. Explain. [CBSE 2019 (66/4/1)]
## Four Marks Questions:
20. What are the main features to be considered by the management while planning?
Explain any five features of planning.
[CBSE 2014, 2015]
21. Define 'Planning'. State any four points of importance of planning. [CBSE 2014]
22. Give the meaning of 'Objectives' and 'Budget' as types of plans. [CBSE (D) 2017]
23. Give the meaning of 'Procedure' and 'Rule' as types of plans. [CBSE (D) 2017]
24. Give the meaning of 'Policy' and 'Strategy' as types of plans. [CBSE (D) 2017]
25. Give the meaning of 'Strategy' and 'Rule' as types of plans. [CBSE (AI) 2017]
26. Give the meaning of 'Policy' and 'Budget' as types of plans. [CBSE (AI) 2017]
27. Give the meaning of 'Objectives' and 'Procedure' as types of plans. [CBSE (AI) 2017]
28. Give the meaning of 'Procedure' and 'Method' as types of plans. [CBSE (F) 2017]
29. In 2015, Naveen left his luxurious life in Mumbai, where he worked as a manager for Bluebirds Ltd. He shifted to Begampur, Chhattisgarh to fulfill his grandmother's dream of converting their 25 acre ancestral land into a fertile farm. For this he set out specific goals along with the activities to be performed to achieve the goals.
Every activity was a challenge since he was clueless about farming. He learnt every activity from filling the land to sowing the seeds. To aid farmers he launched his own company 'Innovative Agriculture Solutions Pvt. Ltd.'
It was difficult initially as no one trusted an urban youth telling farmers about farming. But when everything was discussed in detail the farmers started taking interest. He wanted to ensure that the future events meet effectively the best interests of the company. Through sales forecasting, he prepared an annual plan for production and sales. He also found that the farmers grew only paddy, which was an activity of 3-4 months and the land remained idle for the rest 8-9 months of the year. He not only identified but evaluated various alternatives through which the farms could be utilized for the remaining months of the year. Through correct foresight and logical and systematic thinking based on analysis of all facts, all alternatives were examined and evaluated. He presented a plan to the farmers, where after harvesting paddy, vegetables could be grown.
The above case highlights the features of one of the functions of management. By quoting lines from the above identify and explain these features. [CBSE 2018 (66/1-2-3)]
30. Mega Ltd. holds an Annual Management Programme every year in the month of March in which the top managerial personnel formulate plans for the next year by analysing and predicting the future to meet future events effectively.
As they are responsible for providing direction to the organisation, facts are thoroughly checked through scientific calculations. Detailed plans are prepared after discussion with professional experts. Preliminary investigations are also undertaken to find out the viability of the plan.
Since it is an intellectual activity requiring intelligent imagination and sound judgement, it is mainly done by the top management. Usually rest of the members just implement the plans. Middle level managers are neither allowed to deviate from the plans nor are they permitted to act on their own. The top management ensures that the expenses incurred in formulating the plans justify the benefits derived from them.
State two limitations and two features of planning discussed above. [CBSE 2019 (66/1/1)]
## Five/Six Marks Questions:
31. Two years ago, Madhu completed her degree in food technology. She worked for sometime in a company manufacturing chutneys, pickles and murabbas. She was not happy in the company and decided to have her own organic food processing unit for the same. She set the objectives and the targets and formulated action plan to achieve the same.
One of her objectives was to earn 10% profit on the amount invested in the first year. It was decided that raw materials like fruits, vegetables, spices, etc. will be purchased on three months credit from farmers cultivating organic crops only. She also decided to follow the steps required for marketing of the products through her own outlets. She appointed Mohan as a Production Manager who decides the exact manner in which the production activities are to be carried out. Mohan also prepared a statement showing the number of workers that will be required in the factory throughout the year. Madhu informed Mohan about her sales target for different products, areawise for the forthcoming quarter. While working on the production table a penalty of ₹100 per day for not wearing the caps, gloves and apron was announced.
Quoting lines from the above para, identify and explain the different types of plans discussed.
[CBSE (D) 2016]
32. State any five features of 'Planning'. [CBSE (D) 2015]
33. Saurabh Jain set up a telecom business in Nasik ' Ketone' with an ambitious target of reaching out to 90% of the Indian population within one year. He chose this business on the belief that the demand for data services will increase 4 times within the next 2-3 years. To fulfill such an ambitious target, he had to either acquire an existing telecom business or collaborate or go independent aggressively in the light of tough competition.
He assessed the proposals of different companies vis-a-vis earnings per share, taxes, dividends paid etc. and their future projections knowing fully well that the projections may change if the country's economic policies get modified.
The above paragraph discusses some of the steps of one of the functions of management. By quoting the lines from the above paragraph, explain these steps in chronological order.
[CBSE 2019 (66/3/1)]
34. Matta Auto Ltd. is manufacturing different types of commercial vehicles. Their sales were rupees two hundred crores in the previous year. The company decided to increase sales by 20% during the current year. It conducted internal as well as external audits for the same. Through internal audit, they analysed the strengths and weaknesses of the business across all departments. External audit focused on the opportunities and the threats in the constantly changing business environment. Thus, a comprehensive plan was prepared taking into consideration the business environment and the necessary resources were allocated to achieve the target. The company directed its offices throughout the country to follow the plan. The company's commitment to develop effective plans to achieve a consistent increase in sales has ensured its continual growth over the past one decade.
Identify and explain the two types of plans discussed above. [CBSE 2019 (66/5/1)]
## Hints of the Answers for Case Studies
6. First two steps in process of planing:
(i) Setting up of Objectives.
(ii) Developing Premises.
9. Strategy
12. Plan
14. Planning: Planning is defined as the process of setting objectives for a given time period, formulating various courses of action to achieve them and then selecting the best possible alternative from among the various courses of action available.
## 29. Features of planning are:
(i) Planning focuses on achieving objectives
'He set out specific goals along with the activities to be performed to achieve the goals'
Planning focuses on achieving objectives as specific goals re set out in the plans along with activities to be undertaken to achieve the goals.
## (ii) Planning is futuristic
'He wanted to ensure that the future events meet effectively the best interests of the company'
## OR
'Through sales forecasting, he prepared an annual plan for production and sales'
Planning is futuristic as it involves looking ahead and preparing for the future.
## (iii) Planning involves decision making
'He not only identified but evaluated various alternatives through which the farms could be utilised for the remaining months of the year'.
## OR
## '.... all alternatives were examined and evaluated'
Planning involves decision making as it involves a choice from among the various alternative courses of action.
## (iv) Planning is a mental exercise
‘Through correct foresight and logical and systematic thinking based on analysis of all facts...’
Planning is a mental exercise as it is intellectual activity of thinking rather than doing.
## 30. Two limitations of planning discussed above are:
(i) Planning reduces creativity as it is mostly done by the top management; rest of the members just carry out orders and think on the same lines as others.
(ii) Planning involves huge costs in terms of time and money. The costs incurred sometimes may not justify the benefits derived from the plans.
Two features of planning discussed above are:
(i) Planning is futuristic as it involves looking ahead and preparing for the future to meet future events effectively to the best advantage of the organisation.
(ii) Planning is a mental exercise as it requires application of mind involving foresight, intelligent imagination and sound judgement. It is an intellectual activity of thinking rather than doing.
## 31. The different types of plans are:
## (i) Objective.
'One of her objective is to earn 10% profit on the amount invested in the first year'.
## (ii) Policy.
'It was decided that raw materials like fruits, vegetables, spices etc. will be purchased on three months credit from farmers cultivating organic crops only'.
## (iii) Procedure.
'She also decided to follow the steps required for marketing of the products through her own outlets'.
## OR
'She appointed Mohan as a Production Manager who decides the exact manner in which the production activities are to be carried out'.
## (iv) Budget
'Mohan also prepared a statement showing the number of workers that will be required in the factory throughout the year'.
## OR
'Madhu informed Mohan about the sales target for different products, areawise for the forthcoming quarter'.
## (v) Rule
‘While working on the production table, a penalty of ₹100 per day for not wearing the caps, gloves and aprons was announced’.
## 33. Steps discussed in the above case are:
(i) Setting objectives: 'Saurabh Jain set up a telecom business in Nasik 'Ketone' with an ambitious target of reaching out to 90% of the Indian population within one year'.
Objectives may be set for the entire organisation and each department or unit within the organisation.
They specify what the organisation wants to achieve.
(ii) Developing premises: 'He chose this business on the belief that the demand for data services will increase 4 times within the next 2-3 years'
A manager is required to make certain assumptions about the future called premises. Assumptions are the base material upon which plans are to be drawn.
(iii) Identifying alternative courses of action: 'To fulfill such an ambitious target, he had to either acquire an existing telecom business or collaborate or go independent aggressively in the light of tough competition'
As there may be many ways to achieve the objectives, all the alternative courses of action should be identified and thoroughly discussed.
(iv) Evaluating alternative courses: 'He assessed the proposals of different companies vis-a-vis earrings per share, taxes, dividends paid etc. and their future projections knowing fully well that the projections may change if the country's economic policies get modified.'
The pros and cons of each alternative are weighed in the light of the objective to be achieved, their feasibility and consequences.
34. The two types of plans discussed above are:
(a) Objectives
(b) Strategy
## Objectives
\- Objectives are the ends, which the management seeks to achieve.
\- Objectives needs to be expressed in specific terms that is quantified and is to be achieved within a given time period.
\- They are usually set by top management of the organisation and focus on broad, general issues.
## Strategy
\- A strategy is a comprehensive plan for accomplishing an organisation's objectives taking business environment into consideration.
\- It provides the broad contours of an organisations business and defines the organisation's direction and scope in the long run.
\- It includes determining long term objectives, adopting a particular course of action, and allocating resources necessary to achieve the objectives.
## ANSWERS OF MCQs AND CASE STUDIES
## Page 161
1. (a) Planning
2. (c) Planning is a mental exercise
3. 1. Planning is a primary function. "He knew that without planning . . . . function".
2. Planning is continuous. "Beside he will have to prepare . . . . half yearly basis."
3. Planning is a mental exercise. "He undertakes intellectual thinking . . . guess work."
4. Planning focuses on achieving objectives. "All these planning activities . . . purpose for which business is being carried out."
5. Planning is futuristic. "On the basis of sales forecast, he can prepare annual plan."
## Page 163
1. (c) Planning reduces the risk of uncertainties
2. Points of importance highlighted in above para are
(i) Planning reduces the risk of uncertainties. – “Ready to face uncertainties....”
(ii) Planning reduces overlapping and wasteful activities. "No duplication....
## Page 165-166
1. (b) Creates Rigidity
2. (i) Planning does not guarantee success.
(ii) Planning may not work in dynamic environment.
3. (i) Planning involve huge cost.
(ii) Planning is time consuming.
(iii) Planning may not work in dynamic environment.
## Page 168-169
1. (a) Selecting an alternative.
2. (c) Evaluating alternative course of actions.
3. (a) Planning is the function of management, which is described in above paragraph.
(b) The various steps involved in the above process are:
1. Setting objectives. "The company plan to increase sale . . . . . . . by next quarter".
2. Developing premises. "In order to achieve this target . . . . might have to face".
3. Listing the various alternatives for achieving the objectives. "The team explored the various available options . . . three years, etc".
4. Evaluating different alternatives. "A thorough analysis of each option was done".
5. Selecting an alternative. "Finally company decided . . . . . three years".
6. Implement the plan. "In order to implement the plan, they made various packages of services .....electronic medias".
7. Follow-up. "A separate team was . . . . . on the sale".
## Page 176
1. (c) Strategy
2. (b) Policy
3. 1. Objective, "The company seeks to increase . . . . . . . . sale".
2. Strategy, "Flipkart card was the first company to give Cash on Delivery . . . . . . this offer".
3. Policy, "The company in general offer two week return option".
4. Procedure, "After receiving . . . . . till the delivery".
5. Method, "The company offers various options . . . . . . . net banking, etc."
6. Budget, "The company plans to speed ₹50 crore. . . . . . .this year".
7. Rule, "Flipkart reserve . . . . . . use website".
## ANSWERS OF OBJECTIVE TYPE QUESTIONS
## Multiple Choice Questions
1. (a) 2. (c) 3. (b) 4. (c) 5. (d)
6. (c) 7. (b) 8. (c) 9. (d) 10. (d)
11. (b) 12. (c) 13. (b) 14. (a) 15. (d)
## Fill in the Blanks
1. Objectives
2. Decision Making or Choice
3. Rigidity
4. Creativity
5. Guarantee of success
6. Strategy
7. Rules
8. Programme
9. Reach
10. Standing plans
## True or False
1. (T)
2. (F) - It is the task of all level
3. (F) – No due to uncertainties and change in environment.
6. (F)
7. (T)
8. (T)
# ORGANISING
## Contents as per Latest CBSE Syllabus
■ Concept and importance
Organising Process
■ Structure of organisation—functional and divisional concept. Formal and informal organisation—concept
■ Delegation: concept, elements and importance
■ Decentralization: concept and importance
## 5.1 MEANING OF ORGANISING
Organising can be defined as “identifying and grouping different activities in the organisation and bringing together the physical, financial and human resources to establish most productive relations for the achievement of specific goal of organisation.”
## Definitions of Organising:
“To organise a business is to provide it with everything useful to its functioning: raw materials, machines and tools, capital and personnel.”
—Henry Fayol
“In its broadcast sense organising refers to relationship between various factors present in a giving endeavour or enterprise.”
—William Spriegel
“Organising is the establishing of effective authority relationships among selected work, persons and work places in order for the group to work together efficiently.”
—G.R. Terry
In general words, organising refers to arranging everything in orderly form and making most efficient use of resources. When the managers are performing organising function it results in creation of an organisational structure which shapes the system of working.
Example. Your school plans to conduct Sports Day or annual function. All the teachers and students are assigned different duties, various resources are arranged and a coordinator is appointed whom every one report for the work done and pending. This whole arrangement is called organising.
## 5.2 ORGANISING PROCESS
## The process of organising consists of following steps:
1. Identification and Division of Work. The first step in the organising is identifying and dividing the work as per plan. The division of work make sure there is no duplication of work and there is no burden of work on one person. Work can be shared among the employees. The manager divides the work into smaller units and each unit of work is called a job.
For example, in a bank every individual is assigned a job. One cashier accepts cash, one cashier makes payments, one person issues cheque books, one person receives cheques, etc. With division of work into jobs the banks work very smoothly and systematically.
2. Departmentalisation. After dividing the work in smaller jobs, related and similar jobs are grouped together and put under one department. The departmentation or grouping of jobs can be done by the organisation in different ways. But the most common two ways are:
(a) Functional departmentation. Under this method jobs related to common function are grouped under one department. For example, all the jobs related to production are grouped under production department, jobs related to sales are grouped under sales department and so on.
(b) Divisional departmentation. When an organisation is producing more than one type of products then they prefer divisional departmentation. Under this jobs related to one product are grouped under one department. For example, if an organisation is producing cosmetics, textile and medicines then jobs related to production, sale and marketing of cosmetics are grouped under one department, jobs related to textile under one and so on.
3. Assignment of Duties. After dividing the organisation into specialised departments each individual working in different departments is assigned a duty matching to his skill and qualifications. The work is assigned according to the ability of individuals. Employees are assigned duties by giving them a document called job description. This document clearly defines the contents and responsibilities related to the job.
4. Establishing Reporting Relationship. After grouping the activities in different departments the employees have to perform the job and to perform the job every individual needs some authority. So, in the fourth step of organising process all the individuals are assigned some authority matching to the job they have to perform. The assignment of the authority results in creation of superior-subordinate relationship and the question of who reports to whom is clarified. The individual of higher authority becomes the superior and with less authority becomes the subordinate. With the establishment of authority, managerial hierarchy gets created (chain of command) and principle of scalar chain follows this hierarchy. The establishment of authority also helps in creation of managerial level. The managers with maximum authority are considered as top level managers, managers with little less authority become part of middle level management and managers with minimum authority are grouped in lower level management. So with establishment of the authority the individuals can perform their jobs and everyone knows who will report to whom.
## Keywords
## Organising Process
(a) Identifying and division of work or activities
(b) Grouping the activities
(c) Creating departments
(d) Assigning duties
(e) Giving or assigning responsibility or authority
(f) Creating a framework within which operational and managerial activities are performed
(g) Creating superior-subordinate relationship
(h) Creating managerial hierarchy
(i) Determining style of working of an organisation
(j) Creating relationship between authority and responsibility
## MCQs and Case Studies
| S.No. | Points of Difference | Functional Structure | Divisional Structure |
| 1. | Basis of Formation | This structure is formed on the basis of function. | This structure is formed on the basis of product. |
| 2. | Accountability and Responsibility | Difficult to make accountable as departments are interdependent. | Easy to fix the accountability as departments work independently. |
| 3. | Economy Cost | It is economical. | It is not very economical because all the resources are required in different departments. |
| 4. | Development of Managers | Less chances as manager becomes specialised in one function only. | More chances as managers perform multifunctions. |
| 5. | Specialisation | This type of structure brings functional specialisation. | It brings product specialisation. |
| 6. | Co-ordination | Compared to Divisional less when company is producing more products. | Better co-ordination because all the activities related to one product are in one department only. |
| 7. | Autonomy of operations | Less autonomy of action. | More autonomy. |
| 8. | Suitable | It is suitable for all types of organisations. | It is suitable for multiproduct or diversified firms. |
## Keywords
## Functional Structure
1. Division of work as per functions
2. Specialisation in every function
3. Grouping of similar nature of jobs
4. Uniproduct or single or one type of product manufacturing company
## Divisional Structure
(a) Division of work as per product
(b) Grouping of jobs related to common products
(c) Specialisation in each product
(d) Multiproduct manufacturing companies
(e) Organisations adding more lines of products
(f) Organisations planning for expansion and diversification
## MCQs and Case Studies
## 1. Grouping the activities on the basis of product line is a part of
(a) Functional structure
(b) Divisional structure
(c) Formal orgainisation
(d) Informal organisation
2. Every Divisional Structure has a functional structure in it.
(True/False)
3. Vimal Cloth Ltd. was manufacturing only fabrics. After having great success in fabric business the directors of Vimal Cloth Ltd. acquired three new manufacturing units and started selling multi-products in market. (Electronics, Mobile phone, Cements)
They decided that an individual who has capability and competence to handle responsibility would head each unit. The vacant position will be filled by women candidate only.
(a) State the type of organisation structure Vimal Cloth Ltd. have followed as a producer of single product.
(b) Suggest which type of organisational structure Director must adopt now and explain its advantages.
(Answers at Page no. 243)
## 5.5 FORMAL AND INFORMAL ORGANISATION
## 5.5.1 Formal Organisation
When the managers are carrying on organising process then as a result of organising process an organisational structure is created to achieve systematic working and efficient utilisation of resources. This type of structure is known as formal organisational structure.
Formal organisational structure clearly spells out the job to be performed by each individual, the authority, responsibility assigned to every individual, the superior-subordinate relationship and the designation of every individual in the organisation. This structure is created intentionally by the managers for achievement of organisational goal.
## Features of Formal Organisation:
(1) The formal organisational structure is created intentionally by the process of organising.
(2) The purpose of formal organisation structure is achievement of organisational goal.
(3) In formal organisational structure, each individual is assigned a specific job.
(4) In formal organisation, every individual is assigned a fixed authority or decision-making power.
(5) Formal organisational structure results in creation of superior-subordinate relations.
(6) Formal organisational structure creates a scalar chain of communication in the organisation.
## Advantages of Formal Organisation
1. Systematic working. Formal organisation structure results in systematic and smooth functioning of an organisation.
2. Achievement of organisational objectives. Formal organisational structure is established to achieve organisational objectives.
3. No overlapping of work. In formal organisation, structure work is systematically divided among various departments and employees. So there is no chance of duplication or overlapping of work.
4. Coordination. Formal organisational structure results in coordinating the activities of various departments.
5. Creation of chain of command. Formal organisational structure clearly defines superior subordinate relationship, i.e., who reports to whom.
6. More emphasis on work. Formal organisational structure lays more emphasis on work than interpersonal relations.
## Disadvantages of Formal Organisation
1. Delay in action. While following scalar chain and chain of command actions get delayed in formal structure.
2. Ignores social needs of employees. Formal organisational structure does not give importance to psychological and social need of employees which may lead to demotivation of employees.
3. Emphasis on work only. Formal organisational structure gives importance to work only, it ignores human relations, creativity, talents, etc.
## 5.5.2 Informal Organisation
In the formal organisational structure, individuals are assigned various job positions. While working at those job positions, the individuals interact with each other and develop some social and friendly groups in the organisation. This network of social and friendly groups forms another structure in the organisation which is called informal organisational structure.
The informal organisational structure gets created automatically and the main purpose of such structure is getting psychological satisfaction. The existence of informal structure depends upon the formal structure because people working at different job positions interact with each other to form informal structure and the job positions are created in formal structure. So, if there is no formal structure, there will be no job position, there will be no people working at job positions and there will be no informal structure.
## Features of Informal Organisation
(1) Informal organisational structure gets created automatically without any intended efforts of managers.
(2) Informal organisational structure is formed by the employees to get psychological satisfaction.
(3) Informal organisational structure does not follow any fixed path of flow of authority or communication.
(4) Source of information cannot be known under informal structure as any person can communicate with anyone in the organisation.
(5) The existence of informal organisational structure depends on the formal organisation structure.
## Advantages of Informal Organisation
1. Fast communication. Informal structure does not follow scalar chain so there can be faster spread of communication.
2. Fulfills social needs. Informal communication gives due importance to psychological and social need of employees which motivates the employees.
3. Correct feedback. Through informal structure the top level managers can know the real feedback of employees on various policies and plans.
Strategic Use of Informal Organisation. Informal organisation can be used to get benefits in the formal organisation in the following ways:
1. The knowledge of informal group can be used to gather support of employees and improve their performance.
2. Through grapevine important information can be transmitted quickly.
3. By cooperating with the informal groups the managers can skillfully take the advantage of both formal and informal organisations.
## Disadvantages of Informal Organisation
1. Spread rumours. According to a survey 70% of information spread through informal organisational structure are rumours which may mislead the employees.
2. No systematic working. Informal structure does not form a structure for smooth working of an organisation.
3. May bring negative results. If informal organisation opposes the policies and changes of management, then it becomes very difficult to implement them in organisation.
4. More emphasis to individual interest. Informal structure gives more importance to satisfaction of individual interest as compared to organisational interest.
| S.No. | Basis | Formal | Informal |
| 1. | Formation | Formal organisational structure is formed deliberately in a planned manner. | Informal organisational structure gets created spontaneously without any planning. |
| 2. | Purpose | The purpose of formal organisational structure is to work systematically and achieve the organisational goal. | The purpose of informal structure is to get psychological satisfaction. |
| 3. | Behaviour of members | Under formal organisation structure the behaviour of the employees is decided by the managers. | In informal organisation structure there is no control of the management over the behaviour of members. But if the behaviour of informal group is bringing negative results then the management may interfere. |
| 4. | Structure | Under formal organisation there is well defined organisational structure which decides the scalar chain and defines superior-subordinate relationship. | In case of informal, there is no well defined structure, no fixed superior or subordinate and no scalar chain. |
| 5. | Communication | Under formal structure all the information passes through scalar chain and the managers prefer written channels for communication. | Under informal structure there is no fixed path of passing of information. Information can travel from any side. Mostly oral communication takes place. |
| 6. | Leadership | In formal organisation structure there is direct relation between the authority and leadership. The person with highest authority is considered as the leader. Generally the managers act as leaders. | Under informal structure there is no relationship between the authority and leadership. The person with the lowest authority also can be a leader. |
| 7. | Stability or duration | The formal organisation structure is more stable and durable (lasts for a long period of time) because once the organisational structure is made, it exists till survival of organisation. | Informal organisation structure is not very stable because employees can change their friendly and social group whenever they desire. |
| 8. | Rules and Regulations | Under formal organisation structure the employees strictly have to follow the rules and regulations and in case they are not following the rules and regulations there will be penalty on them. | There are no rules or regulations for the members of informal organisation and if they are not following also there is no penalty. |
| 9. | Inter-dependence | The formal structure is an independent structure which can exist systematically after the organising process is over. | Informal structure depends upon formal organisation structure. |
| 10. | Flow of authority | Authority flows from top to bottom. | Authority can flow in all the directions. |
## Difference between Formal and Informal Organisation
## Keywords
## Formal Organisation
(a) Official organisation
(b) Follows scalar chain for communication
(c) Main purpose is achieving organisational goal
(d) Include functional and divisional structure
(e) Created intentionally by managers
## Informal Organisation
(a) Gets created automatically
(b) For psychological satisfaction and social needs of employees
(c) Does not follow scalar chain
(d) Include all recreational activities
(e) Cut across official lines of communication
## MCQs and Case Studies
1. The form of organisation known for giving rise to rumours is called
(a) Centralised orgainsation (b) Decentralise organisation
(c) Formal organisation (d) Informal organisation
2. Name the type of organisation which is deliberately design by top management to achieve a common organisational objective.
(a) Informal organisation (b) Corporate organisation
(c) Formal organisation (d) Divisional organisation
3. A company is manufacturing washing machines. There is a well-defined system of jobs with a clear and definite authority, responsibility and accountability in the company. But people are not allowed to interact beyond their officially defined roles. As a result, the company is not able to adapt to the changing business environment. The workforce is also not motivated due to lack of social interaction. The company is facing problems of procedural delays and inadequate recognition to creative talents.
(i) Suggest how the organisation can overcome the problems faced by it.
(ii) Give any two benefits it will derive from your suggestion.
(Answers at Page no. 243-244)
## 5.6 DELEGATION OF AUTHORITY
In every organisation, managers are assigned lot of work and manager alone cannot perform all the work. He divides the work among different individuals working under him according to their qualification and get the work done from them. The manager begins with sharing of his responsibilities with his subordinates. He deliberately passes some of his responsibilities to his subordinates. After passing the responsibilities the manager also shares some of his authority, i.e., power to make decision with his subordinates so that the responsibilities can be carried on properly. To make sure that his subordinates perform all the work effectively and efficiently in the expected manner the manager creates accountability and this whole process is known as delegation. So delegation can be defined as:
"A process of entrusting responsibility and authority to the subordinates and creating accountability on those employees who are entrusted responsibility and authority."
In simple words delegation refers to downward transfer of authority from superior to subordinate.
No delegation leads to overburden on Manager
## 5.6.1 Principle of Absoluteness of Accountability
Delegation is a very important process to carry on the work systematically in the organisation. But delegation is not a process of abdication which means accountability is absolute. It can never be passed or delegated. After creating accountability on subordinates, the superiors also remain accountable. For example, if the sales manager is assigned a target of selling 1,000 units in one month, he divided this target among the five salesmen working under him. One of the salesmen fell sick. So, at the end of one month only 800 units could be sold. In such a situation, the accountability lies with the manager although he has delegated or passed this target to his subordinates. But by passing or delegating the responsibilities, he cannot get rid of accountability. He should have checked in between and supervised from time to time whether the work is going in right direction or not and taken timely action.
## 5.6.2 Elements of Delegation/Process of Delegation
## There are three elements of delegation:
1. Responsibility,
2. Authority,
3. Accountability.
1. Responsibility. Responsibility means the work assigned to an individual. It includes all the physical and mental activities to be performed by the employees at a particular job position. The process of delegation begins when manager passes on some of his responsibilities to his subordinates which means responsibility can be delegated.
## Features of Responsibility:
1. Responsibility is the obligation of a subordinate to properly perform the assigned duty.
2. It arises from superior subordinate relationship because subordinate is bound to perform the duty assigned by his superior.
3. Responsibility flows upward because subordinate will always be responsible to his superior.
2. Authority. Authority means power to take decision. To carry on the responsibilities, every employee need to have some authority. So, when managers are passing their responsibilities to the subordinates, they also pass some of the authority to the subordinates. The delegating authority is the second step of organising process. While sharing the authority, managers keep in mind that the authority matching to the responsibility should only be delegated. They shall not pass all their authority to their subordinates.
## Features of Authority:
1. In a formal organisation authority arise or originate from an individual's position.
2. Authority refers to right to take decision due to your managerial position.
3. Authority determines superior subordinate relationship. As subordinate communicates his decisions to subordinate expecting compliance from him as per his directions.
4. Authority is restricted by law and rules and regulations of the organisation.
5. Authority arises from the scalar chain which links various job positions.
6. Authority flows downward from superior to subordinate.
7. Authority must be equal to responsibility, i.e.,
## Authority = Responsibility
3. Accountability. To make sure that the employees or subordinates perform their responsibilities in their expected manner, the accountability is created. Accountability means subordinates will be answerable for the non-completion of the task; creating accountability is the third and final step of delegation process. The accountability cannot be passed or delegated. It can only be shared with the subordinates which means even after delegating responsibility and authority the managers will be accountable for non-completion of task.
If the production manager is given the target of producing 20 machines in one month's time and he divided this target between four foremen working under him, i.e., 5 machines to be produced by each foreman but one foreman could not achieve the target and at the end of the month only 17 machines are manufactured, then production manager will be held accountable for non-completion of target as accountability cannot be transferred or shared: it is an absolute term.
Creation of accountability for performance
## Features of Accountability:
1. Accountability refers to answerable for the final output.
2. It cannot be delegated or passed.
3. It enforced through regular feedback on the extent of work accomplished.
4. If flows upward, i.e., subordinate will be accountable to his superior.
Difference between Responsibility and Accountability
| S.No. | Point of difference | Delegation | Decentralisation |
| 1. | Scope/Parties involved | Delegation is limited in scope because in delegation only two parties are involved. It is confined to manager and his immediate subordinates. | Decentralisation is large or wide in scope because in decentralisation employees working at different levels are involved which means almost all the employees in the organisation are involved in the process of decentralisation. It means pushing down the authority at every marginal level. |
| 2. | Significance status | Delegation is important function but it is the routine function of the managers. Almost everyday managers share their authority and responsibilities with the subordinates. | Decentralisation is more significant because it is a one time decision and it is a policy matter. The top level executives decide whether to follow the decentralised or centralised policy. And once the decision is taken it is very difficult to change the decision. |
| 3. | Freedom of action | In the process of delegation the managers pass the authority and the responsibilities to the subordinates and after that also there is constant and continuous supervision by the managers to keep a check how subordinates are performing their activities. | In decentralisation there is more freedom of action because once the authority is distributed systematically there will be periodic appraisal and not the continuous supervision. |
| 4. | Scope | It is narrow in scope. | It is wide in scope. |
| 5. | Responsibility | It is the responsibility of every manager. | It is the responsibility of top level manager. |
| 6. | Nature/Essential | Delegation is compulsory act because no individual can perform all the tasks on his own. | Decentralisation is an optional policy. |
| 7. | Purpose | To reduce the burden of manager. | To increase the role of subordinates and giving them more autonomy. |
| 8. | Grant of authority | Authority is granted by immediate superior. | Authority is granted by top level. |
Difference between Centralisation and Decentralisation
| S. No. | Point of difference | Internal recruitment | External recruitment |
| 1. | Meaning | Internal recruitment means making use of existing staff to fill up the vacant job positions in the organisation. | External recruitment means making use of new personnel or outsiders to fill up the vacant job positions in the organisation. |
| 2. | Time | It is less time-consuming. | It is more time consuming. |
| 3. | Economy | This process is more economical as it does not involve any cost of searching external sources. | This process is costly as vacancies have to be notified in newspapers, magazines, etc. |
| 4. | Quality | There is a limited choice so better quality may not be assumed. | It provides a wider choice and the best quality is assumed. |
| 5. | Morale of the employees | This method boosts up the morale of the employees because existing staff gets chance of promotion. | This method brings down the morale of the employees as they do not get chance of growth and development. |
## Keywords
## Recruitment
(i) Searching for prospective candidates
(ii) Inviting applications
(iii) Inducing people to apply for job
(iv) Positive process
## Case Studies
| S.No. | Point of difference | Training | Development |
| 1. | Concept/depth of knowledge | Training is concerned with teaching technical skill only. | Development is concerned in teaching technical, human and conceptual skill. |
| 2. | Suitability | Training is more suitable for technical staff. | Development is more suitable for managerial staff. |
| 3. | Nature | Training concentrates on developing the skill already possessed by the employees. | Development concentrates on development of hidden qualities of the employees. |
| 4. | Methods used | In training on-the-job methods of training are preferred. | In development off the job methods of training are preferred. |
| 5. | Focus/purpose | Training focuses on present requirements of the organisation. | Development focuses on present as well as future requirements of the organisation. |
| 6. | Time | It is a short term process. | It is a long term process. |
| 7. | Initiative | The boss/superior takes initiatives for imparting training to his subordinates. | The individual takes initiatives himself for his growth and development. |
| 8. | Duration | Training is short term process, its duration is fixed and certain. | It is a never ending procedures, its duration is never defined. |
| 9. | Levels of trainees involved | It is useful for non-managerial, i.e., operative employees or lower level of managers. | It is useful for managerial personnel, i.e., middle and top level managers. |
| 10. | Centered | It is work centered. | It is person-centered. |
Another concept related with training and development is education.
Difference between Training, Development and Education
| S.No. | Point of Difference | Authoritative Style | Democratic Style | Laissez Faire Style |
| 1. | Decision-making | Leader only makes decision | Leader makes decision in consultation with subordinates | Subordinates themselves make decisions |
| 2. | Communication | One way, i.e., downward communication | Two way communication | Free flow communication |
| 3. | Motivation Technique | Fear and punishment (Negative motivation) | Reward and involvement (Positive motivation) | Self-direction and self-control |
| 4. | Delegation of Authority | No Delegation | Delegation of authority to some extent | Complete delegation of authority |
| 5. | Focus | Leader control | Group centered | Individual centered |
| 6. | Role of Leader | Provides Direction | Maintains team work | Provides support and resources |
| 7. | Growth and Development of Employees | No scope for initiative and creativity ‘I’ Style | Scope for initiative and creativity “We Style” | Full scope for initiative and style “You Style” |
| 8. | Discipline | Obedience of order and discipline | Interchange of ideas | Self-discipline or control |
## EXAMPLES
1. Mr. Rajiv, CEO of headlines India Ltd. distributes work for the month and he personally delegates the work to his staff as per his directions. (He is behaving like an autocratic leader).
2. Due to festival season, company gets an additional order to cover up the order. Mr. Rajiv discusses with his staff members how to meet the pending orders. All the staff members decided to do overtime and planned to stay back. (This is democratic leadership style).
3. The Boss asked his staff members to organize a farewell party for the Retiring officer. He asked them to fix the venue and menu themselves for the occasion.
(This is free-rein or laissez faire style of leadership).
## Keywords
Leadership
(i) Influencing the behaviour of others
(ii) Maintain good interpersonal relationship
(iii) Influence employees to voluntarily perform, working with cooperation and coordination
Leadership Style
(i) Autocratic/Authoritative—Dictator
No suggestions taken, placing orders only
(ii) Democratic—
Taking suggestions from employees
Two way
Keep initiative level of employee high
(iii) Free rein—
Complete freedom to employees
No interference of superior in taking decision by subordinates
## MCQs and Case Studies
1. Which style of leadership does not believe in use of power, unless it is absolutely essential.
(a) Autocratic Leadership (b) Democratic Leadership
(c) Laissez Faire Leadership (d) None of the above
2. In an organisation, employees always feel that they are under stress, as the manager does not discuss anything with them but simply instruct them what to do. He never listen to any of the suggestions given by them. State the manager's style of leadership.
(a) Autocratic
(b) Participative
(c) Laissez Faire
(d) All of the above
3. Umang Gupta is the Managing Director of Denver Ltd. The company had established a good name for itself and had been doing well. It was known for timely completion of orders. The Production Manager, Ms. Kanta was efficiently handling the processing of orders and had a team of fourteen motivated employees working under her. Everything was going on well. Unfortunately she met with an accident. Umang knew that in the absence of Ms. Kanta, the company may not be able to meet the deadlines. He also knew that not meeting the deadliness may lead to customer dissatisfaction with the risk of loss of business and goodwill. So, he had a meeting with his employees in which accurate and speedy processing of orders was planned. Everybody agreed to work as team because the behaviour of Umang Gupta was positive towards the employees of the organisation. Hence everyone put in extra time and efforts and the targets were met on time.
Not only this, Umang visited Ms. Kanta and advised her to take sufficient rest.
Identify the leadership style of Umang Gupta and draw a diagram depicting the style.
4. In Manik Ltd., selection process is very fair, scientific and standardised. Competent, laborious employees with good work culture are selected. As a result, subordinates are efficient, responsible and take initiative in every activity. Which kind of leadership style would be suitable in Manik Ltd.
(Answers at Page no. 349)
## 7.8 COMMUNICATION
Communication can be defined as transmission or exchange of ideas, views, message, information or instructions between two or more persons by different means.
The common means and ways for transmission of ideas are:
(a) Spoken words; (b) Written words;
(c) Diagrams, pictures or graphs; and (d) Gestures.
The communication is a two way process as it begins with sender and ends when the feedback comes from receiver to sender. Minimum two parties are involved in the process of communication, i.e., the sender and the receiver.
## 7.8.1 Communication Process/Elements of Communication Process
The communication process begins when sender thinks of an idea or message to be conveyed to other person. Then the sender encodes the message, i.e., plans out the words or the language in which the message must be sent to the other party. After encoding the message the sender transmits or transfers the message by using different ways and means. After transmission the message reaches to receiver. The receiver decodes the message to understand the message and give his response or feedback to the sender. When the feedback reaches back to sender then only the communication process ends which means the communication is a circular process which starts with sender and ends with sender.
1. Sender. Sender is the person who conveys the message. The communication process begins immediately when the idea comes in the mind of sender.
2. Message. The contents of ideas or message or suggestion which sender wants to share with receiver is called message.
3. Encoding. Receiver cannot read the mind of sender. So receiver converts the idea into a language or other communication symbols such as pictures, gestures, etc. This is known as encoding.
4. Media. It is the way or means through which encoded message has to be transmitted to receiver. The common ways of transmission are phone, letter, internet, message, etc.
5. Decoding. Decoding refers to converting the encoded message into language and understanding the message.
6. Receiver. Receiver is the person who receives the communication and understands the message.
7. Feedback. After understanding the message the receiver sends his response on that idea or message to sender. When response reaches the sender then only communication process ends.
Noise. Noise is any element which results in disturbance, distraction or interruption in the flow of information. The noise can be a loud sound made by any vehicle, disturbance in the telephone line, disconnection of line, losing of letter or documents on the way, poor connectivity in the e-mail or internet. Due to noise the message is not conveyed to receiver and receiver is not able to decode the message in the same manner as expected by the sender.
## 7.8.2 Forms of Organisational Communication
There are two forms of organisational communication:
1. Formal communication; and
2. Informal communication.
## 1. Formal Communication
"Formal communication refers to official communication at official peace between the people who are officially related to each other."
Formal communication refers to official communication taking place in the organisation. Whenever there is exchange of views or message or information related to official matter such as assignment of task, fixing of responsibilities, granting authority or setting up of targets, objectives, etc. then it is known as formal communication.
Formal communication generally takes place in the written form such as issue of notice, letter, memo, document, etc. Verbal or oral channels are avoided in formal communication as there is no record or proof of such communication.
## Features of Formal Communication
1. Goal oriented. Formal communication focus on achievement of organisational goal.
2. Systematic. Formal communication is very systematic as it ensure orderly flow of information through scalar chain only.
3. Source of Information. Under formal communication it is easy to fix responsibility as there is proof of information communicated.
4. Impersonal. Under formal communication information is passed in impersonal manner.
5. Delay in Information. As scalar chain is followed in passing of information so generally, information is delayed.
## Types of Communication
## 1. Vertical Communication:
(a) Downward Communication. The flow of information from the top level or from the superiors to lower level or subordinates is known as downward communication. In this communication the manager passes instructions to his subordinates and the success of downward communication depends upon communication skill of the managers.
(b) Upward Communication. When the subordinates inform or pass any information to superiors then it is known as upward communication. This communication flows from subordinates to superiors. Upward communication generally consists of work performance, opinion, grievances or problems of the employees. In the recent years upward communication is gaining more importance because the subordinates prefer to involve themselves in the decision making and they have started demanding a better working condition.
2. Horizontal Communication. Horizontal communication is the communication between the two or more persons working at the same level of authority. Generally different departmental heads discuss the policy of their department with each other. That will be considered as the horizontal communication. Discussion between two managers of same
Subordinates
rank is also a horizontal communication. For example, the marketing manager may discuss from time to time the quality and packing of product with the production manager.
3. Diagonal Communication. Diagonal communication is a flow of information between the persons working in different departments and holding different levels of authority. For example, the salesman may request the production manager to modify the product design according to the requirement of the customer. The diagonal communication prevents delay in flow of information and helps in taking fast decisions as subordinates of one department can directly communicate with the managers of other department.
## 2. Informal Communication
Informal communication between different members of organisation who are not officially attached to each other is known as informal communication. Generally, the social interactions, friendly talks and non-official matters are discussed in the informal communication.
There is no fixed direction or path for the flow of information under informal communication. The information moves in a very vague, confusing and zig-zag manner. That is why the network of informal communication is known as Grape Vine. There is no fixed source of information under informal communication and information can move in any direction.
## Features of Informal Communication
1. Focus on Psychological satisfaction. Through informal communication employees can develop friendly relationship and get social satisfaction.
2. Fast. The information travel very fast as it cut across the scalar chain.
3. Spreading Rumours. Sometimes the informal communication result in spreading rumours as it is not possible to find the source of information.
4. Get Distorted. The information travel in a very unsystematic manner and get distorted, while passing through various channels.
5. Leakage of Confidential Information. The confidential information may get leaked under informal communication as it is not possible to fix the responsibilities.
## Strategic use of Informal Communication:
1. The managers can fill up communication gap if there is any information through informal communication.
2. Informal communication travels very fast. So urgent matters can be communicated informally.
3. The managers can get true and accurate response of subordinates on various policy matters.
4. Informal communication provides emotional relief to employees and results in reducing union and management problems.
Difference between Formal and Informal Communication
| Basis of Difference | Formal Communication | Informal Communication |
| 1. | Meaning | It refers to communication taking place within the official chain of command. | It refers to communication between individuals and groups which are not officially recognised. |
| 2. | Relations | It establishes relation between the subordinates, superiors and relations are highly impersonal. | It establishes personal relationship among individuals irrespective of the levels. |
| 3. | Nature | It is more rigid in nature and cannot be modified. | It is flexible, dynamic and varies from individual to individual. |
| 4. | Channel | It follows formal or established line of command. | It is based on informal relationship and no fixed line of command is followed. |
| 5. | Expression | It is mostly expressed in written form. | It mostly tends to be oral. |
| 6. | Need | It serves the need of organisation. | It serves the need of individuals working in organisation. |
| 7. | Speed | The speed of formal communication is generally slow because all information has to pass through an established chain of command. | The speed of informal communication is very fast as it cuts across all the official channels. |
| 8. | Fixation of Responsibility | It is easy to fix the responsibility in formal communication because source of information is known. | It is not possible to fix the responsibility because source of information is not known. |
| 9. | Record | The records of formal communication are maintained for future reference. | No records of information communication are maintained. |
## MCQs
| Situation-I | Situation-II | Situation-III |
| EBIT(Earning before Interest and Tax)Less: Interest | 7,00,0000 | 7,00,000-1,00,000(10% of 10 lakhs) | 7,00,000-2,00,000(10% of 20 lakhs) |
| EBT(Earning before Tax)Less: Tax (30% of EBT) | 7,00,000-2,10,000(30% of 7 lakhs) | 6,00,000-1,80,000(30% of 6 lakhs) | 5,00,000-1,50,000(30% of 5 lakhs) |
| EAT(Earning after Tax) | 4,90,000 | 4,20,000 | 3,50,000 |
| EPS | 0.98 | 1.05 | 1.16 |
| $\left( \frac{\text{EAT}}{\text{No. of Equity shares}} \right)$ | $\left( \frac{4,90,000}{5,00,000} \right)$ | $\left( \frac{4,20,000}{4,00,000} \right)$ | $\left( \frac{3,50,000}{3,00,000} \right)$ |
If we compare the above table we can see that in situation–III equity shareholders get maximum return followed by situation–II and least earning in situation–I. Hence it is proof that more debt brings more income for owners in the capital structure.
But this statement holds true only till rate of earning of capital, i.e., return
on investment of the company is more than the rate of interest charged on debt. As we can see return on investment in this example
$$
\begin{array}{l} = \frac {\text {EBIT}}{\text {Total investment}} \times 100 = \frac {7 , 0 0 , 0 0 0}{5 0 , 0 0 , 0 0 0} \times 100 \\ = 14 \% \text { which is more than rate of interest.} \end{array}
$$
Return of investment is 14% and rate of interest is 10%
$$
14\% > 10\%, i.e., \text {ROI} > \text {Rate of interest}.
$$
If return on investment is less than the rate of interest then equity shareholders lose by including more debt. Then more of equity is beneficial for owners of company to prove this. Let us take an example where return on investment is less than rate of interest.
## Situation-I.
Total capital
Equity capital
$$
= 5 0, 0 0, 0 0 0
$$
$$
= 5 0, 0 0, 0 0 0 (5, 0 0, 0 0 0 \text { shares } @ ₹ 1 0 \text { each })
$$
Debt
$$
= \text {Nil}
$$
Tax rate
$$
= 30\% \text {p.a.}
$$
Interest rate
$$
= 10 \% \mathrm{p.a.}
$$
Earning before interest and tax
$$
= \text {₹} 3, 0 0, 0 0 0
$$
ROI
$$
= \frac {3 , 0 0 , 0 0 0}{5 0 , 0 0 , 0 0 0} \times 1 0 0 = 6\%
$$
## Situation-II.
Total capital
$$
= 5 0, 0 0, 0 0 0
$$
Equity capital
$$
= 4 0, 0 0, 0 0 0 (4, 0 0, 0 0 0 \text { shares } @ ₹ 1 0 \text { each })
$$
Debt
$$
= 1 0, 0 0, 0 0 0
$$
Tax rate
$$
= 30\% \text {p.a.}
$$
Interest rate
$$
= 10 \% \text {p.a.}
$$
Earning before interest and tax
$$
= \text {₹} 3, 0 0, 0 0 0
$$
ROI
$$
= \frac {3 , 0 0 , 0 0 0}{5 0 , 0 0 , 0 0 0} \times 1 0 0 = 6\%
$$
## Situation-III.
Total capital
Equity capital
$$
= 5 0, 0 0, 0 0 0
$$
$$
= 3 0, 0 0, 0 0 0 (3, 0 0, 0 0 0 \text { shares } @ ₹ 1 0 \text { each })
$$
Debt
$$
= 2 0, 0 0, 0 0 0
$$
Tax rate
$$
= 30\% \text {p.a.}
$$
Interest rate
$$
= 10 \% \text {p.a.}
$$
Earning before interest and tax = ₹ 3,00,000
ROI
$$
= \frac {3 , 0 0 , 0 0 0}{5 0 , 0 0 , 0 0 0} \times 1 0 0 = 6\%
$$
Let us now calculate earning per share in all the situations.
| Situation-I | Situation-II | Situation-III |
| EBIT(Earning before Interest and tax) | 3,00,000 | 3,00,000 | 3,00,000 |
| Less: Interest | 0 | -1,00,000(10% of 10 lakhs) | -2,00,000(10% of 20 lakhs) |
| EBT(Earning before tax)Less: Tax(30% of EBT) | 3,00,000-90,000(30% of 3 lakhs) | 2,00,000-60,000(30% of 2 lakhs) | 1,00,000-30,000(30% of 1 lakh) |
| EAT(Earning after tax) | 2,10,000 | 1,40,000 | 70,000 |
| EPS | 0.42 | 0.35 | 0.23 |
| $\left(\frac{EAT}{No. of Equity shares}\right)$ | $\left[\frac{2,10,000}{5,00,000}\right]$ | $\left[\frac{1,40,000}{4,00,000}\right]$ | $\left[\frac{70,000}{3,00,000}\right]$ |
Hence proved that in case return of investment is less than rate of interest the equity shareholders get less earning when debt is included in the capital structure.
In other words we can say that during boom period we must have more of debt and less of equity shares in capital structure and during depression when income or return is less we should have more of equity and less of debt in the capital structure.
## 9.5.2 Factors Determining the Capital Structure
## The various factors which influence the decision of capital structure are:
1. Cash flow position. The decision related to composition of capital structure also depends upon the ability of business to generate enough cash flow.
The company is under legal obligation to pay a fixed rate of interest to debenture holders, dividend to preference shares and principal and interest amount for loan. Sometimes company makes sufficient profit but it is not able to generate cash inflow for making payments.
The expected cash flow must match with the obligation of making payments because if company fails to make fixed payment it may face insolvency. Before including the debt in capital structure company must analyse properly the liquidity of its working capital.
A company employs more of debt securities in its capital structure if company is sure of generating enough cash inflow whereas if there is shortage of cash then it must employ more of equity in its capital structure as there is no liability of company to pay its equity shareholders.
2. Interest coverage ratio (ICR). It refers to number of time companies earning before interest and taxes (EBIT) cover the interest payment obligation.
$$
\mathrm{ICR} = \frac {\mathrm{EBIT}}{\text {Interest}}
$$
High ICR means companies can have more of borrowed fund securities whereas lower ICR means less borrowed fund securities.
3. Debt service coverage ratio (DSCR). It is one step ahead ICR, i.e., ICR covers the obligation to pay back interest on debt but DSCR takes care of return of interest as well as principal repayment.
$$
\mathrm{DSCR} = \frac {\text {Profit after tax} + \text {Depreciation} + \text {Interest} + \text {Non cash exp. written off}}{\text {Preference Dividend} + \text {Interest} + \text {Repayment obligation}}
$$
If DSCR is high then company can have more debt in capital structure as high DSCR indicates better ability of company to repay its debt but if DSCR is less then company must avoid debt and depend upon equity capital only.
4. Return on investment. Return on investment is another crucial factor which helps in deciding the capital structure. If return on investment is more than rate of interest then company must prefer debt in its capital structure whereas if return on investment is less than rate of interest to be paid on debt, then company should avoid debt and rely on equity capital. This point is explained earlier also in financial gearing by giving examples.
5. Cost of debt. If firm can arrange borrowed fund at low rate of interest then it will prefer more of debt as compared to equity.
6. Tax rate. High tax rate makes debt cheaper as interest paid to debt security holders is subtracted from income before calculating tax whereas companies have to pay tax on dividend paid to shareholders. So high end tax rate means prefer debt whereas at low tax rate we can prefer equity in capital structure.
7. Cost of equity. Another factor which helps in deciding capital structure is cost of equity. Owners or equity shareholders expect a return on their investment i.e., earning per share. As far as debt is increasing earning per share (EPS), then we can include it in capital structure but
when EPS starts decreasing with inclusion of debt then we must depend upon equity share capital only.
8. Floatation costs. Floatation cost is the cost involved in the issue of shares or debentures. These costs include the cost of advertisement, underwriting statutory fees etc. Issue of shares, debentures requires more formalities as well as more floatation cost. Whereas there is less cost involved in raising capital by loans or advances.
9. Risk consideration. Financial risk refers to a position when a company is unable to meet its fixed financial charges such as interest, preference dividend, payment to creditors etc. If firm's business risk is low then it can raise more capital by issue of debt securities whereas at the time of high business risk it should depend upon equity.
10. Flexibility. Excess of debt may restrict the firm's capacity to borrow further. To maintain flexibility it must maintain some borrowing power to take care of unforeseen circumstances.
11. Control. The equity shareholders are considered as the owners of the company and they have complete control over the company.
If existing shareholders want complete control then they should prefer debt, loans of small amount, etc. If they don't mind sharing the control then they may go for equity shares also.
12. Regulatory framework. Issue of shares and debentures have to be done within the SEBI guidelines and for taking loans. Companies have to follow the regulations of monetary policies. If SEBI guidelines are easy then companies may prefer issue of securities for additional capital whereas if monetary policies are more flexible then they may go for more of loans.
13. Stock market condition. There are two main conditions of market, i.e., Boom condition and Recession or Depression condition. These conditions affect the capital structure specially when company is planning to raise additional capital. Depending upon the market condition the investors may be more careful in their dealings.
During depression period in the market business is slow and investors also hesitate to take risk so at this time it is advisable to issue borrowed fund securities as these are less risky and ensure fixed repayment and regular payment of interest but if there is Boom period, business is flourishing and investors also take risk and prefer to invest in equity shares to earn more in the form of dividend.
14. Capital structure of other companies. Some companies frame their capital structure according to Industrial norms. But proper care must be taken as blindly following Industrial norms may lead to financial risk. If firm cannot afford high risk it should not raise more debt only because other firms are raising.
## Keywords
(i) Ratio of Debt and Equity in Total Capital.
(ii) Issue of additional equity shares to raise more funds will effect capital structure.
(iii) Issue of additional debentures or taking more loans will effect the capital structure.
## MCQs and Case Studies
| Name of the factor | Requirement of More working capital | Requirement of Less working capital |
| Nature of business | Manufacturing concern because of processing work. | Trading concern because of no production. |
| Scale of operation | Large scale operation because of huge inventory. | Small scale operations because of small inventories. |
| Business cycle | During boom period because of more production. | During depression period because of less production. |
| Seasonal factors | Peak season because of more demand. | Lean season, because of low demand. |
| Credit allowed to customers | Sales on ‘credit basis’ | Sales on ‘cash basis’ |
| Credit availed from suppliers. | Purchase on ‘cash basis’ | Purchase on ‘credit basis’ |
| Inflation Vs Deflation | During inflation, due to high price level for raw material, wages, etc. | During deflation, due to low price level. |
| Operating cycle/Turnover of working capital. It is the time period from purchase of raw material to realisation from debtors. | Long Operating Cycle | Short operating cycle. |
| Availability of raw material | Higher lead time to acquire raw material, so higher stock of raw material would be needed. | Lower lead time, so less stock of raw material would be needed. |
| Growth prospects | High growth prospects. | Low growth prospects. |
| Level of competition | High competition would require high amount of stock keeping. | Low competition would require less amount of stock keeping. |
| Productive cycle | Long production cycle. | Short production cycle |
## Keywords
(i) Amount invested for one financial year.
(ii) Total value of current assets represent gross working capital.
(iii) Difference between value of current assets and current liabilities represent net working capital.
(iv) Amount invested in inventory, cash, receivables, debtors, bank, etc.
## MCQs and Case Studies
1. Longer the operating and production cycle \_\_\_\_ is the requirement of working capital.
(a) More
(b) Less
(c) No effect of operating cycle on working capital
(d) None of the above
2. Megha is planning to enter in the business of Herbal Shampoo in the beginning she was thinking there are very few companies making herbal shampoo, but when she started selling her product she realised that many companies are already in the business of selling herbal shampoo.
Identify the factor affecting working capital in the above para.
(a) Growth prospects (b) Nature of business
(c) Level of competition (d) Business cycle fluctuation
3. A businessman who wants to start a manufacturing concern, approaches you to suggest him whether the following manufacturing concern would require large or small working capital:
(a) Bread
(b) Coolers
(c) Sugar
(d) Motor car
(e) Furniture manufactured against specific orders
(f) Locomotives
(Answers at Page no. 429)
## Quick Revision
Meaning. Financial management is concerned with efficient acquisition and allocation of funds. In other words, financial management means estimating the required fund, arranging the required fund, utilising the required fund in the most productive manner and distributing the surplus generated by investment in the best possible way.
Objectives of Financial Management. The objective of financial management is to maximise the wealth of shareholders that means maximising the wealth of owners by investing the funds in most suitable investment proposal.
Finance Functions/Decisions. Three important functions/decisions of finance manager are:
1. Investment decision. This relates to the careful selection of assets in which funds will be invested by the firm.
2. Financing decision. This relates to composition of various securities in the capital structure of the company.
3. Dividend decision. This relates to distribution of profit earned. The major alternatives are to retain the earnings or to distribute to the shareholders.
Investment decision (Capital Budgeting Decision):
1. Cash flow of the project
2. Return on Investment
3. Risk involved
4. Investment criteria
Importance of capital budgeting decisions. The investment or budgeting decisions are important because of following reasons:
1. Long-term growth
3. Risk involved
2. Large amount of funds involved
4. Irreversible decision
Factors affecting financing decisions
1. Cost
2. Risk
3. Cash flow position
4. Control considerations
5. Floatation cost
6. Fixed operating cost
7. State of capital market.
Factors affecting dividend decision
1. Earning
2. Stability of earnings
3. Cash flow position
4. Growth opportunities
5. Stability of dividend
6. Preference of shareholders
7. Taxation policy
8. Access to capital market consideration
9. Legal restrictions
10. Contractual constraints
11. Sock market reaction.
Financial Planning. Financial planning means deciding how much to spend and on what to spend. The two main activities of financial planning are:
Objectives of Financial Planning
1. To ensure availability of funds whenever these are required.
2. To see that firm does not raise resources unnecessarily.
## Importance of Financial Planning
1. It facilitates collection of optimum funds.
2. It helps in fixing the most appropriate capital structure.
3. Helps in investing finance in right projects.
4. Helps in operational activities.
5. Base for financial control.
6. Helps in proper utilisation of finance.
7. Helps in avoiding business shocks and surprises.
8. Link between investment and financing decisions.
9. Helps in coordination.
10. It links present with future.
## Capital Structure. Meaning. It refers to proportion of debt and equity used for financing the operations of business:
## Factors determining the capital structure:
1. Cash flow position
2. Interest Coverage Ratio (ICR)
3. Debt Service Coverage Ratio (DSCR)
4. Return on Investment (Rol)
5. Cost of debt
6. Tax rate
7. Cost of equity
8. Floatation costs
9. Risk consideration
10. Flexibility
11. Control
12. Regulatory framework
13. Stock market condition
14. Capital structure of other companies
## Fixed and working (capital). It means allocation of firm's capital to different projects or assets with long term implications.
## Factors affecting requirement of fixed capital
1. Nature of business
2. Scale of operation
3. Technique of production
4. Technology upgradation
5. Growth prospects
6. Diversification
7. Availability of finance
8. Level of collaboration.
## ■ Working Capital. There are two concepts of working capital:
1. Gross working capital
2. Net working capital.
## Factors affecting requirement of working capital:
1. Length of operating cycle
2. Nature of business
3. Scale of operation
4. Business cycle fluctuation
5. Seasonal factors
6. Technology and production cycle
7. Credit allowed
8. Credit avail
9. Operating efficiency
10. Availability of raw materials
11. Level of competition
12. Inflation
13. Growth prospects.
## Objective Type Questions
## Multiple Choice Questions
1. The main objective of financial management is
(a) Profit Maximisation (b) Wealth Maximisation
(c) Ensuring availability of finance (d) None of the above
2. Investment decision is also called
(a) Capital Budgeting decision (b) Working capital decision
(c) Current Assets decision (d) None of the above
3. Capital Structure indicates ratio between
(a) Assets and liabilities of the firm (b) Current Assets and Fixed Assets
(c) Debt and equity in the total capital (d) Profit and Revenue of the firm
4. If fixed operating cost is high, a firm should prefer
(a) Debt
(b) Equity
(c) Both (a) and (b)
(d) None of the above
5. The decision related to acquiring funds from debt or equity is called
(a) Investment decision
(b) Financing decision
(c) Dividend decision
(d) All of the above
6. The decision related to distribution of residual profit is called
(a) Investment decision (b) Financing decision
(c) Dividend decision (d) None of the above
7. If a firm has growth opportunities, it should prefer giving
(a) Low dividend (b) High dividend
(c) Does not effect dividend decision (d) None of the above
8. If large number of shareholders of the firm are from middle income group and old age group who prefer regular income, then the firm should prefer giving
(a) Low dividend
(b) High dividend
(c) No dividend
(d) None of the above
9. The concept which makes sure the availability of right amount of finance at the right time is called
(a) Financial Planning (b) Capital Structure
(c) Working Capital (d) Fixed Capital
10. Financial Planning links
(a) Investment and dividend decision (b) Investment and financing decision
(c) Dividend and financing decision (d) None of the above
11. If ICR is high, firm prefers
(a) Debt
(b) Equity
(c) Both (a) and (b)
(d) None of the above
12. The amount of fixed assets is decided by
(a) Working capital concept (b) Fixed capital
(c) Investment decision (d) Financing decision
13. The amount of current assets is decided by
(a) Working capital concept (b) Fixed capital
(c) Investment decision (d) Financing decision
14. Positive leverage effect brings
(a) Gain for equity shareholders (b) Loss for equity shareholders
(c) Both (a) and (b) (d) None of the above
15. If return on investment is less than the rate of interest, then company must prefer
(a) Equity
(b) Debt
(c) Both (a) and (b)
(d) None of the above
16. What is the cost of raising funds called?
(a) Flotation Cost (b) Marginal Cost
(c) Fixed Cost (d) Variable Cost
17. Gross working capital refers to:
(a) Investment in Fixed Assets (b) Investment in Current Assets
(c) Investment in Bank (d) All of the above
18. Stock market condition is a factor related to
(a) Financing decision (b) Dividend decision
(c) Investment decision (d) Financial planning
19. Retained earnings are affected by
(a) Financing decision (b) Investment decision
(c) Dividend decision (d) Capital structure
20. What is related to debt
(a) Higher cost higher risk
(b) Lower cost higher risk
(c) High cost low risk
(d) Low cost low risk
(Answers at Page no. 430)
## Fill in the Blanks
1. ensures availability of finance, whenever required.
2. Capital budgeting or investment decision helps in deciding the of fixed assets.
3. Financing decision helps in deciding of capital.
4. Dividend decision helps in appropriate allocation of
5. During negative leverage effect, firm prefers
6. Positive leverage effect is for equity shareholders.
7. Service providers require working capital.
8. Manufacturer requires working capital.
9. If firm has liberal credit policy, it will require working capital.
10. If firm has long operating and production cycle, it will require \_\_\_\_ working capital.
(Answers at Page no. 430)
## True or False
1. Financial management and financial planning are synonyms of each other. (True/False)
2. If tax rate is high, firms prefer to give high dividend.
(True/False)
3. Firms can avoid Floatation Cost by raising funds through loan. (True/False)
4. Firms having stable earnings prefer to give less dividend. (True/False)
5. Easy access to capital market allows firms to give more dividend. (True/False)
6. Investment in current assets for longer duration is called fixed capital (True/False)
7. If a company follows labour intensive technique in production, they will go for less requirement of fixed capital.
(True/False)
8. Capital structure means the portion of current assets and current liabilities. (True/False)
9. A company employs more of debt securities in its capital structure if company is sure of generating enough cash inflows.
(True/False)
10. If debt service coverage ratio is high then company can have more debt in capital structure.
(True/False)
## Remembering and Understanding-based Questions with Answers
Q. 1. State the objective of financial management.
Ans. The objective of financial management is "maximisation of wealth of equity shareholders".
Q. 2. Enumerate three important decisions taken in financial management.
Ans. The three decisions taken by financial management are:
(i) Investment decision, (ii) Financial decision,
(iii) Dividend decision.
Q. 3. State steps involved in financial planning.
Ans. Steps involved in financial planning are:
(i) Estimating the capital required. (ii) Determining the form of securities.
(iii) Determining the right investment proposal.
## Q. 4. What is the link between operating cycle and working capital?
Ans. Longer the operating cycle, more is the requirement of working capital. Shorter the working capital less is the requirement of working capital.
Q. 5. Why is dividend decision called residual decision?
Ans. Dividend Decision is considered as residual decision with distribution of left over surplus profit, i.e., how much to be kept aside as retained earning and how much to be distributed in the form of dividend.
Q. 6. How is interest coverage ratio computed?
Ans. ICR = $\frac{EBIT (Earning before Interest and Taxes)}{Interest}$ .
Q. 7. How is return on investment computed?
Ans. ROI = $\frac{EBIT}{Total Investment}$ .
Q. 8. What is meant by gross working capital and net working capital?
Ans. Gross working capital refers to aggregate value of current assets. Net working capital refers to excess of current assets over current liabilities.
Net working capital = C.A. - C.L.
Q. 9. How do growth opportunities affect Dividend Decision?
Ans. More growth opportunities means less dividend to be declared and more retained earnings should be maintained.
Q. 10. How does control of existing shareholders affect financing decisions?
Ans. If existing shareholders do not want to lose the control then more of borrowed fund securities should be issued.
Q. 11. What is financial risk?
Ans. The risk of default on payment is known as financial risk.
Q. 12. What is the other name of a long term investment decision?
Ans. Capital budgeting.
Q. 13. Give two factors affecting financing decision.
Ans. (i) Risk, (ii) Returns.
Q. 14. Give two factors affecting dividend decision.
Ans. (i) Earnings, (ii) Stability of learnings.
Q. 15. Give two factors affecting investment decision.
Ans. (i) ROI, (ii) Risk.
Q. 16. There are three important decisions which an organisation has to take in respect of financial management. Enumerate and explain in brief these three decisions.
Ans. Every finance manager has to take three important decisions in an organisation, these are:
(i) Investment decision
(ii) Financing decision
(iii) Dividend decision.
[For detailed description refer to page nos. 381-386]
Q. 17. How do loan components or debentures in the capital structure act as lever to raise the return on equity share capital?
Ans. The fixed cost securities such as loan or preference shares or debentures act as lever to raise the return on equity share. This can be proved by following example:
[Financial leverage with table refers to page nos. 391-392]
Q. 18. The directors of a manufacturing company are thinking of issuing ₹20 lacs additional debentures for expansion of their production capacity. This will lead to an increase in debt-equity ratio from 2 : 1 to 3 : 1. What are the risks involved in it? What factors other than risk do you think the directors should keep in view before taking the decision?
Ans. The increase in debt equity ratio from 2 : 1 to 3 : 1 is subject to following risks:
(a) Interest on debt has to be paid even when the company is not making sufficient profits.
(b) The debenture holders have charge over the assets of the company, so there is threat of insolvency.
Apart from risk, the directors must keep in mind the following factors before taking this decision: Explain factors kept in mind while deciding the capital structure of a company, refer to page no. 394-396.
Q. 19. You are the finance manager of a company. The board of directors has asked you to determine the working capital requirement for the company. State the factors that you would take in consideration while determining the requirement of working capital for the company.
Ans. Refer to factors kept in mind while deciding working capital of a company, refer to page nos. 400-402.
## HOTS (Higher Order Thinking Skills) and Case Studies
Q. 1. Tata International Ltd. earned a net profit of ₹50 crores. Ankit, the finance manager of Tata International Ltd. wants to decide how to appropriate these profits. Identify the decision that Ankit will have to take and also discuss any five factors which help him in taking this decision.
[CBSE Sample Paper 2014]
Ans. Dividend decision
Factors affecting dividend decision: (any five)
(i) Amount of earnings (ii) Stability of earnings
(iii) Stability of dividend (iv) Growth opportunities
(v) Cash flow position (vi) Shareholders preference
(vii) Taxation policy (viii) Stock market reaction
(ix) Access to capital market (x) Legal constraints
(xi) Contractual constraints.
## Q. 2. How do rising prices affect the requirement of working capital of an organisation?
[CBSE Sample Paper 2015]
Ans. With rising prices larger amounts are required to maintain a constant volume of production and sales. Thus working capital requirement of a business will be high.
Q. 3. Shalini, after acquiring a degree in Hotel Management and Business Administration took over her family food processing company of manufacturing pickles, jams and squashes. The business was established by her great grandmother and was doing reasonably well. However the fixed operating costs of the business were high and the cash flow position was weak. She wanted to undertake modernisation of the existing business to introduce the latest manufacturing processes and diversify into the market of chocolates and candies. She was very enthusiastic and approached a finance consultant, who told her that approximately ₹ 50 lakh would be required for undertaking the modernization and expansion programme. He also informed her that the stock market was going through a bullish phase.
(a) Keeping the above considerations in mind, name the source of finance Shalini should not choose for financing the modernization and expansion of her food processing business. Give one reason in support of your answer.
(b) Explain any two other factors, apart from those stated in the above situation, which Shalini should keep in mind while taking this decision. [CBSE Sample Paper 2015]
## Ans. (a) Debt
## Reason: (Any one)
1. Due to weak cash flow position, the firm may not be able to honour fixed cash payment obligations.
2. Increased fixed operating cost will increase the business risk, therefore debt should not be issued as it further increases the financial risk.
3. The stock market condition being bullish, the investors will prefer to buy equity shares.
(b) Other factors which Shalini would keep in mind are: (any two)
\- Return on Investment
Tax Rate
Cost of Equity
\- Floatation Costs
• Flexibility
Control Consideration
Regulatory Framework
• Capital Structure of other companies.
\- Debt Service Coverage Ratio
\- Interest Coverage Ratio
Cost of Debt
Q. 4. 'A business that doesn't grow dies', says Mr Shah, the owner of Shah Marble Ltd. with glorious 36 months of its grand success having a capital base of ₹ 80 crores. Within a short span of time, the company could generate cash flow which not only covered fixed cash payment obligations but also create sufficient buffer. The company is on the growth path and a new breed of consumers is eager to buy the Italian marble sold by Shah Marble Ltd.
To meet the increasing demand, Mr Shah decided to expand his business by acquiring a mine. This required an investment of ₹120 crores. To seek advice in this matter, he called his financial advisor Mr Seth who advised him about the judicious mix of equity (40%) and Debt (60%). Mr Seth also suggested him to take loan from a financial institution as the cost of raising funds from financial institutions is low. Though this will increase the financial risk but will also raise the return to equity shareholders. He also apprised him that issue of debt will not dilute the control of equity shareholders. At the same time, the interest on loan is a tax deductible expense for computation of tax liability.
After due deliberations with Mr Seth, Mr Shah decided to raise funds from a financial institution.
(a) Identify and explain the concept of Financial Management as advised by Mr Seth in the above situation.
(b) State the four factors affecting the concept as identified in part (a) above which have been discussed between Mr Shah and Mr Seth. [CBSE Sample Paper 2016]
Ans. (a) Capital structure
(b) (1) Cash flow position (2) Floatation cost
(3) Risk consideration (4) Tax rate
(5) Control
Q. 5. Avik is the finance manager of Mars Ltd. In the current year, the company earned high profit. However, Avik thinks that it is better to declare smaller dividend as he is unsure about the earning potential of the company in the coming years.
Avik's choice of dividend decision is based on which of the factor that affect it?
Ans. Stability of Dividend.
Q. 6. When is financial leverage favourable?
[CBSE Sample Paper 2016]
Ans. When ROI is higher than cost of Debt.
Q. 7. HCL Company's finance manager has decided to retain its entire profit to meet financial requirement for its growth. Name the type of decision involved.
Ans. Dividend.
Q. 8. Tata sons has debt equity ratio of 4:1 and Bajaj has 1:1 debt equity ratio. Name the advantage, Tata sons may have over Bajaj.
Ans. Trading on equity.
Q. 9. Dabur India has decided to increase credit limit and duration of credit to its customers to boost its sales. Name the type of decision involved.
Ans. Working capital.
Q. 10. Bharti Ltd. is a leading mobile company. It is planning to acquire Queen Ltd's (its close competitor) business worth ₹1,000 crore. Which financial decision is involved in it? Explain it.
Ans. Investment.
Q. 11. Chandra Ltd. is a manufacturer of Laptops. It made a profit of 1000 crores. The director have proposed a dividend of 38%. As a finance manager of the company, what factors would you consider while formulating a dividend policy of the company?
Ans. Refer to Page nos. 384-385.
Q. 12. Pankaj is engaged in Warehousing Business. Identify the working capital requirements of Pankaj stating the reason in support of your answer. Pankaj is also planning to start his Transport business.
Explain any two factors that will affect his fixed capital requirements.
Ans. Less Working Capital.
Q. 13. Name the factor due to which a petro chemical company requires much higher investment in fixed capital than an information technology company. However both may generate same amount of revenue. Explain any two factors affecting fixed capital requirement.
Ans. Nature of business.
Q. 14. "Ranbaxy Ltd. has been earning handsome profits since last 15 years. Company enjoy fair goodwill in the market, so company can easily arrange debt as well equity from the market, whenever needed. Therefore company decided to declare dividend with a hike of 15% from last year."
Which two components affecting dividend decision have been highlighted in the above paragraph.
Ans. (i) Stability of earning. (ii) Access to capital markets.
Q. 15. "During annual general meeting of Prakash Ltd. CEO, Mr. Rajnesh put the expansion plan for the coming year before shareholders and asked for suitable source of finance to finance manager. Finance manager Mr. Kant proposed issue of debentures than equity with a plan that they can be paid back whenever requirement of funds is over." In the above paragraph, which component affecting financing decision has been highlighted? Explain the component.
Ans. Flexibility.
Q. 16. How does 'Trading on Equity' affect the Capital structure of a company? Explain with the help of a suitable example.
Ans. Refer to Page nos. 391-392.
Q. 17. "Tax benefits is available only in case of payment of interest and not on the payment of preference dividend." Why?
Ans. Interest is an expense while dividend is an appropriation.
Q. 18. 'REI Agro Food Ltd. is a famous multinational company. Mr. S.K. Nagi is its finance manager. He is making efforts to increase the market value of capital invested by the equity shareholders. He already knew it could be possible only when price of the shares increases and price of shares increase only if financing, investment and dividend decisions are taken optimally. He did the same and achieved success.
Which objective of financial management has been referred here? Explain.
Ans. Maximising the wealth of equity shareholders.
Q. 19. Jai Bharat Company Ltd. is an auto part supplier company in Guru Gram, Haryana. Its business is spread over several cities. The CEO of company wants to open a factory in Gujarat near Tata Motors Ltd. but due to recession for the last two years, its business is facing slow down. Company needs capital. Rakesh Gupta is CA and financial advisor of the company. He opines that during recession profit falls and investors prefer to invest in debentures to earn fixed income. Therefore, the company should issue debentures.
In this paragraph, which factor affecting financing decision has been highlighted? Explain state of capital market.
Ans. State of capital market.
Q. 20. Canara Bank wants to open a new branch of his bank. What is this decision called?
Ans. This decision is considered as investment decision.
Q. 21. A decision is taken to distribute certain part of profit to shareholders after paying tax. What is this decision called? Explain any three factors affecting such decisions.
Ans. Dividend decision.
[For explanation of factors refer to page no. 384-385]
Q. 22. Name types of capital which are part of capital structure.
Ans. Debt and equity.
Q. 23. A decision is taken to raise money for long term capital needs of business from certain sources. What is their decision called? Explain the three factors affecting such decision.
Ans. Financing decision.
[For explanation of factor affecting refer to page no. 383]
Q. 24. What is considered the cheapest source of finance?
Ans. Debt.
Q. 25. What is financial leverage? Explain with the help of an example.
Ans. Financial leverage is proportion of debt in overall capital.
[For example, refer to page no. 391]
Q. 26. What is favourable financial leverage?
Ans. Favourable financial leverage means when, ROI > Rate of Interest on debt.
Q. 27. What is the cost of raising funds called?
Ans. Floatation cost.
Q. 28. What determines overall financial risk?
Ans. Proportion of debt in the total capital determines the overall financial risk.
Q. 29. In case of high fixed operating cost, company should prefer debt or equity?
Ans. Equity.
Q. 30. What is the another name for long term investment decision?
Ans. Capital budgeting.
Q. 31. A sound financial plan is the key to success of sound financial management of the company. Discuss.
Ans. Yes, it is right to say that sound financial plan is key to success of sound financial management because of following importance.
[Refer to page nos. 388-389 for importance of financial planning]
Q. 32. Amit is running an 'Advertising agency' and earning a lot by providing this service to big industries. State whether the working capital requirement of the firm will be 'less' or 'more'. Give reason in support of your answer.
Ans. Less working capital is required as service industries which usually do not have to maintain inventory require less working capital.
Q. 33. Satnam Singh won a fruit orchit in Shimla where finest quality of apples are grown. He plans to start 15 juice stations in different localities in Shimla, Chandigarh, Solan, etc., in partnership with his friend Gurpreet Singh. Instead of buying he plans to take shops on rent. He needs money for other inputs.
Identify any explain two factors affecting fixed capital requirement of Satnam's business discussed in above para by quoting the lines.
Ans. 1. Level of collaboration, "In partnership with his friend Gurpreet."
2. Financing and leasing facility, "He plans to take shops on rent."
Q. 34. PVR is a renowned multiplex operators in India. It owns 254 screens in 52 properties at 24 locations in the country. Considering the fact that there is more growing trend among the people to spend more of their disposable income on entertainment, company planned to add more screen at existing locations and start at new locations also; they also plan to add food chain also at their locations. The company planned to float equity shares in market to raise the desired capital. The issue was fully subscribed and paid. Over the years the sale and the profit of the company have increased tremendously and it has been declaring higher dividend and the market price of its share has increased manifolds.
(a) Name the different kinds of financial decisions taken by PVR Ltd. by quoting lines from para.
(b) Do you think the financial management team of the company has been able to achieve its prime objectives? Why or why not?
Ans. (a) The different kinds of financial decisions taken by company are
(1) Investment decision lines "company plan to add more screen . . . . . food chain.
(2) Financing decision lines "The 10 planned to float equity shares . . . . capital."
(3) Dividend Decision, "It has been declining higher dividend."
(b) Yes as price of its share has increased manifolds as prime objective of financial management is maximising the wealth of equity share holders."
Q. 35. Healthcare Ltd. is a company engaged in production of organic food. Presently it sells its products through indirect channels of distribution. The company is planning to start its own show rooms and online portals. The financial manager suggested to use debt to invest in own showrooms and online portals.
Company plans to raise debt capital of ₹40 lakhs through a loan from ICICI bank at 10% Interest. The present capital base of the company is 9 lakhs equity shares of ₹10 each. The rate of tax is 30%.
In the context of above case —
Assuming expected rate of return same as current year, i.e., 15%, do you think the decision to use debt is justified.
Show your working clearly.
## Ans.
| S.No. | Basis | Primary Market | Secondary Market |
| 1. | Types of Securities | There is sale of new securities. | It is the market for existing or second hand securities. |
| 2. | Issued by | In primary market securities are directly issued by companies. | Securities are transferred between investors only. |
| 3. | Capital Formation | Primary market contributes directly for capital formation as funds are transferred from surplus units to deficit units. | Secondary market contributes indirectly for capital formation as funds are exchanged between surplus units only. |
| 4. | Entry | All companies enter the primary market to raise capital for their operations. | Only listed companies' securities are bought and sold in secondary market. |
| 5. | Geographical Location | There is no fixed geographical area for primary market. All the institutions, banks, foreign investors, etc. constitute primary market. | There is a fixed geographical area and working hours. |
| 6. | Price | Prices of securities are fixed by the management of the company. | Prices of securities are fixed by the demand and supply factors of stock exchange market. |
## Difference between Capital Market and Money Market
| S.No. | Basis | Capital Market | Money Market |
| 1. | Participants | The participants in capital market are financial institutions, banks, public and private companies, foreign investors and ordinary retail investors from public. | The participants of money market are financial institutions, banks, public and private companies but foreign and ordinary retail investors do not participate in money market. |
| 2. | Duration | The capital market deals in medium and long term securities. | Money market deals with short term securities having maximum tenure of 1 year. |
| 3. | Instruments | The common instruments of capital market are equity shares, debentures, preference shares, bonds and other innovative securities. | The common instruments of money market are treasury bills, trade bills, CD, CP, etc. |
| 4. | Investment outlay | The investment in capital market does not require huge financial investment as the value of securities is generally low, i.e., ₹10 to ₹100. | The instruments of money market are quite expensive so huge financial investment is required. |
| 5. | Liquidity | Capital market securities are considered liquid because of stock exchange but compared to money market instruments these are less liquid. | Money market securities enjoy higher degree of liquidity. |
| 6. | Safety | The instruments of capital market are riskier in respect to returns as well as respect to principal repayment as issuing company may fail. | The instruments of money market are safe or less risky due to short duration and soundness of issuers. |
| 7. | Expected return | The expected return is higher in capital market as along with regular dividend or interest there are chances of capital gain. | The expected return of money market is less due to short duration. |
| 8. | Type of capital | Companies approach capital market for fixed capital requirement. | Companies approach money market for working capital requirement. |
## Keywords
Capital Market
(i) Market for long term
Primary Market
(i) New issue market (ii) Market for fixed capital
(ii) Directly contribute for capital formation
## Methods of Floatation in Primary Market
(i) Offer through prospectus: Direct-appeal to investor.
(ii) Offer for Sale:
(a) Company sell to intermediary at a fixed price
(b) Intermediary sell to investor at a higher price
(iii) Private placement: Securities are allotted to institutional investors and selected individual.
(iv) Right issue: Issue of shares to existing shareholders.
(v) e-ipo: Selling through online system of stock exchange.
## Secondary Market
(i) Stock Exchange.
(ii) Market for second hand securities.
(iii) Indirectly contribute for capital formation.
## MCQs and Case Studies
1. The ABC Ltd. wants to raise ₹500 Cr. to fulfill its expansion plans by issue of equity shares. Identify the market ABC Ltd. will look for raising funds:
(a) Primary market
(b) Secondary Market
(c) Both (a) and (b)
(d) None of the above
2. Primary and secondary markets
(a) Compete with each other
(b) Compliment each other
(c) Function independently
(d) Control each other
3. A company wants to set up a new branch in Chennai. For additional capital company is planning to issue equity shares to public as there is boom period in capital market and public will prefer to invest in shares.
While analysing the issue, finance manager found that floatation costs of the issue would be high and company is already in liquidity crunch. Company deemed it proper to depend on money market instruments for about six months.
(i) Identify the method of flotation of capital, mentioned above.
(ii) Besides above shares issue method, mention two other methods.
(iii) Use of what kind of instrument will be appropriate for the money market.
(Answers at Page no. 471)
## 10.4 STOCK EXCHANGE
The securities contract and regulation act defines a stock exchange as, “An organisation or body of individuals, whether incorporated or not established for the purpose of assisting, regulating and controlling of business in buying, selling and dealing in securities”.
## 10.4.1 Functions of Stock Exchange/Secondary Market
1. Economic barometer. A stock exchange is a reliable barometer to measure the economic condition of a country. Every major change in country and economy is reflected in the prices of shares. The rise or fall in the share prices indicates the boom or recession cycle of the economy. Stock exchange is also known as a pulse of economy or economic mirror which reflects the economic conditions of a country.
2. Pricing of securities. The stock market helps to value the securities on the basis of demand and supply factors. The securities of profitable and growth oriented companies are valued higher as there is more demand for such securities. The valuation of securities is useful for investors, government and creditors. The investors can know the value of their investment, the creditors can value the creditworthiness and government can impose taxes on value of securities.
3. Safety of transactions. In stock market only the listed securities are traded and stock exchange authorities include the companies names in the trade list only after verifying the soundness of company. The companies which are listed they also have to operate within the strict rules and regulations. This ensures safety of dealing through stock exchange.
4. Contributes to economic growth. In stock exchange securities of various companies are bought and sold. This process of disinvestment and reinvestment helps to invest in most productive investment proposal and this leads to capital formation and economic growth.
5. Spreading of equity cult. Stock exchange encourages people to invest in ownership securities by regulating new issues, better trading practices and by educating public about investment.
6. Providing scope for speculation. To ensure liquidity and demand of supply of securities the stock exchange permits healthy speculation of securities.
7. Liquidity. The main function of stock market is to provide ready market for sale and purchase of securities. The presence of stock exchange market gives assurance to investors that their investment can be converted into cash whenever they want. The investors can invest in long term investment projects without any hesitation, as because of stock exchange they can convert long term investment into short term and medium term.
8. Better allocation of capital. The shares of profit making companies are quoted at higher prices and are actively traded so such companies can easily raise fresh capital from stock market. The general public hesitates to invest in securities of loss making companies. So stock exchange facilitates allocation of investor's fund to profitable channels.
9. Promotes the habits of savings and investment. The stock market offers attractive opportunities of investment in various securities. These attractive opportunities encourage people to save more and invest in securities of corporate sector rather than investing in unproductive assets such as gold, silver, etc.
## 10.4.2 Trading Procedure on a Stock Exchange
Before selling the securities through stock exchange, the companies have to get their securities listed in the stock exchange. The name of the company is included in listed securities only when stock exchange authorities are satisfied with the financial soundness and other aspects of the company.
Previously the buying and selling of securities was done in trading floor of stock exchange; today it is executed through computer and it involves the following steps:
1. Selection of broker. The buying and selling of securities can only be done through SEBI registered brokers who are members of the stock exchange. The broker can be an individual, partnership firms or corporate bodies. So the first step is to select a broker who will buy/sell securities on behalf of the investor or speculator.
Before placing order to registered broker-investor has to provide other details and information. These include
— PAN number
— Date of birth and address
— Educational qualification and occupation
— Residential Status (Indian/NRI)
— Bank Account details
— Depository A/c details
— Name of any other brokers with whom registered
— Client code number in client registration form
After taking these information broker opens a trading account in the name of investor.
2. Opening demat account with depository. Demat (dematerialised) account or beneficial owner (BO) account refer to an account which an Indian citizen must open with the depository participant (banks or stock brokers) to trade in listed securities in electronic form. Second step in trading procedure is to open a Demat account.
The securities are held in the electronic form by a depository. Depository is an institution or an organisation which holds securities (e.g. shares, debentures, bonds, mutual (funds, etc.). At present in India there are two depositories: NSDL (National Securities Depository Ltd.) and CDSL (Central Depository Services Ltd.) There is no direct contact between depository and investor. Depository interacts with investors through depository participants only.
Depository participant will maintain securities account balances of investor and intimate investor about the status of their holdings from time to time.
3. Placing the order. After opening the demat account, the investor can place the order. The order can be placed to the broker either (DP) personally or through phone, email, etc.
Investor must place the order very clearly specifying the range of price at which securities can be bought or sold. e.g., “Buy 100 equity shares of Reliance for not more than ₹500 per share.”
4. Match the share and Best Price. The broker will then go online and connect to the main stock exchange and match the share and best price available.
5. Executing order. When the shares can be bought or sold at the price mentioned, it will be communicated to the broker terminal and the order will be executed electronically. The broker will issue a trade confirmation slip to the investors.
6. Issue of Contract Note. After the trade has been executed within 24 hours, the broker issues a contract note. This note contains the details of number of shares bought or sold, the price, the date, time of deal and brokerage charges.
This is an important legal document as it helps to settle disputes claims between investors and the brokers.
A unique order code number is assigned to each transaction by the Stock Exchange and is printed on the contract note.
7. Delivery of share and making payment. Now the investor has to deliver the shares sold or pay cash for the shares bought. This should be done immediately after receiving the contract note or before the day when the broker shall make payment or delivery of shares to the exchange. This is called Pay in day.
8. Settlement cycle. Cash is paid or securities are delivered on pay in day, which is before. T +2 day as the settlement cycle is T +2 days on w.e.f April 2003 rolling settlement basis for example if transaction has taken place on Monday then payment must be given before Wednesday, i.e., T +2 (Transaction day and two more days).
9. On the T+2 day, the Stock Exchange will deliver the share or make payment to the other broker. This is called Pay out day.
The broker then has to make payment to investor within 24 hours of the pay out day since he has already received payment from the exchange.
10. The broker can make delivery of shares in demat form directly to the investor's demat account. The investor has to give details of his demat account and instruct his Depository participant (DP) to take delivery of securities directly in his beneficial owner account.
## 10.4.3 Dematerialisation and Depositories
All trading in securities is now done through computer terminals. Since all systems are computerised, buying and selling of securities are settled through an electronic book entry form. This is mainly done to eliminate the problems like theft, fake/forged transfers, transfer delays and paper work associated with share certificates or debentures held in physical form.
Dematerialisation is a process where securities held by investor in physical form are cancelled and the investor is given an electronic entry or number so that he/she can hold it as an electronic balance in account. So in short, dematerialisation refers to holding securities in electronic form.
For this investor has to open a demat Account. With an organisation called depository.
Now even all Initial Public Offers (IPO) are issued in dematerialisation form and more than 90% of the turnover is settled by delivery in Demat form.
Securities Exchange Board of India (SEBI) has made it mandatory into trade in demat form only for certain selected securities.
## Benefits of Dematerialisation
1. Holding shares in demat form is very convenient as it is just like a bank account.
Physical shares can be converted into electronic form or even electronic form can be converted back to physical certificate, i.e., Dematerialisation.
2. These demat securities can even be pledged or mortgaged to get loans.
3. There is no danger of loss, theft or forgery of share certificates.
4. Reduces paper work.
5. It is broker's responsibility to credit the correct number of shares in the investor's account.
6. Securities of different companies can be held in a single demat account.
## 10.4.4 Working of Demat System
1. Before opening a demat account with depositories the investor has to select a DP, i.e., Depository participant. DP is the agent of Depository.
DP may be a bank, broker or a financial service company.
2. Filling of an account opening form, along with PAN card details, photograph, etc.
3. The physical share certificates to be given to DP along with a request form for dematerialisation.
4. If shares are applied in IPO, then simple details of demat A/c and DP to be given, allotment would automatically be credited to demat account.
5. If shares are to be sold through broker, the DP must be instructed to debit the account with the number of shares sold.
6. The broker then gives instructions to his DP for delivery of the shares to the stock exchange.
7. The broker than receives the payment and pays the person for the shares sold.
8. All these transactions are to be completed, within 2 days, i.e., delivery of shares. Payment received from buyers as settlement period is T+2 days since April 2003.
## 10.4.5 Constituents of Depository System
## Depository system consists of:
(i) The depository
(ii) The depository participants
(i) The Depository. Depository is the apex organisation or unit in the depository system. Depository is just like a bank where Depositor/Investor can deposit and withdraw the money or securities. In a depository, an investor can deposit and withdraw his shares. Features of depository are:
1. Depository is an institution which holds securities such as shares, debentures, etc.
2. Depository interacts with the investors through agents called Depository Participants (DPs).
3. DPs can offer services only after obtaining a certificate from SEBI.
4. Investors have to open depository account with any DP called demat account.
5. Depository with the help of DPs controls electronic transfer of securities and settlement of transactions.
6. Depository can hypothecate dematerialised securities against bank loan.
7. Depository issues receipt of bonus shares in electronic form.
8. Depository offers nomination facility of demat account.
(ii) The Depository Participants (DP). Depository participant is an agent of the depository. An investor has to interact only with a DP and not with the depository for all his dealings in shares in electronic form. As per SEBI guidelines, any financial institution, the share brokers, banks, etc. can become DP after registration with SEBI. DP is the vital intermediary in depository system and all buying and selling of shares under depository system take place through DP only.
## Stock Exchange Indices
(i) Sensex. This is Bombay Stock Exchange Index. It is calculated by taking prices of 30 stocks across key sector of BSE.
(ii) Nifty. This is a National Stock Exchange Index. It is calculated by taking prices of 50% key stocks listed in NSEI.
## Other Benefit of on Line Stock Exchange
1. Demutualisation. Earlier on the intermediaries, i.e., brokers used to own, control and manage the stock exchanges. This ownership and management of stock exchange by brokers often led to conflict of interests between brokers and their clients. To solve this problem government did demutualisation of stock exchange.
Demutualisation refers to separation of ownership and control of stock exchange from the trading rights of members. Through demutualisation there is reduction of chances of brokers using stock exchange for personal gains.
## 10.4.6 SEBI
Securities and Exchange Board of India (SEBI) was set up in 1988 to regulate the functions of securities market. SEBI promotes orderly and healthy development in the stock market but initially SEBI was not able to exercise complete control over the stock market transactions. It was left as a watch dog to observe the activities but was found ineffective in regulating and controlling them. As a result in May 1992, SEBI was granted legal status. SEBI is a body corporate having a separate legal existence and perpetual succession.
## Reasons for establishment of SEBI
With the growth in the dealings of stock markets, lot of malpractices also started in stock markets such as price rigging, unofficial premium on new issue, delay in delivery of shares, violation of rules and regulations of stock exchange and listing requirements. Due to these malpractices the customers started losing confidence and faith in the stock exchange. So government of India decided to set up an agency or regulatory body known as Securities and Exchange Board of India (SEBI).
## Purpose and Role of SEBI
SEBI was set up with the main purpose of keeping a check on malpractices and protect the interest of investors. It was set up to meet the needs of three groups:
1. Issuers. For issuers it provides a market place in which they can raise finance fairly and easily.
2. Investors. For investors it provides protection and supply of accurate and correct information.
3. Intermediaries. For intermediaries it provides a competitive professional market.
## Objectives of SEBI
The overall objectives of SEBI are to protect the interest of investors and to promote the development of stock exchange and to regulate the activities of stock market. The objectives of SEBI are:
1. To regulate the activities of stock exchange.
2. To protect the rights of investors and ensuring safety to their investment.
3. To prevent fraudulent and malpractices by having balance between self regulation of business and its statutory regulations.
4. To regulate and develop a code of conduct for intermediaries such as brokers, underwriters, etc.
## 10.4.7 Functions of SEBI
The SEBI performs functions to meet its objectives. To meet three objectives SEBI has three important functions. These are:
1. Protective functions
2. Developmental functions
3. Regulatory functions
1. Protective Functions. These functions are performed by SEBI to protect the interest of investor and provide safety of investment. As protective functions SEBI performs following functions:
(i) Check a price rigging. Price rigging refers to manipulating the prices of securities with the main objective of inflating or depressing the market price of securities. SEBI prohibits such practice because this can defraud and cheat the investors.
(ii) It prohibits insider trading. Insider is any person connected with the company such as directors, promoters, etc. These insiders have sensitive information which affects the prices of the securities. This information is not available to people at large but the insiders get this privileged information by working inside the company and if they use this information to make profit, then it is known as insider trading, e.g., the directors of a company may know that company will issue Bonus shares to its shareholders at the end of year and they purchase shares from market to make profit with bonus issue. This is known as insider trading. SEBI keeps a strict check when insiders are buying securities of the company and takes strict action on insider trading.
(iii) SEBI prohibits fraudulent and unfair trade practices. SEBI does not allow the companies to make misleading statements which are likely to induce the sale or purchase of securities by any other person.
(iv) SEBI undertakes steps to educate investors so that they are able to evaluate the securities of various companies and select the most profitable securities.
(v) SEBI promotes fair practices and code of conduct in security market by taking following steps:
(a) SEBI has issued guidelines to protect the interest of debenture-holders wherein companies cannot change terms in mid term.
(b) SEBI is empowered to investigate cases of insider trading and has provisions for stiff fine and imprisonment.
(c) SEBI has stopped the practice of making preferential allotment of shares unrelated to market prices.
2. Developmental Functions. These functions are performed by the SEBI to promote and develop activities in stock exchange and increase the business in stock exchange. Under developmental categories following functions are performed by SEBI:
(i) SEBI promotes training of intermediaries of the securities market.
(ii) SEBI tries to promote activities of stock exchange by adopting flexible and adoptable approach in following way:
(a) SEBI has permitted internet trading through registered stock brokers.
(b) SEBI has made underwriting optional to reduce the cost of issue.
(c) Even initial public offer of primary market is permitted through stock exchange.
3. Regulatory Functions. These functions are performed by SEBI to regulate the business in stock exchange. To regulate the activities of stock exchange following functions are performed:
(i) SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries such as merchant bankers, brokers, underwriters, etc.
(ii) These intermediaries have been brought under the regulatory purview and private placement has been made more restrictive.
(iii) SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer agents, trustees, merchant bankers and all those who are associated with stock exchange in any manner.
(iv) SEBI registers and regulates the working of mutual funds, etc.
(v) SEBI regulates takeover of the companies.
(vi) SEBI conducts inquiries and audit of stock exchanges.
## Keywords
## Demat
(i) Conversion of paper/material form of share certificate into electronic entry.
(ii) To overcome the problem of mutilation, loss of security of certificate.
(iii) No physical transfer of securities.
(iv) Transfer through a book entry.
SEBI. Overall controller of capital market.
## Functions of SEBI
(i) Protective: To protect the interest of investor.
(ii) Developmental: To promote and develop activities in stock exchange, and to bring more business.
(iii) Regulatory: To frame rules, regulations, code of conduct to regulate the stock market.
## MCQs and Case Studies
1. \_\_\_\_ is a legal document as it help to settle disputes/claims between investor and the broker.
(a) Credit note
(b) Contract note
(c) both (a) and (b)
(d) None of the above
2. Delivery of share sold or payment of cash for the shares bought is made on the
(a) Pay in day
(b) Pay out day
(c) both (a) and (b)
(d) None of the above
3. Name any two details that need to be provided by investor to the broker while filling a client register.
4. Amaira's grandmother in her will gave shares worth ₹50 lac in her name, when she opened the bank locker to get the share certificates, she found all were in very bad shape, half torn etc.
To overcome this problem financial market has started a new concept called:
(a) Dematerialisation
(b) Demutualisation
(c) Both (a) and (b)
(d) None of the above
5. SEBI is also called as
(a) Watchbull of stock exchange (b) Watchbear of stock exchange
(c) Watchdog of stock exchange (d) None of the above
6. 'Unicon Securities Pvt. Ltd.' was established to deal in securities. It was registered as a stock broker with National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) to trade in securities listed at these exchanges. It is also a depository participant with CDSL and NSDL. In the first three years, it developed its business successfully. After that the composition of Board of Directors changed. Some customers complained to the customer care centre of the company that shares purchased by them and for which the payment has been duly made, were not transferred to their D'mat Accounts by 'Unicon securities Pvt. Ltd.' The executive of customer care centre promised the aggrieved customers that their shares will be transferred to their respective D'mat Accounts very soon. But the company delayed the matter and didn't transfer the shares of the customers to their D'mat Accounts. This eroded investors' confidence and multiplied their grievances.
(1) Identify the step of trading procedure in a stock exchange which has not been followed by 'Unicon Securities Pvt. Ltd.'
(2) Name the Apex statutory body of capital market to whom customer can complain to redress their grievances.
7. ABC Ltd. issued prospectus for the subscription of its shares for ₹ 500 crores in 2008. The issue was oversubscribed by 20 times. The company issued shares to all the applicants on pro-rata basis. Later SEBI inspected the prospectus and found some misleading statement about the management of the company in it. SEBI imposed a penalty of ₹ 5 crores and banned its three executive directors for dealing in securities market for three years.
Identify the function and its type performed by SEBI in the above case.
[CBSE Sample Paper 2016]
8. Charu is a chartered accountant in Prakash Ltd. During the course of meeting with directors, she came to know that as against the previous years, this year company is going to declare handsome dividend offer. It is observed that when such news becomes public then the share-market jumps up. Considering it, Charu purchased large number of company's shares before this news reached the public.
1. Identify the type of malpractice used by Charu.
2. Name the authority which regulates such behaviour. Write any three other functions of this authority.
(Answers at Page no. 471-472)
## Quick Revision
Financial Market (Concept and Nature). Financial market is a link between surplus and deficit units or in other words financial market brings together lenders and borrowers. There are two major segments of financial market:
1. Capital Market
## 2. Money Market
Functions of Financial Markets
1. Mobilisation of savings and channelising them into the most productive uses.
2. Facilitate price discovery.
3. Provide liquidity to financing assets.
4. Reduce the cost of transaction.
Money market. It is the market of short term funds that means funds for a period of upto one year only. It is considered as a market for providing working capital.
Difference between capital market and money market: The major points of difference between capital market and money market are:
(i) Participants
(ii) Duration
(iii) Instruments
(iv) Investment outlay
(v) Liquidity
(vi) Safety
(vii) Expected return (viii) Type of capital
Capital Market. It is the market for long and medium term funds. It refers to the organisations/institutions which provide funds for more than one year time period.
Nature or Features of capital market:
1. Link between savers and investment opportunities
2. Deals in long-term investment 3. Utilises intermediaries
4. Determinant of capital formation 5. Government rules and regulations
There are two components of capital market:
(i) Primary market
(ii) Secondary market
Primary Market. It is also known as new issue market as it is the market for new long term capital securities issued by the company. The securities in primary market can be issued in following ways:
1. Public issue through prospectus
2. Offer for sale
3. Private placement
4. Right issue (for existing company)
5. e-IPOs
Secondary Market. It is more commonly known as second hand security market or stock exchange market. In this market securities are not directly issued by company but by existing investors. This market provides liquidity to primary market and hence contributes indirectly in capital formation.
Stock Exchange. The Securities Contract Act (1956) defines stock exchange as an association, organisation or body of individuals whether incorporated or not established for the purpose of assisting, regulating and controlling of business in buying, selling and dealing in securities.
Functions of Stock Exchange. The functions of stock exchange are:
(i) Economic barometer (ii) Pricing of securities
(iii) Safety of transactions (iv) Contributes to economic growth
(v) Spreading of equity cult (vi) Providing scope for speculation
(vii) Liquidity (viii) Better allocation of capital
(ix) Promotes the habits of savings and investment
Trading Procedure on a Stock Exchange
1. Selection of broker.
2. Opening demat account with depository.
3. Placing the order.
4. Match the share and Best Price
5. Executing order
6. Issue of Contract Note
7. Delivery of share and making payment
8. Settlement Cycle
Constituents of Depository System
1. Depository
2. The depository participants (DP)
3. Demat account
4. The issuing company
5. The investor
Objectives of SEBI. The main objectives of SEBI are:
1. Protect the interest of investors.
2. Promote and develop stock exchange dealings.
3. Regulate the dealings.
Functions of SEBI. To achieve its objectives, SEBI performs three types of functions:
1. Protective functions
2. Developmental functions
3. Regulatory functions
## Objective Type Questions
## Multiple Choice Questions
1. If a firm requires to two crores for six months time to keep the stock of raw material, it should approach
(a) Money market
(b) Capital market
(c) Both (a) and (b)
(d) None of the above
2. Call money, treasury bill, C.R., etc. are the instruments of
(a) Capital Market
(b) Money market
(c) Both (a) and (b)
(d) None of the above
3. The safest instrument of money market is
(a) Call Money (b) Commercial Paper
(c) Treasury Bill (d) Commercial Bill
4. To meet floatation cost, firms generally issue the following instrument of money market.
(a) Call Money (b) Commercial Paper
(c) Treasury Bill (d) Commercial Bill
5. Which instrument of money market is also called zero coupon bond?
(a) Call money (b) Commercial Paper
(c) Certificate of Deposit (d) Treasury Bill
6. Which market directly contributes for capital formation and increase in capital of firms?
(a) Primary market
(b) Secondary market
(c) Both (a) and (b)
(d) None of the above
7. The duration of money market instruments are
(a) Upto one year
(b) Upto three years
(c) Upto five years
(d) Upto ten years
8. Under Private Placement, shares are never offered to
(a) Institutes
(b) Brokers
(c) General Public
(d) None of the above
9. Under secondary market, sale of securities take place between
(a) Company and Investors (b) Company and Company
(c) Investor and other investor (d) None of the above
10. In Right Issue, shares are issued to
(a) General public
(b) Existing shareholders
(c) Institutes only
(d) None of the above
11. The economic condition of every country is reflected by dealings in
(a) Stock Market
(b) Money Market
(c) Primary Market
(d) None of the above
12. The Apex Body who controls the Capital Market of our country is
(a) RBI
(b) SBI
(c) SEBI
(d) None of the above
13. SEBI protects the interest of
(a) Investor
(b) Companies
(c) Brokers
(d) None of the above
14. Conversion of physical form of share certificate into an electronic entry is called
(a) Exchange Mechanism (b) Conversion
(c) Dematerialisation (d) Rematerialisation
15. To buy securities, i.e., share or debentures, it is compulsory to open
(a) Current Account (b) Demat Account
(c) Fixed Deposit Account (d) Recurring Account
16. Certificate of deposit is issued by
(a) Mutual fund companies (b) Reserve Bank of India
(c) Large Corporate House
(d) Commercial bank and development financial institution
17. Secondary market is also known as
(a) Primary Market
(b) New Issue Market
(c) Financial Market
(d) Stock Exchange
18. Call money is used to
(a) Maintain a minimum cash balance known as a cash reserve ratio
(b) To meet floatation cost
(c) To meet working capital needs
(d) To meet fixed capital needs
19. Identify the function of stock exchange
(a) Trading and settlement procedure (b) Dematerialisation
(c) Pricing of securities (d) Depository participants
20. Which instrument does not relate to money market
(a) Call money (b) Treasury bill
(c) Commercial Bill (d) IPOs
(Answers at Page no. 472)
## Fill in the Blanks
1. Capital market is a link between \_\_\_\_ and opportunities.
2. In India, there are \_\_\_\_ number of depositories.
3. NSDL refers to \_\_\_\_.
4. CDSL refers to central \_\_\_\_.
5. The agent between Investor and Depositories is called
6. The day when investor has to deliver shares sold or pay cash for shares bought is called
7. The day when stock exchange delivers the share or makes payment to the other broker is called .
8. Bombay Stock Exchange Index is called \_\_\_\_.
9. National Stock Exchange Index is called \_\_\_\_.
10. To promote and develop activities in stock exchange, SEBI performs \_\_\_\_ function.
(Answers at Page no. 472)
## True or False
1. SEBI was set up with the main purpose of increasing business is stock markets. (True/False)
2. Under offer for sale, companies offer shares directly to general public. (True/False)
3. Money market is a market for short term or market for working capital. (True/False)
4. Call money is also called Inter bank money.
(True/False)
5. Capital market is a branch of money market.
(True/False)
6. Banks and financial markets are competing intermediaries in financial system. (True/False)
7. The interest paid on call money is called call rate.
(True/False)
8. Commercial bill and treasury bill are same.
(True/False)
(Answers at Page no. 472)
## Remembering and Understanding-based Questions with Answers
Q. 1. Explain any four functions of financial market. [CBSE Sample Paper 2015]
Or
"A financial market is for the creation and exchange of financial assets." Explain any two of its functions.
[CBSE Sample Paper 2016]
Ans. Four functions of financial market are:
(i) Mobilisation of savings and channelling them into the most productive use.
(ii) Facilitating price discovery.
(iii) Providing liquidity to financial assets.
(iv) Reducing the cost of transactions.
Q. 2. “Money market is essentially a market for short-term funds”. In the light of this statement, state any three features of money market. [CBSE Sample Paper 2017]
Ans. Features of money market:
(i) It is a market for short term funds which deals in monetary assets whose period of maturity is up to one year.
(ii) Money market instruments are highly liquid.
(iii) Money market instruments are less risky.
Q. 3. Name the market where companies issue new securities.
Ans. Primary market.
Q. 4. What are the different ways of issuing securities in primary market?
Ans. In primary market securities can be issued by:
1. Prospectus
2. Offer for sale
3. Private placement
4. Right issue
5. e-ipo
6. Preferential allotments
Q. 5. Why is secondary market considered as market for second hand securities?
Ans. Secondary market is considered as market for second hand securities because in this market second hand securities are sold between investors.
Q. 6. In secondary market sale of securities takes place between investors only, then how does this market contribute for capital formation?
Ans. This market contributes for capital formation indirectly by providing liquidity to the securities bought in primary market.
Q. 7. Name any two instruments of money market.
Ans. (i) Call money (ii) Treasury bill
Q. 8. Name the market which provides short term finance.
Ans. The market which provides short term finance is known as money market.
Q. 9. What is meant by capital market?
Ans. Capital market acts as a link between savers and investors. It provides long term funds.
Q. 10. Name the two segments of capital market.
Ans. (i) Primary market (ii) Secondary market
Q. 11. Name any two national level stock exchanges.
Ans. (i) NSEI (National Stock Exchange of India).
(ii) OTCEI (Over the Counter Exchange of India).
Q. 12. Name the common instruments of capital market.
Ans. Common instruments of capital market are: shares, debentures, bonds, etc.
Q. 13. What do you mean by the term 'going public'?
Ans. Going public refers to the process of converting private capital into public capital, for example loan taken by companies.
Q. 14. Explain the term 'water the equity'.
Ans. When existing shareholders lose control in the management of company due to acquiring of more number of equity shares by another group, then it is known as 'water the equity'.
Q. 15. How many regional stock exchanges are there in India? Name the oldest one.
Ans. In India, there are 24 Regional Stock Exchanges and Bombay Stock Exchange is the oldest one.
Q. 16. Give the full form of SEBI.
Ans. SEBI refers to Securities and Exchange Board of India.
Q. 17. Enumerate the objectives of SEBI.
Ans. Objectives of SEBI are:
(i) To protect the interests of the investors.
(ii) To promote the development of securities.
(iii) To regulate the securities market.
Q. 18. What do you mean by 'bridge financing'?
Ans. Funds raised through commercial paper are used to meet floatation cost. This is known as bridge financing.
Q. 19. Which money market security is also known as zero coupon bond?
Ans. 'Treasury bill' is also known as zero coupon bond.
Q. 20. "Money market instruments are more liquid than capital market instruments". Comment.
Ans. Money market instruments are considered as more liquid because the time period within which these securities get converted into cash is very short in some cases it is one day only and before the time period also these securities can be discounted easily from banks and discount Finance house (DFH) has been established for discounting the securities of money market.
Capital market securities are long term securities and they get liquidity in stock market but in stock market there may not be a buyer for share in the stock market. So liquidity of capital market securities depends upon the demand of these securities in the stock exchange.
Q. 21. "SEBI is the watchdog of security market". Comment.
Ans. SEBI was set up in 1988 to regulate the functions of the securities market and to protect the interest of investors but SEBI was found ineffective in regulating the activities of stock market. It was able to observe and watch only but failed to take corrective measure that is why it was called as watchdog. As a result in May 1992, SEBI was granted legal status. Now it is a body corporate having a separate legal existence and perpetual succession.
Now SEBI is considered as a watchdog because it performs the following functions to protect stock exchange dealings. [Explain protective functions of SEBI refer on page no. 449]
Q. 22. "Stock market imparts liquidity to investment". Comment.
Ans. The stock market is a place where securities of companies are bought and sold. Generally the securities are long term and get matured only after a long period of time. These securities can be sold in stock market and can be easily converted into cash. The presence of continued market is an assurance to investors that their investment can be converted into cash as and when required by them.
Q. 23. What function does financial market perform?
Ans. The financial market performs the function of bringing together the deficit units (corporate sector) and surplus units (investors). It is through financial market that the lenders meet the borrowers.
Q. 24. "Stock market quotations contribute to better allocation of capital and promoting the habits of savings and investments". Explain.
Ans. Yes, I agree with this statement. As stock market provides following functions. Refer to functions of stock exchange, refer on page no. 442, 443.
Q. 25. Explain the capital market reforms in India.
Ans. The first Stock Exchange in India was set up in 1875 as the Native Share and Stock Broker Association in Bombay. Today it is known as Bombay Stock Exchange (BSE). This was followed by development of stock exchange in Ahmedabad (1894), Calcutta (1908) and Madras (1937). It is interesting to note that stock exchanges were first set up in major centers of trade and commerce. Until 1990 there were regional stock exchanges in India. After the reforms of 1991, there are following three types of stock exchanges in India.
1. Regional Stock Exchanges.
2. National Stock Exchanges.
3. Over the Counter Exchange of India.
## HOTS (Higher Order Thinking Skills) and Case Studies
Q. 1. Supriya's grandmother who was unwell, called her and gave her a gift packet. Supriya opened the packet and saw many crumpled share certificates inside. Her grandmother told her that they had been left behind by her late grandfather.
As no trading is now done in physical form, Supriya wants to know the process by adopting which she is in a position to deal with these certificates.
(a) Identify and state the process.
(b) Also give two reasons to Supriya why dealing with shares in physical form had been stopped.
[CBSE Sample Paper 2014]
Ans. (a) De-materialisation. It is a process where securities held by the investor in physical form are cancelled and the investor gives an electronic entry or number so that she/he can hold it as an electronic balance in an account.
(b) Problems with dealing in physical form: (Any two)
(i) Theft
(ii) Fake/Forged transfers
(iii) Transfer delays
(iv) Paper work associated with share certificates or debentures held in physical form.
Q. 2. Reshu's father has gifted her shares of a large cement company, with which he had been working. The securities were in physical form. She already has a bank account and does not possess any other forms of securities.
She wished to sell the shares and approached a registered broker for the purpose. Mention one mandatory detail which she will have to provide with the broker.[CBSE Sample Paper 2015]
Ans. Permanent Account Number (PAN)
Q. 3. Sudha Ltd. has sold 1 lakh equity shares of ₹ 10 each at ₹ 12 per share to an investment banker, who offered them to the public at ₹ 20 each. Identify the method of floaton.
Ans. Offer for sale.
Q. 4. Mohan wants to sell 50 shares of Tata Motors. Explain the trading procedure of shares.
Ans. Refer to Page 444
Q. 5. Charu is a chartered accountant in Prakash Ltd. During the course of meeting with directors she came to know that as against the previous years, this year company is going to declare handsome dividend offer. It is observed that when such news becomes public then the share-market jumps up. Considering it, Charu purchased large number of company's shares before this news reached the public.
1. Identify the type of malpractice used by Charu.
2. Name the authority which regulates such behaviour. Write any three other functions of this authority.
Ans. 1. Price Rigging.
2. Authority is Securities and Exchange Board of India (SEBI).
Their functions are: (i) Protective functions, (ii) Developmental functions, (iii) Regulatory functions.
Q. 6. The Director of Pico Limited decided to declare bonus issue of equity shares to the shareholders in its Annual General Meeting. Immediately one of the Director purchases 20,000 shares from market @ 30 per share and sold them @ 100 per share as bonus issue was declared and made capital gain from it.
(i) Name the practice used by the Director taking the benefits of internal information.
(ii) How does SEBI prohibit such practices?
Ans. (i) Insider trading (ii) Refer to Page 449
Q. 7. Name the financial instrument which may be used in the following situations:
(i) A company needs funds to meet floatation cost in order to issue equity shares in the market.
(ii) The instrument that is issued during the period of tight liquidity when the deposit growth of bank is slow but demand for credit is high.
(iii) These are also known as zero coupon bonds and are issued by RBI on the behalf of central government.
(iv) It is used by one bank having surplus funds to meet the funds requirements of another bank facing shortage of funds.
Ans. (i) Commercial Paper (ii) Commercial Bill
(iii) Treasury Bill (iv) Call Money
Q. 8. Bandhu Limited is a real estate company, which was formed in 1960. In about 55 years of its existence, the company has managed to carve out a niche for itself in this sector. In order to establish itself in India, the company decided to list its securities on BSE, in order to raise money through India market.
State the functions performed by SEBI that make investors comfortable and secured in dealing with Bandhu Ltd.
Ans. Protective.
Q. 9. Identify the markets highlighted in following statements:
(i) This market directly contributes to capital market.
(ii) This market deals in instrument whose maturity is upto one year.
(iii) It deals in medium and long term securities.
(iv) It is also known as Stock Exchange and deals in sale and purchase of previously issued securities.
(v) It requires less investment as value of securities is generally low.
Ans. (i) Primary (ii) Money Market
(iii) Capital Market (iv) Secondary Market
(v) Stock Exchange
Q. 10. Dinesh has 100 equity shares of a company. He wants to sell 500 of these shares. Which market should he approach?
Q. 11. Why are money market instruments more liquid as compared to capital market instruments?
Ans. Reliable participants and duration of investment is less.
Q. 12. Who issues the Treasury Bill?
Ans. R.B.I. (Reserve Bank of India) Financial Institutions & Financial Companies.
Q. 14. How is the price of securities determined in the secondary market?
Ans. By demand and supply of share in the market.
Q. 15. What is the minimum amount of Treasury Bill?
Ans. ₹25,000.
Q. 16. What is dematerialisation (demat)?
Ans. It is an electronic book entry form of holding and transferring securities.
Q. 17. Bhuvan got a chance to buy shares in the ratio of 1 : 1 from ABC company. What is this type of issue called? Explain any other two ways of issue share under primary market.
Ans. Right issue. For other methods refer on page no. 438, 439.
Q. 18. What is REPO rate? How can it result in lowering the rate of interest on loans?
Ans. The rate at which RBI repurchases government securities from banks is known as REPO rate. When government repurchases the securities in return, the banks get cash to meet their short term requirement and they can give loan at low rate of interest.
Whenever RBI wants to lower the interest rate, it reduces the REPO rate. It will become more clear from following cycle.
As the REPO rate charged by RBI reduces, the money is available to banks at low rate, they pass the benefit to the end user by lowering the rate of interest on loan.
Reverse REPO rate is opposite to REPO rate.
Q. 19. What is Badla?
Ans. Carry over of settlement at some forward data is known as Badla.
Q. 20. Shares are given in the ratio of 1:1. What is this type of issue?
Ans. Right issue.
Q. 21. Who is the borrower of call money?
Ans. Banks with temporary shortage of funds.
Q. 22. Who provides protection and guidelines to the investors?
Ans. SEBI.
Q. 23. What do you mean by penny stock?
Ans. These are securities that have no value on the stock exchange but whose trading contributes to speculation.
Q. 24. What do you mean by Bourse?
Ans. Bourse is another name for stock market.
Q. 25. 'R' Limited is a real estate company which was formed in 1950. In about 56 years of its existence the company has managed out from a niche for itself in this sector. Lately this sector is witnessing a boom due to the fact that the Indian economy is on the rise. The income of middle class are rising. More people can afford to buy homes for themselves due to easy availability of loans and accompanying tax concessions.
To expand its business in India and abroad the company is weighing various options to raise money through equity offerings in India. Whether to tap equity or debt market whether to raise money from domestic market or international market or combination of both? Whether to raise the necessary finance from money market or capital market. It is also planning to list itself in New York Stock Exchange to raise money through ADR.
To make its offering attractive it is planning to offer lots of financial plans, products to its stakeholders and investors and also explain its listing at NSE after complying with the regulations of SEBI.
(a) What are the regulations of SEBI that company must comply with?
Ans. Explain regulatory functions, refer to page no. 450.
(b) How does the SEBI exercise control over 'R' limited in the interest of investors?
Ans. To protect the interest of investor the SEBI performs following functions:
[Explain protective functions page 449]
(c) What do you mean by a stock index? How is it calculated?
Ans. A stock market index is a barometer of market behaviour. It measures overall market-trend through a set of stocks which are representatives of the market. An Ideal index must represent changes in the prices of securities and also shows the price movement of different classes of shares. It also indicates market direction and day to day fluctuations in stock prices common.
Stock market indices used in India are SENSEX, NIFTY, etc.
(d) What conclusions can you draw from the various movements of NSE stock indices?
Ans. On comparing the previous and current index of NSE we can see that there is depression in the market as index is down for all the sectors.
(e) What factors affect the movement of stock indices? Elaborate on the nature of these factors.
Ans. The factors which affect the movement of stock indices are:
(i) Demand and supply of various securities (ii) Financial position of the company
(iii) Bank rate
(iv) Speculative pressure
(v) Activities of financial institutions
(vi) Government policy
(vii) Political development
(f) What relationship do you see between the movement of indices in World Market and NSE indices?
Ans. We can see that world indices and NSE indices are moving in same direction there is direct relation between NSE indices and world market indices. As there is negative trend in World Index it is bringing negative trend in NSE index also.
| S.No. | Point of Difference | Advertising | Personal Selling |
| 1. | Form | It is an impersonal form of communication. | It is an personal form of communication. |
| 2. | Flexibility | Less flexible as standardised messages are used. | Flexible messages can be changed according to the type of customers. |
| 3. | Reach | It reaches masses. | Only limited number of customers can be contacted. |
| 4. | Cost | Cost per person is less as at it covers large number of people. | Cost per person is high as at a time limited members can be contacted. |
| 5. | Coverage | Covers market in short time. | Takes long time to cover market. |
| 6. | Use of mass media | Makes use of mass media such as T.V., Radio, Newspaper. | Do not make use of mass media. |
| 7. | Feedback | No direct feedback can be obtained. | Direct feedback can be collected by salesman. |
| 8. | Useful for | More useful for standardised and customer products. | More useful for industrial and customerised products. |
## MCQs and Case Studies
1. “You don’t close a sale, you open a relationship, if you want to build a long term successful enterprise”. Identify the promotion tool referred in this line
(a) Advertisement
(b) Personal selling
(c) Sales Promotion
(d) Public Relation
2. Mr. Rajiv, the sales executive of ABC Ltd. possess good marketing techniques, his techniques involve oral presentation of message, convincing the customer with face to face interaction, etc.
(i) Name the element of marketing mix under which the above technique fall.
(ii) Identify the element used by Rajiv.
(iii) Name any other element of marketing.
(Answers at Page no. 527)
## (IV) PUBLIC RELATION
Apart from four major elements of marketing mix, another important tool of marketing is maintaining Public Relations. In simple words, public relations means maintaining public relations with public. By maintaining public relations, companies create goodwill.
Public relations evaluate public attitudes, identify the policies and procedures of an organisation with the public interest to earn public understanding and acceptance.
Public does not mean only customers, but it includes shareholders, suppliers, intermediaries, customers etc. The firm's success and achievement depends upon the support of these parties for example, firm needs active support of middle men to survive in market, it must have good relations with existing shareholders who provide capital. The consumers' group is the most important part of public as success of business depends upon the support and demand of customers only.
## Definition of public relations:
\- Public Association Relations defines public relations as the Art and Social Science of analyzing trends, predicting their consequences, counselling, organisational leaders and implementing planned programme of action which will serve both the organisation and the public interest.
The Chartered Institute of Public Relations defines Public Relations as a strategic management function that add value to an organisation by helping it to manage its reputation.
\- Public Relations covers a wide range of activities such as providing information to media source in the hope of gaining favourable coverage. It also involves a mix of promoting specific products, services and events and promoting the overall brand of an organisation.
## Ways/Methods and Tools of Public Relations:
The companies can use the following tools to improve their relations with public:
1. News. Sometimes companies get involved in such kind of activities or make such policies so that they get some positive coverage in news. For example, a company's name may be covered in news for reservation of jobs for women or for introducing new technology, etc.
2. Speeches. The speeches given by the leaders of corporate sectors influence various members of public specially banks, shareholders etc. Public relations department creates occasion when the speeches are delivered by the leader of company.
3. Events. Events refer to organising press conferences, multimedia presentation, matches, stage shows etc.
4. Written materials. Sometimes written materials such as Balance Sheet, Annual Reports, Special documents, Brochures, etc., are circulated to various parties to improve and maintain public image of the company.
5. Public service activities. Big business houses often associate themselves with various social service projects such as women welfare programmes, charity shows, up-keeping of parks, planting trees on road side, training schools, running schools, colleges, hospitals, etc.
## MCQs and Case Studies
1. The communication tool which can help in improving the image of the company is
(a) Advertisement
(b) Personal Selling
(c) Sales Promotion
(d) Public Relation
2. 'Coconut Joy Ltd.' are the manufacturer of vegetarian frozen dessert food products made with coconut milk, agave syrup and other certified ingredients. The founders of the company, Lovely and Lalita originally developed this treat to meet their own needs but found that their friends and families around were also keen to use the products. It was not only the vegetarians, but also those who could not get enough environment friendly sustainable food, that appreciated the product.
It did not take long for Lovely and Lalita to recognise the potential of their little venture. In the beginning they started from their home with the product being sold through local family parties that enable guests to personally meet the owner. This helped to establish strong connections with the prospective buyers and the company could put the product on shelves of natural food store. The company used all marketing activities to grow and expand. The company began sponsoring booths at festivals, drawing attention to its newly created vegetarian products. It also disseminated relevant information to media about its products and the people who helped in building the company's reputation. Lovely and Lalita were invited for an interview with one of the leading TV channels in which they talked about their environment friendly vegetarian products.
To show its gratitude to customers, local business and government officials who supported the company from the beginning, ‘Coconut Joy Ltd.’ hosted a gala event and involved all of them to raise funds for a few local NGO’s. The company also asked its fans and customers to send songs and poetry conveying their impression about ‘Coconut Joy’s Ltd.’ products.
(a) Identify and explain the communication tool used by ‘Coconut Joy Ltd.’
(b) Briefly explain the role of the tool identified in (a) above. [CBSE Sample Paper 2016]
(Answers at Page no. 527)
## Keywords
## Marketing Mix/Elements of Marketing
(a) Product Mix:
(i) Related to various features related to the product.
(ii) Variety of products.
(b) Price Mix: Elements of marketing mix which generate revenue for organisation.
(c) Place Mix: This element make sure goods/services available at the right place in right quantity to right persons.
(d) Promotion Mix: This element is used by organisation to communicate and persuade customers to buy its products.
## Elements of Promotion
(a) Advertisement
(i) Impersonal form to communicate
(ii) Paid form
(b) Sales Promotion
(i) Short term incentives
(ii) Increase in sale with immediate effect
(c) Personal Selling
(a) Personal form of communication to pursue customer
(b) Face to face interaction
(d) Public Relation
(a) Improves image of company
(b) Help to bring back the reputation and goodwill of the company.
## Quick Revision
Marketing Management. Managing all the activities related to market. It is done to be customers solve their diverse consumption problems in ways compatible with the objectives of the firm.
Marketing. Marketing is a process by which the marketer attempts to match products or services with customer needs with the purpose of satisfying them at a profit.
Difference between selling and marketing. The marketing and selling can be differentiated on the basis of:
(1) Focus (2) Objective (3) Scope (4) Start and end
(5) Efforts (6) Supremacy (7) Approach (8) Demand.
## Various concepts of marketing management:
(a) Production concept. Firm can sell its product by producing inexpensive products
(b) Product concept. It concentrates on production of quality product.
(c) Selling concept. This concept insists on selling what is produced.
(d) Marketing concept. This concept is consumer-oriented and insists on designing product according to needs of customer and selling by keeping in mind consumer satisfaction.
(e) Societal concept. This concept intends to include social goal with need satisfaction.
## Functions of marketing. Marketer performs following functions:
(a) Gathering and analysing market information (b) Market Planning
(c) Product designing and development (d) Standardisation and grading
(e) Packing and labelling (f) Branding
(g) Customer support services (h) Pricing of products
## Marketing mix. Four important variants or tools of marketing are called marketing mix: These are: (a) Product (b) Price (c) Place/physical distribution (d) Promotion
Product. It means what a seller sells and what a buyer buys.
Product mix. The total number of products and items that a particular marketer offers to the market is called product mix: The variants of product mix are product line, width, depth, length and consistency.
\- Branding. It is the process of using a name, term, symbol or design to identify the product.
Trade mark. It is the mark of a trade carried on by an identified entity.
Packaging. It can be defined as a set of tasks or activities which are concerned with the design and production of an appropriate container for the product.
Labelling. Labels are attached to the product package to provide some information to customer apart from providing information, labels identify the product also.
Price. Price is the value which a buyer passes on to the seller in lieu of the product or service provided.
## Price determination depends upon number of factors. These are:
(a) Pricing objectives. A firm with profit maximisation objective prefers high price and firm with sales maximisation prefers to fix the low price of the product.
(b) Product cost. The price of the product must cover the fixed as well as the variable cost of the product.
(c) Extent of competition in the market. When firms have to face high competition then generally low price is fixed. In case of less competition price can be high.
(d) Customer's demand and utility. The products with elastic demand are priced low and products with inelastic demand are priced high.
(e) Government and legal regulations
(f) Marketing methods used
Place/physical distribution. This ingredient of marketing mix is related to decisions that are taken in order to make the product available to the customers. If the product is not made available to the customers at the right place in the right quantity and at the right time, then customer would not be able to buy them.
Channels of distribution. The channels of distribution perform a number of functions:
(a) They are source of marketing information,
(b) They gather information about customers, competitors and other trends in the market,
(c) They pursue the customers,
(d) They bear risk,
(e) They help in storage and movement of goods,
(f) Help in transfer of ownership of goods and services.
Channel levels. There are four important channel levels:
(i) Zero level channel
(ii) Indirect channel
Physical distribution. Decisions in physical distribution:
(i) Order processing
(ii) Transportation
(iii) Warehousing
(iv) Inventory
Promotion. Promotion refers to all the activities which are undertaken to communicate with the customer and enhance the sale of product or service. The various communication tools are
(i) Advertising
(ii) Sales promotion
(iii) Personal selling
(iv) Public relation
Advertising. There are various media of advertising. The common are:
(i) Reach
(ii) Choice
(iii) Legitimacy
(iv) Expressiveness
(v) Economy
(vi) Enhancing customer satisfaction and confidence
Personal selling. It involves face to face interaction between the seller and the prospective buyer for the purpose of making sale.
Features of Personal Selling. The steps in the sales process of personal selling are
(a) Personal interaction
(b) Two way communication
(c) Better response
(d) Relationship
(e) Better convincing
Public Relations
Methods and Tools of Public Relations:
1. News
2. Speeches
3. Events
4. Written materials
5. Public service activities.
## Exercise
## Objective Type Questions
## Multiple Choice Questions
1. The concept which focuses on large scale production and minimum cost is called
(a) Production concept (b) Product concept
(c) Selling concept (d) Marketing concept
2. The concept which forces on quality of product is called
(a) Production concept (b) Product concept
(c) Selling concept (d) Marketing concept
3. The concept which focuses on customer satisfaction is called
(a) Production concept (b) Product concept
(c) Selling concept (d) Marketing concept
4. The concept which focuses on customer welfare is called
(a) Production concept (b) Product concept
(c) Marketing concept (d) Societal concept
5. Product, price, place and promotion are part of
(a) Product mix (b) Price mix
(c) Marketing mix (d) Place mix
6. The carrier of information is called
(a) Packaging
(b) Labelling
(c) Branding
(d) Goodwill
7. The only element of marketing mix, which generates revenue is called
(a) Product mix
(b) Place mix
(c) Price mix
(d) Promotion mix
8. The product reaches the customer at the right time, in the right quantity and at the right place by using the following element of marketing mix.
(a) Product mix (b) Price mix
(c) Promotion mix (d) Place mix
9. The time period between receiving of order and delivery of goods and services is called
(a) Order Processing Time (b) Inventory
(c) Warehousing (d) Transportation
10. To reach the mass customer in non personnel manner, the following element of promotion mix is used.
(a) Advertisement (b) Sales Promotion
(c) Personal Selling (d) Public Relation
11. To regain the lost reputation and to build goodwill, firm uses
(a) Advertisement (b) Sales Promotion
(c) Personal Selling (d) Public Relation
12. To bring rise in sale with immediate effect for short period, firm uses
(a) Advertisement (b) Sales Promotion
(c) Personal Selling (d) Public Relation
13. The first level packing in which product is initially packed is called
(a) Primary Packing (b) Secondary Packing
(c) Transportation Packing (d) None of the above
14. Following level of packing is optional, products may have or may not have
(a) Primary Packing
(b) Secondary Packing
(c) Transportation Packing
(d) None of the above
15. The firms can charge high price for their product, when the product has
(a) Low demand and low utilities (b) High demand and high utilities
(c) Both (a) and (b) (d) None of the above
16. What can be marketed?
(a) Any physical object with a definite shape
(b) Any physical object which creates value to customers
(c) Any physical object that has a selling price
(d) Any physical object that can be tested
17. Quality and performance of the product is the main focus of which marketing management philosophies.
(a) Selling Concept (b) Marketing Concept
(c) Production concept (d) Product concept
18. Marketing can be best understood as
(a) Pre production activity (b) Post production activity
(c) Pre and Post production activity (d) Selling activity
19. Price of a product can be referred as:
(a) Product cost (b) Brand value
(c) Value of utility for customer (d) Promotion cost
20. Which of the following is the right marketing mix for a Television Set
(a) Price, Place, Promotion, Process (b) Product, Price, Promotion, process
(c) Product, Price, Place, Process (d) Product, promotion, price, place
(Answers at Page no. 528)
## Fill in the Blanks
1. is also called as silent salesman.
2. is legal protection given to a brand.
3. Range of products or variety or assortment of products a company is manufacturing is called
.
4. The decisions related to distribution of product is called
.
5. Decisions related to increasing the sale of the product is called
.
6. Under direct channels, firm has intermediaries.
7. Maintenance of stock is called
8. is a paid form of presentation of a product or idea by an identified sponsor.
9. The communication tool which is used to improve the image or goodwill of the company is called \_\_\_\_.
10. Firm shares and informs all the details about the product to customers through \_\_\_\_.
(Answers at Page no. 528)
## True or False
1. Selling concept focuses on customer satisfaction.
(True/False)
2. Undergrading the quality of product is decided.
(True/False)
3. Packaging and Labelling are same or synonyms of each other. (True/False)
4. The spoken part of brand is called brand name.
(True/False)
5. The brand name should be suggestive.
(True/False)
6. In case the time required to respond to the additional demand for the products is high there is need to maintain higher level of inventories. (True/False)
7. Personal selling is more rigid than other tools of promotion. (True/False)
8. Transportation packaging refers to additional layers of protection that are kept till the product is ready for use.
(True/False)
9. Grading of product is the important function performed by packaging. (True/False)
10. In primary packaging the container is kept throughout the entire life of the product.
(True/False)
(Answers at Page no. 528)
## Remembering and Understanding-based Questions with Answers
Q. 1. It is necessary that goods and services must be made available to the customers at the right place, in the right quantity and at right time.
(a) Name and explain the concerned element of Marketing Mix given above.
(b) Explain the components of this element. [CBSE Sample Paper 2014]
Ans. (a) Name: Place/physical distribution
The physical handling and movement of goods from place of production to the place of distribution is referred to as physical distribution.
(b) Components of Physical distribution/Place:
1. Transportation
2. Warehousing
3. Inventory control
4. Order processing
Q. 2. Explain any two factors affecting price of a product. [CBSE Sample Paper 2015]
Ans. Factors affecting price of a product: (Any two factors)
(i) Product Cost (ii) Utility and Demand
(iii) Extent of competition in the market (iv) Government and Legal Regulations
(v) Pricing Objectives (vi) Marketing Methods used
Q. 3. At which level of packing, the immediate container is referred to?
Ans. In primary package immediate container is referred to.
Q. 4. Distinguish between marketing and selling on the basis of objective.
Ans. Main objective of selling is to maximise sale and profit. Main objective of marketing is to earn optimum profit with customer satisfaction.
Q. 5. What is the focus of product concept?
Ans. The main focus of product concept is maintaining high quality of product.
Q. 6. What do you mean by marketing mix?
Ans. Marketing mix refers to the four tools or ingredients which a marketer mixes in order to interact with market.
Q. 7. Name four elements of Marketing Mix.
Ans. Four elements of marketing mix are (i) Product, (ii) Price, (iii) Place, (iv) Promotion.
Q. 8. Give any two benefits of branding to marketer.
Ans. (i) Product differentiation, (ii) Helps in advertising.
Q. 9. Why is packing called silent salesman?
Ans. Packing is considered as silent salesman because like a salesman attractive packing induces people to buy the products.
Q. 10. Who are called the channels of distribution?
Ans. Channels of distribution refer to the people or middlemen who help in distributing the goods.
Q. 11. Who is a marketer?
Ans. A person or an organisation or a group of persons who provide goods or services to satisfy the needs of customers. He is called as provider of satisfaction.
Q. 12. Who is a customer?
Ans. People or an organisation who want to satisfy their need. They are also called seekers of satisfaction.
Q. 13. 'They don't sell what they can make, but they make what they can sell'. Name the concept to which this statement is related?
Ans. It is related to marketing concept.
Q. 14. What is meant by product?
Ans. Product refers to bundle of utility.
Q. 15. What is meant by Product Mix?
Ans. It refers to assortment of products a firm is manufacturing. It also means all the decisions related to product e.g., designing of product, packing of product, size of product etc.
Q. 16. What is meant by Price Mix?
Ans. It refers to all the decisions related to price of a product.
Q. 17. What is meant by Place Mix?
Ans. It refers to all the decisions related to physical distribution of goods and services.
Q. 18. What is meant by Promotion Mix?
Ans. It refers to all the decisions related to increase in sale of goods and services, e.g., advertisement, publicity, etc.
Q. 19. What is meant by Personal Selling?
Ans. Selling the goods through face to face interaction between salesman and buyer is known as personal selling.
Q. 20. What is meant by Sales Promotion?
Ans. It refers to incentives offered to customers and traders to increase the sale. e.g., discount, rebate, etc.
Q. 21. What is meant by Publicity?
Ans. It refers to non-paid form of impersonal communication by seller.
Q. 22. Name any two factors which help in fixing the price of a product.
Ans. (i) Product cost,
(ii) Competition.
Q. 23. 'Blindly following the goal of customer satisfaction has led to many social and environmental ills'. Do you agree? What should be done?
Ans. Despite of superiority of marketing concept, it has faced criticism from the people who are concerned about society and environment.
[After this explain the societal concept of marketing, refer to page 477.]
Q. 24. You have invented a new device to detect impurities of petrol. Which two advertising media would you use and why?
Ans. I would prefer to use following two media: (i) Newspapers, (ii) TV. [Give advantages of both the media]
Q. 25. 'It pays to advertise'. Do you agree with this statement? Give reasons.
Ans. Yes, it is right to say that it pays to advertise because advertisement offers following benefits. [Give advantages of advertisement, refer to page no. 495-496]
Q. 26. What is meant by direct channels of distribution? List any four methods of direct distribution.
Ans. Direct channels of distribution refer to selling the products directly without involving any middlemen or intermediaries. It is also called zero level channel of distribution.
## Manufacturer → Customers
Common methods of direct distribution are:
(i) Direct sale by appointing salesmen e.g., Tupperware, Eureka Forbes are following this method.
(ii) Through internet.
(iii) Sale by company's own retail outlet.
(iv) Sale through mail order, teleshoppers, etc.
## HOTS (Higher Order Thinking Skills) and Case Studies
Q. 1. Zoom Udyog, a car manufacturing Co., has started its business with Zoom 800 and slowly launched Zoom-1000, Wagon-Z, Swy-fy etc. and offered various services like after sale service, availability of spare parts etc. Identify the element of marketing mix referred here.
[CBSE Sample Paper 2014]
Ans. Product.
Q. 2. Radha found a worm crawling out of newly opened tetra pack of a juice manufactured by a reputed company, Zest, Ltd.. She went back to the shopkeeper from whom the pack was purchased who directed her to call up the customer care centre. When all her efforts failed, she went to a consumer activist group to seek help. The group decided to help Radha and take measures to impose restrictions on the sale of the firm's products of the particular batch and urge customers to refrain from buying the products of the company. Zest Ltd. lost its image in the market. The CEO gives the responsibility of bringing back the lost image of the company to a Manager.
(a) Identify the concept of Marketing Management which will help the manager getting the firm out of the above crisis.
(b) Also explain the role of above identified concept by stating any two points.
[CBSE Sample Paper 2014]
Ans. (a) Public Relations.
(b) Role of public relations can be discussed with respect to the functions which the department performs: (any two)
(i) Press relations (ii) Product publicity
(iii) Corporate communication (iv) Lobbying.
(v) Counselling.
Q. 3. Good Living Ltd. manufactures mosquito repellent tablets. These tablets are packed in strips of 12 tablets each. Each of these strips are packed in a cardboard box, 48 such boxes are then placed in a big corrugated box and delivered to various retailers for sale. State the purpose of packaging the tablets in a corrugated box. [CBSE Sample Paper 2015]
Ans. The packaging of tablets in a corrugated box is necessary for the purpose of storage, identification and transportation.
Q. 4. Shyam bought a pain relieving ointment after seeing it being displayed in the chemist's shop. The ointment tube was packed in a cardboard box. Identify the different levels of packaging of the pain relieving medicine, when it was purchased by Shyam. Also state the functions of packaging.
[CBSE Delhi (C)]
Ans. Different levels of packaging of the pain relieving medicine are:
Ointment tube: Primary packaging
Cardboard box: Secondary packaging
Functions of packaging: (Any three)
(i) It helps in product identification.
(ii) It helps in protection of the product from spoilage, breakage, leakage damage etc.
(iii) It facilitates use of the product to the consumers through appropriate sizes and shapes.
(iv) It helps in promotion of the product as a good package attracts the attention of the people at the time of purchase.
Q. 5. Raman, Joginder, John, Iqbal and Shreya are friends. They are operating different business. Each one has his/her own concept regarding operating their business.
Raman believes in producing products at a large scale. Thereby decreasing the average cost of the products and selling it at a reasonable price.
Joginder focuses on providing best quality products because he believes that a customer always wishes to buy a good quality product. The price of the product is secondary, John is of the belief that most important aspect of business is sales and so he undertakes aggressive selling and promotional effort.
Iqbal believes that his firm can achieve its goals only by identifying the needs of the customer and satisfying them better than the competitors.
Shreya on the other hand feels that her firm has a responsibility towards the society as well. So she provides customer satisfaction along with using techniques which are environmental friendly.
(i) What are the marketing concepts followed by each of them?
(ii) Raman's concept is successful for him because he is into manufacturing and selling iodised salt under the brand 'Healthy salt, this product has a ready market and vast consumer base, also the products are standardised so he can focus on production at a large to cut down the cost per unit. Write any business which can be successfully run by the others using their concepts.
(Joginder—John—Iqbal—Shreya)
Ans. (i) Raman—Production, Joginder—Product Concept, John—Selling Concept
Iqbal—Marketing, Shreya—Societal Concept
Q. 6. "An important task in the marketing of goods relates to designing the label as it provides useful and detailed information about the products". In the light of this statement, draw a label for "Tea" and highlight the important information to be provided on it.
Ans. Student must give information such as—MRP, Date of manufacturing, Date of expiry, Brand name, Batch no., Contents, etc. on Label.
Q. 7. One manufacturer of electronic product produces such products which need special care while using it. But the company has not given the instructions to consumers. If you were the manager of the company what steps you would take?
Ans. Give all the information on Label.
Q. 8. Recently, prices of perfumes, which are one of the major ingredients of agarbattis, have gone up substantially. Since there is keen Competition in the agarbatti market, no manufacturer increased the price of agarbattis. In turn, most of the manufacturer opted to reduce the quantity of perfumes in agarbattis to cut their cost of production. This has resulted in decreased quality of agarbattis though their prices have not changed. In order to overcome this problem, Garden Ltd. introduced a new set of agarbattis under the brand name Khushboo. Khushboo agarbattis captured the agarbattis market very quickly.
(i) Identify the product-related issue involved in the above case and explain its three functions.
(ii) Mention three features of that concept.
Ans. (i) Branding concept; Function (483)
(ii) Features (refer to page 484)
Q. 9. Simone, a budding entrepreneur wishes to operate a business of Flowers. Since they are perishable in nature, she plans to open a flower shop so that she can directly sell them to the customers. Being a small venture, the number of consumers is also less. So she decides that the direct channel of distribution is better. Her friend, Ankit is a manufacturer of gift items. He is confused regarding the level of channel he should follow. Can you guide him regarding the problem? Give points for support of yours answer.
Ans. Indirect.
Q. 10. You have an advertising agency. A manufacturer of consumer product like Soap, Tooth Paste has come to you to help him in promotion of his products. Convince him how advertising can assist in giving boost to his sales?
Q. 11. A commercial unit uses rocks, trees, electric poles, historical managements and walls to advertise its products. Which faults of the company does this advertising policy show?
Ans. Misuse of Public Property.
Q. 12. 'Various tools of communication are used by the marketers to promote their products.'
(i) Why do companies use all tools at the same time?
(ii) Name and explain the most commonly used non-personal tool of promotion which is paid for by the marketer.
(iii) Which tool of promotion will primarily be used for the following?
(a) To promote or protect a company's image or its individual products.
(b) An existing product meant for mass usage by literate people.
(c) To introduce a new product to a particular class of people through door-to-door visits.
(d) To attract attention of the people by using incentives.
Ans. (i) Synergy in Total Promotion Efforts
(ii) Advertisement
(iii) (a) Public Relation (b) Advertisement
(c) Personal selling (d) Sales Promotion
Q. 13. Which marketing philosophy give more importance to 'consumer welfare' instead of consumer satisfaction?
Ans. Societal marketing concept.
Q. 14. Which concept of marketing suggest that the organisation earn profit through volume of production?
Ans. Production concept.
Q. 15. Name the element of marketing which makes the product available to the target customer?
Ans. Physical distributions.
Q. 16. Write one example of exchange of goods in which buyer is a marketer.
Ans. In situation of rare supply, where buyer may be taking extra efforts in persuading the seller to sell the products to him/her.
Q. 17. A cosmetic manufacturing company is spending a lot of money on advertisement to sell their products as they believe that the sale of good depends largely on the quality of advertisement. Name the marketing philosophy followed by him. State any other two marketing philosophy.
Ans. The type of marketing philosophy followed by this firm is "selling concept".
Q. 18. Haldiram is selling fast food to the customers. Write the name of channel of distribution used by the company.
Ans. Direct channel (zero level of distribution channels).
Q. 19. For selling its cars and vans. Maruti Udyog is making used of which channel of distribution? Ans. Indirect channel (one level of distribution channel).
Q. 20. A tube of shaving cream is always offered in a cardboard box. Name the type of packaging used in this case.
Ans. Secondary level package.
Q. 21. A dealer wants to send some gift items of glassware to Delhi from Mumbai. Which type of packaging is needed here?
Ans. Transport level packaging.
Q. 22. A leading leather manufacturing company is using banned animal skin to make huge profit. Name the marketing concept which is ignored here.
Ans. Societal marketing concept is ignored here.
Q. 23. Mr Rajiv wants to buy LCD T.V. for his family. Now he has come to Jagota Electronics, Model Town, after coming to shop he gets confused. Write the name of promotion tool which has brought him to the shop and promotion tool needed now. Also write the four points of features of latter tool.
Ans. The just promotion tool which brought Rajiv to the shop is advertisement and the promotion tool required now is personal selling. For features of personal selling, refer to page no. 497.
Q. 24. One of the element of marketing mix is concerned with designing the shape, size and quality of goods and services.
(i) Name that element of marketing mix
(ii) Name the important features of that element.
Ans. (i) Product Mix
(ii) Features of Product Mix are:
(a) Labelling (b) Branding (c) Packaging
Q. 25. ITC started its business with Jobaico Industry, later on its entered in hotel industry, consumer goods industry, stationery, etc. ITC assured quality to customer and kept company's name as its identity. This help the customers in product identification and hence ensured quality. It also built up their confidence and help in increasing their level of satisfaction.
(i) Name the element of marketing mix referred in above para.
(ii) Name the other elements of marketing mix.
(iii) Name the concept which assure quality and help in identification of product.
Ans. (i) Product Mix
(ii) Other elements: Price mix, Place mix, Promotion mix.
(iii) Concept which help in identifying the product and assure quality is branding.
Q. 26. Ajay was appointed as a marketing head of Alfa Enterprise manufactures of toothpaste and tooth brushes. His target sale was zero units a month. Apart from thinking about various channels of distribution to achieve the target, he himself started visiting schools in backward areas. He found that even after taking various steps and counselling some school children had not started brushing their teeth. He investigated and found that they could not afford to buy toothbrush and toothpaste. So with due permission the started donating 200 toothbrush and toothpaste to schools.
Identify the channels of distribution Ajay would adapt for distribution of toothbrush and toothpaste, justify buying more
Identify the channels of distribution Ajay would adapt for distribution of toothbrush and toothpaste, justify by giving reasons.
Ans. The channel of distribution Ajay would adapt is indirect because he is dealing with consumer goods
Q. 27. 'Advertising' and 'Personal Selling' both are communication tools used by the marketers to promote their products. Yet they differ in their approach. Differentiate between the two by giving any six differences.
Ans. Refer to page no. 497.
Q. 28. Mansi, a shoe manufacturer for school students, decided to maximise her profit by producing and distributing at large scale and thereby reducing the average cost of production:
(i) Identify the marketing management philosophy adopted by Mansi.
(ii) Explain this philosophy on the basis of:
(a) Main focus
(b) Means and ends.
Ans. (i) Production concept
(ii) Give difference, see page no. 477.
Q. 29. 'Be Healthy' is one of the top selling organic food brand in India. It has more than hundred products in over ten categories and thus established a brand average in market. The company sell its products through online and company owned showrooms only.
In context of above case :
(i) Identify the components of marketing mix being discussed above.
(ii) Name the important decisions related to both of these concept.
Ans. (i) (a) Place concept (b) Product concepts
(ii) (a) Important decisions related to place concepts are
(i) Transportation (ii) Warehouse
(iii) Order Processing (iv) Inventory
(b) Important decisions related to product
(i) Branding
(ii) Packaging
(iii) Labelling
## Guidelines to NCERT Questions
## Very Short Answer Type Questions
1. Explain the advantages of branding to marketers of goods and services. [Refer on page no. 484]
2. List the characteristics of a good brand name.
[Refer on page no. 483]
3. What is the societal concept of marketing?
[Refer on page no. 477]
4. Enlist the advantages of packaging of a consumer products. [Refer on page no. 485]
## Short Answer Type Questions
1. What is marketing? What functions does it play with process of exchange of goods and services? Explain.
[Refer on page no. 473-474]
2. Distinguish between the product concept and production concept of marketing.
[Refer on page no. 476]
3. Product is a bundle of utilities. Do you agree? Comment.
4. 'Product is a mixture of tangible and intangible attributes'. Discuss.
[Refer on page no. 483-484]
5. Describe the functions of labelling in the marketing of products. [Refer on page no. 486]
6. Explain briefly the components of physical distribution. [Refer on page no. 492-493]
7. Define advertising. What are its main features? Explain. [Refer on page no. 495]
8. Discuss the role of 'sales promotion' as an element of promotion mix.
[Refer on page no. 500-501]
## Long Answer Type Questions
1. What is the marketing concept? How does it help in the effective marketing of goods and services?
[Refer on page no. 476]
2. What is marketing mix? What are its main elements? Explain. [Refer on page no. 482-483]
3. How does branding help in creating product differentiation? Does it help in marketing of goods and services? Discuss.
[Refer on page no. 484-485]
4. What are the factors affecting determination of the price of a product or service? Explain.
5. What do you mean by 'channels of distribution'? Explain. [Refer on page no. 490-491]
6. Explain the major activities involved in the physical distribution of products.
[Refer on page no. 492-493]
7. Distinguish between advertising and personal selling. [Refer on page no. 497]
## TEST YOURSELF
## Very Short Answer Questions
1. Who is a marketer?
2. Define customer.
3. What do you mean by 'market'?
4. What is the role of consumer in present day concept of marketing?
5. Define marketing management in present context.
6. How does the process of marketing establish a place for the business in the market?
7. What is the purpose of packaging a product?
8. What is marketing research?
9. What is meant by 'product mix'?
10. Why are packaging called silent salesman?
11. Explain the meaning of the term promotion mix.
12. Define marketing mix.
13. What do you mean by labelling?
14. Define a product.
15. What is a trade mark?
16. Define Place as one of the 'P's of marketing mix.
17. What is the meaning of advertisement?
## Short Answer Questions
1. Explain briefly the pillars of marketing concept.
2. Explain product concept and the societal concept of marketing.
3. Bhuvan & Co. has launched a new product in the market. As a marketing manager suggest the sales promotion techniques which Bhuvan & Company can adopt to increase the sale of new product.
4. Rajiv has written a book on management studies. What factors must be considered by Rajiv before fixing the price of the book?
5. Define advertising. What are its important features?
6. What is a product mix? Describe briefly the salient features of the product mix.
7. Explain in brief the concept of personal selling.
## Long Answer Questions
1. What do you mean by marketing management? Explain its important functions.
2. What is meant by marketing mix? Explain different elements or components of marketing mix.
3. What is price mix? Explain the factors which are kept in mind while fixing the price of a product.
4. What are the major activities involved in the physical distribution of goods?
5. Bhuvan & Company has invented a fuel saving instrument which can reduce the consumption of petrol and diesel if it is attached in the engine of vehicle. Suggest any two media which the company must select to advertise for this product and why.
6. Explain briefly the functions of labelling.
7. Nisha a school bag manufacturer decided to improve the product for profit maximisation and thus added a water bottle holder to the existing design.
(i) Identify the marketing management philosophy adapted by Nisha.
(ii) Explain this philosophy.
[Hint: Product concept.]
## Previous Years' Examination Questions (2014-2019)
## One Mark Questions
1. Why is the understanding of 'Marketing Management Philosophies' important? [CBSE 2018]
2. 'Buy one get one free' is printed on the label of the package of a mosquito repellant.
State the labelling function being performed by this statement. [CBSE 2018]
3. Name the function of marketing which is concerned with the cost and location of target market.
[CBSE (AI) 2016]
4. 'Beauty Products Ltd' is a natural and ethical beauty brand famous for offering organic beauty products for men and women. The company uses plant based materials for its products and is the No.1 beauty brand in the country. It not only satisfies its customers but also believes in overall protection of the planet.
Identify the marketing management philosophy being followed by 'Beauty Products Ltd.'
[CBSE (F) 2015]
5. Name the marketing function which is concerned with informing the customers about the firm's products.
[CBSE (D) 2016]
6. 'Maruti Vega Ltd.' entered into the market with coloured television and have now introduced products like audio systems, air conditioners, washing machines, etc. The company is not only offering the products but also handling complaints and offering after-sales services.
Identify the element of marketing-mix discussed here.
[CBSE (AI) 2015]
7. Name the marketing function which is concerned with the important decision of managing inventory.
[CBSE (F) 2016]
8. Give the meaning of 'Physical Distribution' as an element of Marketing Mix.
[CBSE 2019 (66/1/1)]
## OR
What is meant by 'Marketing Management'? [CBSE 2019 (66/1/1)]
9. Kumar wanted to purchase a fuel efficient car having the latest standards regarding minimisation of pollution. He saw an advertisement offering such a car and visited the showroom of the company wherein the car was displayed. In his discussion, the Marketing manager told him that the company is providing credit facilities, maintenance services and many other effective services which are helping in bringing repeat sales and developing brand loyalty.
Identify the marketing function which the Marketing manager was discussing with Kumar.
[CBSE 2019 (66/2/1)]
10. People think that it is the 'Product' only that can be marketed. But something else can also be marketed, e.g. 'Visit Kerala for Health Tourism'. Identify what is being marketed here.
[CBSE 2019 (66/3/1)]
11. Give the meaning of 'Price' as an element of marketing mix.
[CBSE 2019 (66/3/1)]
OR
What is meant by 'Public Relations'?
[CBSE 2019 (66/3/1)]
12. What is the meant by 'Packaging'?
[CBSE 2019 (66/4/1)]
13. 'Nayan Medicare Equipment Ltd.' manufactures equipment for surgeons having a unique laser technique. The equipment can be used by the surgeons only after proper training. Even their maintenance requires guidance of specialised engineers. Because of this, the equipment is used in a limited number of hospitals. The company wants to increase the sale of the equipment. Suggest the promotion tool to be used by the company giving reason in support of your answer.
[CBSE 2019 (66/5/1)]
## Three Marks Questions
14. Explain how the 'Product Related Factors' affect the choice of channels of distribution?
[CBSE (D) 2015]
15. Hemant, Guddu and Toshiba were friends from college days and presently they were doing different kinds of business. They regularly meet and discuss their business ideas, and exchange notes on customer satisfaction, marketing efforts, product designing, selling techniques, social concerns, etc. In one of such meetings, Hemant drew the attention of Guddu and Toshiba towards the exploitation of consumers. He told that most of the seller were exploiting the consumers in various ways and were not paying attention towards the social, ethical and ecological aspects of marketing, whereas he was not doing so. Guddu told that they were under pressure to satisfy the consumers but stated that the consumers would not buy or not buy enough unless they were adequately convinced and motivated for the same.
Toshita stressed that a company cannot achieve its objectives without satisfying the needs of the customers. It was the duty of the businessmen to keep consumer satisfaction in mind, because business is run by the resources made available by the society. She further stated that she herself was taking into consideration the needs of the customers. Identify the various types of thinking that guided Hemant, Guddu and Toshita in the marketing efforts of their business. Also, state one more feature each of the various types of thinking identified that is not given in the above paragraph.
[CBSE (AI) 2014]
16. JTM Ltd launched 'Buddyline', an exercise book and comprehensive stationery brand name comprising of ball pens, gel pens and geometry boxes after identifying the target market and understanding the needs and wants of the consumers of that market. All their products were of good quality and eco-friendly but expensive. They wanted to distinguish their product from that of their competitors. They spent lot of effort, time and money in creating the brand name, as they knew that without a brand name, they can only create awareness for the generic product and can never be sure of the sale of their products. The effort paid off and the demand for the products started growing. The customers liked the brand and became habitual to it. They did not mind paying a higher price.
Over a period of time, it became a status symbol to buy ‘Buddyline’ brand because of its quality. The consumers felt pride in using them.
(i) Identify the marketing management philosophy followed by JTM Ltd.
(ii) Explain the advantages of branding to the marketers highlighted in the above case.
[CBSE 2019 (66/1/1)]
## Four Marks Questions
17. A company was marketing ‘water purifiers’ which were very popular due to their quality and after sales services provided to the customers. The company was a leading company in the market and earning huge profits. Because of huge profits the company ignored the after sales services. As a result its relations with the customers got spoiled and the image of the company was damaged in the public. Top management became concerned when the profits for the current quarter fell steeply. On analysis it was revealed that ignoring the after sales services was its reason. Therefore the company took all possible measures to protect and promote its favourable image in the eyes of the public. As a result the goodwill of the company improved in the society.
Name and state the communication tool used by the marketer in the above case to improve its image.
[CBSE (D) 2016]
18. Explain the following functions of marketing:
(i) Product designing and development
(ii) Standardization and Grading
[CBSE 2019 (66/1/1)]
19. Explain any four factors which affect the fixation of price of a product. [CBSE 2019 (66/2/1)]
20. Tapas Sen, a manufacturer, redesigned his existing soup making machine into a small portable machine. For selling the machine, he entered into an agreement with his uncle who agreed to finance the project with a 50% share in the profits. To launch the machine, they decided to start with direct channels of distribution. They named the venture 'Cup-a-Soup'. In the first year, their main objective was profit maximisation. They appointed 30 trained salesmen for distribution of the machine across the country. They offered incentives and awards to salesmen for achieving their sales targets.
(a) Identify the marketing philosophy used by 'Cup-a-soup'.
(b) Identify the tool of promotion used by 'Cup-a-Soup'.
[CBSE 2019 (66/3/1)]
21. What is meant by 'Branding'? State any three advantages of branding to customers.
[CBSE 2019 (66/3/1)]
## OR
What is meant by 'Packaging'? State any three functions of packaging. [CBSE 2019 (66/3/1)]
22. Mudit Gupta set up 'Healthy Biscuits', a company manufacturing various kinds of biscuits like oat biscuits, soya biscuits, ragi biscuits and wholewheat biscuits. He knew that a customer would only pick up a small quantity of the product, so he did not want to invest in starting his own retail outlets. He planned to market the product at the 'In and Out' stores at various petrol pumps in the city though the other biscuit manufacturers were using other channels of distribution.
Give the meaning of 'Channels of Distribution'. [CBSE 2019 (66/4/1)]
23. Jay is working as the Chief Executive Officer of a soft drinks company. The company is doing its business in collaboration with a soft drinks company of France. Jay's friend, Swami a teacher of Business Studies in a reputed college was discussing the 'Marketing' chapter with his students. He wanted clarity from Jay about the factors which affect the marketing decisions. Jay explained that there were a large number of factors affecting marketing decisions which may be divided into two categories:
(i) controllable factors, and (ii) non-controllable factors. Jay further explained that controllable factors became marketing tools that can be constantly shaped and reshaped by marketing managers, to achieve marketing success.
Identify and explain the set of marketing tools that can be constantly shaped and reshaped by marketing managers.
[CBSE 2019 (66/5/1)]
## Five/Six Marks Questions
24. State the functions performed by financial Market. [CBSE (AI) 2016]
25. 'Hayaram' is a famous chain selling a large variety of products in the Indian market. Their products include chips, biscuits, sweets and squashes. It charges a comparatively higher price than its competitors as it sells quality products. Besides, it offers regular discounts to its customers and easy credit terms to its retailers. It has five of its own retail shops. It also sells its products through various grocery stores so that the products are made available to customers at the right place, in the right quantity and at the right time. It regularly uses different communication tools to increase its sales.
The above para describes the combination of variables used by Hayaram to prepare its market offering. Identify and explain the variables. [CBSE (D) 2015]
26. Vasvi purchased a bottle of pickle from the local grocery shop. The information provided on the bottle was not clear. She fell sick on consuming it. She filed a case in the District Forum under Consumer Protection Act and got the relief.
(a) Identify the important aspect neglected by the marketer in the above case.
(b) Explain briefly the functions of the aspect identified in (a) above. [CBSE (AI) 2016]
27. Vasvi was a student of Commerce in class XII. Her father was a farmer, who grew different varieties of wheat and was well versed about various aspects of wheat cultivation. He was also selected by the government for a pilot-project on wheat cultivation. As a project she decided to study the feasibility of marketing good quality wheat at reasonable price. Her father suggested to her to use internet to gather customers' views and opinions. She found that there was a huge demand for organic-packed wheat. She knew that there were no predetermined specifications in case of wheat, because of which it would be difficult to achieve uniformity in the output. To differentiate the product from its competitors, she gave it the name of 'Mahan-organic-wheat' and classified it into three different varieties namely - Popular, Classic and Supreme, based on the quality. She felt that these names would help her in product differentiation.
Explain the three functions of marketing, with reference to the above paragraph.
[CBSE (AI) 2016]
28. 'Pushpanjali Ltd.', is manufacturing chocolates, biscuits, cakes and other similar products. The company is not generating enough profits. Saurabh, the Marketing manager of the company got a survey conducted to find out the reasons. The finding of the survey revealed that in spite of better quality, the customers were not able to distinguish the products of the company from its competitors. Though the customers wanted to buy the products of 'Pushpanjali Ltd.' again and again because of its goods quality, but they were not able to identify its products in the market. Because of this, the sales of the company could not pick up resulting in inadequate profits. Saurabh, the Marketing manager now realised that 'Pushpanjali Ltd.' had forgotten to take one of the most important decisions related to the product. What decision should 'Pushpanajali Ltd.' take so that its customers are able to identify its products in the market? Explain the benefits that may result to 'Pushpanjali Ltd.' and its customers if the above decision is taken.
[CBSE 2019 (66/2/1)]
29. Since childhood Niru and Janak had been watching their grandmother procuring wheat from the market, washing it well drying it and getting it converted into atta. They conducted a survey to collect data to identify whether there is demand for readymade atta and realised that with the growing number of working women, it is the need of the hour to manufacture high quality atta. They named their product 'Srijan' and set up 'Srijan Atta Factory' at Jaunpur Village. To penetrate in the market, they decided to keep the price low. For maintaining smooth flow of their product into the market and avoiding delays in delivery, it was decided to store wheat at SKM Services which had scientific processes and logistics facilitating quick delivery. They also set up an online complaint portal to take care of consumer grievances.
By quoting the lines from the above paragraph, state five marketing functions undertaken by Niru and Janak for successful marketing of ‘Srijan’ atta. [CBSE 2019 (66/4/1)]
## Hints of the Answers for Case Studies
2. Labelling function performed is -
'Helps in Promotion of products' as labelling plays an important role in sales promotional schemes launched by companies.
4. Social Marketing Concept.
5. Promotion
6. Product/Product Mix
7. Warehousing
9. Customer Support Service
10. Place
13. Personal Selling.
This is because it is a complex product requiring technical details and is best sold through shorter channels.
15. Various types of thinking that guided the marketing efforts were:
## Hemant
## Societal Marketing concept
Feature of Societal marketing concept: (Any one)
(i) It takes care of long term well being of the consumers as well as the society.
(ii) It uses integrated marketing as a means to achieve the objective.
(iii) Its objective is to earn profits through customer satisfaction and social welfare.
(iv) The marketing efforts start from the identification of needs of the target market and the society.
## Guddu
## Selling concept
Feature of Selling concept: (Any one)
(i) It uses aggressive selling and promotional techniques like advertising, personal selling and sales promotion to achieve the objective.
(ii) It involves pushing the sale of existing products.
(iii) Its objective is to earn profits through increased volume of sales.
(iv) The marketing efforts start after the product is produced in the factory.
## Toshita
## Marketing concept
Feature of Marketing concept: (Any one)
(i) It involves development of products for satisfying needs of the target market better than the competitors.
(ii) Its focus is on satisfaction of customers' needs.
(iii) It uses integrated marketing as a means to achieve the objective.
(iv) The marketing efforts start from the identification of needs of the target market.
16. (i) Societal marketing philosophy.
(ii) Advantages of branding highlighted in the above case are: (Any two)
(a) Helps in product differentiation.
(b) Helps in advertising and display programmes.
(c) Differential pricing.
17. (a) Public Relations.
Public Relations refer to a variety of programmes to promote and protect a company's image or its products in the eyes of the public.
20. (a) Product concept
(b) Personal Selling.
22. (a) Channels of Distribution mean a set of individuals and firms that take title, or assist in transferring title to particular goods or services as it moves from the producers to the consumers.
(b) Factors affecting determination of choice of channels
(i) Product related factor: Since the product is a consumer product, its unit value is low and is standardized, longer channels should be used.
(ii) Market related factor: Since the size of order of biscuits for 'Healthy Biscuits' was small, large number of intermediaries were used.
(iii) Competitive factor: The company decided to be different from the choice of channel selected by the competitors, so it decided to market the product at the 'In and Out' stores at various petrol pumps in the city.
23. Set of marketing tools that can be constantly shaped and reshaped by marketing managers are:
(i) Product: Product is a mixture of tangible and intangible attributes which are capable of being exchange for a value with ability to satisfy customer needs.
(ii) Price: Price may be defined as the amount of money paid by the buyer (or received by the seller) in consideration for the purchase of a product or a service.
(iii) Place or Physical Distribution: Place or Physical Distribution is concerned with making the goods and services available at the right place, in right quantity and at the right time so that the consumers can purchase the same.
(iv) Promotion: Promotion refers to the use of communication with the objective of informing potential customers about the product and persuading them to buy the same.
25. The combination of variables used by Hayaram to prepare its market offering are:
## (i) PRODUCT
It refers to the combination of various aspects relating to the product or service to be offered for sale. It relates to decisions regarding planning, designing and developing the right type of products and services for the consumers. It includes branding, labelling and packaging.
'Their products include chips, biscuits, sweets and squashes'.
## (ii) PRICE
Price Mix involves different Pricing Methods, Pricing strategies, Pricing Policies and Price Changes. It involves decisions regarding the basic price of the product, discount, allowances, terms of payment etc.
'It charges a comparatively higher price than its competitors'.
## OR
'It offers regular discounts to its customers and easy credit terms to its retailers'.
## (iii) PLACE/PHYSICAL DISTRIBUTION
It includes activities that make firm's products available to the target customers. It consists of all the activities involved in transferring ownership and physical possession of the product to the consumers.
It consists of physical distribution i.e. activities involving the movement of products or services from producers to consumers as well as channels of distribution i.e. the route through which the goods move form the producer to the consumer.
'It has five of its own retail shops'.
## OR
'It also sells its products through various grocery stores....right time'.
## (iv) PROMOTION
It consists of all the activities aimed at persuading customers to buy the product through advertising, personal selling, sales promotion and publicity.
'It regularly uses different communication tools to increase its sales'.
## 26. (a) Labelling.
(b) Functions of labelling: (any five points with explanation)
(i) Describes the product and specifies its contents.
(ii) Identifies the product or brand.
(iii) Helps in grading of products.
(iv) Helps in promotion of products.
(v) Provides information required by law.
## 27. Functions of marketing, with reference to the above paragraph are:
(i) Gathering and analysing market information.
'...use internet to gather customers' views and opinions.'
(ii) Standardisation and Grading/ Grading.
'...no pre-determined specifications in case of wheat because of which it would be difficult to achieve uniformity in the output.'
## OR
'…classified it into three different varieties namely – Popular, Classic and Supreme, based on the quality'.
(iii) Branding.
'To differentiate the product from its competitors, she gave it the name of 'Mahan Organic Wheat'.'
## OR
She felt that these names would help her in product differentiation.
28. The decision which 'Pushpanjali Ltd.' should take so that its customers are able to identify its products in the market is Branding.
Benefits that may result to Pushpanjali Ltd.: (Any two)
(i) Enables marking product differentiation.
(ii) Helps in advertising and display programmes.
(iii) Differential pricing.
(iv) Ease in introduction of new product.
Benefits that may result to the customers: (Any two)
(i) Helps in product identification.
(ii) Ensures quality.
(iii) Status symbol.
29. Marketing functions undertaken by Niru and Janak:
(i) Gathering and analyzing market information is necessary to identify the needs of the customers and take various decisions for successful marketing of products and services.
"They conducted a survey to collect data to identify whether there is demand for readymade atta and realised that with the growing number of working women, it is the need of the hour to manufacture high quality atta."
(ii) Branding is the process of giving a name/sign/symbol to the product in order to distinguish the product from that of competitors.
"They named their product 'Srijian'
"They named their product 'Srijan'"
(iii) Pricing of product involves fixation of price of a product and taking various related decisions like pricing strategies.
"To penetrate in the market, they decided to keep the price low."
(iv) Storage or warehousing refers to arranging for proper storage of goods to maintain smooth flow of goods in the market and avoid delay in delivery.
"For maintaining smooth flow of their product into the market and avoiding delays in delivery, it was decided to store wheat at SKM Services which had scientific processes and logistics facilitating quick delivery."
(v) Customer support Services aim at providing maximum satisfaction to the customers for developing brand loyalty for a product.
"They also set up an online complaint portal to take care of consumer grievances."
## ANSWERS OF MCQs AND CASE STUDIES
## Page 475
1. (d) All of the above
2. (a) Marketing
(b) Features of marketing:
(1) Need and wants
(2) Creating market offering
(3) Customer value
(4) Exchange mechanism
## Page 478
1. (c) Selling concept
2. (a) Production concept
3. (d) Marketing concept
4. Various types of thinking that guided the marketing efforts were:
## Ginika
## Societal Marketing concept
Feature of Societal marketing concept: (Any one)
(i) It takes care of long term well being of the consumers as well as the society.
(ii) It uses integrated marketing as a means to achieve the objective.
(iii) Its objective is to earn profits through customer satisfaction and social welfare.
(iv) The marketing efforts start from the identification of needs of the target market and the society.
## Tanish
## Selling concept
## Feature of Selling concept: (Any one)
(i) It uses aggressive selling and promotional techniques like advertising, personal selling and sales promotion to achieve the objective.
(ii) It involves pushing the sale of existing products.
(iii) Its objective is to earn profits through increased volume of sales.
(iv) The marketing efforts start after the product is produced in the factory.
## Rohit
## Marketing concept
Feature of Marketing concept: (Any one)
(i) It involves development of products for satisfying needs of the target market better than the competitors.
(ii) Its focus is on satisfaction of customers needs.
(iii) It uses integrated marketing as a means to achieve the objective.
(iv) The marketing efforts start from the identification of needs of the target market.
## Page 481
1. (i) The elements of marketing discussed in above para are—
(a) Product
(b) Price
(ii) The functions of Marketing discussed in above para are—
1. Gathering and analysing market Information.
(she used social media and online survey)
2. Market Planning (She prepare SWOT analysis)
3. Product designing and development (started new segment)
4. Pricing (Fixed Low Price)
## Page 487
1. (c) Labelling
2. (b) Brand name
3. (i) Branding, Labelling, Packaging
(ii) Short and Simple, Unique
## Page 489-490
1. (a) High competition
2. (d) To deliver goods in rural area
3. (a) Price/Pricing
(b) Factors discussed in the above case are: (Any four)
(i) Product Cost
(ii) Utility and Demand
(iii) Extent of competition
(iv) Marketing methods used
(v) Pricing objectives
## Page 494
1. (a) Zero level channel.
2. (c) Order processing
3. Activities/Components of Physical Distribution: (Any two)
1. Order processing: A good physical distribution system should provide for an accurate and speedy processing of orders, in the absence of which goods would reach the customers late or in wrong quantity or specifications.
2. Transportation: It is the means of carrying the goods and raw materials from the point of production to the point of sale. It is important because unless the goods are physically made available, the sale cannot be completed.
3. Warehousing: It refers to the act of storing and assorting products in order to create time utility in them.
4. Inventory Control: Higher the level of inventory, higher will be the level of service to customers but the cost of carrying the inventory will also be high because lot of capital would be tied up in the stock. Thus, a balance is to be maintained in respect of the cost and customer satisfaction.
## Page 496
1. (a) Identified sponsor
2. Advertising.
## Page 498
1. (b) Personal selling
2. (i) Promotion
(ii) Personal Selling
(iii) Advertising, Public Relations, etc.
## Page 499-500
1. (d) Public relation
2. (a) Public Relation.
(b) (i) Press Relation.
(ii) Product Publicity.
(iii) Corporate Communication.
(iv) Counselling.
## ANSWERS OF OBJECTIVE TYPE QUESTIONS
## Multiple Choice Questions
1. (a)
2. (b)
3. (d)
4. (d)
5. (c)
6. (b) 7. (c) 8. (d) 9. (a) 10. (a)
11. (d) 12. (b) 13. (a) 14. (b) 15. (b)
16. (b) 17. (d) 18. (c) 19. (c) 20. (d)
## Fill in the Blanks
1. Packaging
2. Trade mark
3. Product mix
4. Place Mix
5. Promotion mix 6. Zero 7. Inventory 8. Advertisement
9. Public Relation 10. Labelling
## True or False
1. (F) – It focus on sales maximisation.
2. (F) – Under grading the product is classified on the basis of size, quality, etc.
4. (T)
6. (T)
7. (F)
8. (F)
9. (F)
10. (T)
# CONSUMER PROTECTION
## Contents as per Latest CBSE Syllabus
■ Concept and importance of consumer protection
■ Consumer Protection Act 1986:
\- Meaning of consumer
\- Rights and responsibilities of consumers
• Who can file a complaint?
\- Redressal machinery
\- Remedies available
■ Consumer awareness—Role of consumer organizations and Non-Governmental Organizations (NGOs).
## INTRODUCTION AND MEANING
Consumer protection refers to protecting the interest of consumers. An analysis of marketing management has made it clear that consumer is a king pin in the market. The producer should produce goods keeping in mind the requirements of consumers and satisfy the consumer but it is observed that this obligation is neglected by some businessmen and they are involved in the unfair practices such as supply of substandard quality, adulteration, etc. So there is need for consumer protection. Hence consumer protection means protecting the interest of consumer.
## 12.1 IMPORTANCE OF CONSUMER PROTECTION
Consumer protection is very wide. It includes rights, responsibilities and various remedies available to consumers. It is not only beneficial for consumer but it is equally important for businessmen also.
## Importance of Consumer Protection from Consumers' Point of View:
1. Consumer Ignorance. Consumer protection provides information to the ignorant customers regarding rights and remedies available to them. It spreads awareness so that consumer can know about the various redressal agencies where they can approach to protect their interests.
2. Unorganised Consumers. In developing countries like India, consumers are not organised. There are very few consumer organisations which are working to protect the interests of consumers. Consumers protection encourages establishment of more consumer organisations. Consumer protection provides power and rights to these organisations as these organisations can file case behalf of customers.
3. Widespread Exploitation of Consumers. Although nowadays consumer is the king pin of market but then also there is lot of exploitation of consumers as businessmen use various unfair trade practices to cheat and exploit consumers. Consumer protection provides safeguard to consumers from such exploitation.
## Importance of Consumer Protection from Businessmen's Point of View:
Businessmen cannot survive for a long time by ignoring the interest of consumer. They have to give due importance to consumer if they want to prosper in competitive market. Consumer protection provides following benefits to businessmen:
1. Long-term Interest of Business. After the liberalisation and globalisation the level of competition has increased so much that not only internal but business has to face international competition. In the race of competition the businessmen can win and capture a big share in the market only when they are able to satisfy its customers by designing the products keeping in mind the requirements of customers. The businessmen who ignore the interest and satisfaction of customers lose their goodwill and clients. So it is in interest of business itself to keep its customers satisfied.
2. Businessman Uses Society's Resources. Businessmen use the resources of society. They earn profit by supplying goods and services to the members of society so it must do something for society. Businessmen are merely trustee of resources, they must use these resources for the benefits of consumers.
3. Social Responsibilities. A businessman has social obligations towards various groups and customer is one of the important groups. It is responsibility of businessmen to provide quality goods at reasonable price. Consumer protection guides businessmen to provide social responsibilities.
4. Moral/Ethical Justification. Traditionally ethics was part of profession only, but today ethics is playing very important role in business also. The ethics or moral values practised by the businessmen adds glory to businessmen. In today's environment business without ethical value is not more than a criminal activity and no civil society can tolerate and allow the existence of unethical business.
5. Government Intervention. If businessmen want to avoid intervention of government then they should not involve in unfair trade practices. Government intervention may spoil the image of business. Businessmen should voluntarily involve in the activities which protect the interest of consumer.
6. Consumer is the Purpose of Business. The basic purpose of business is to create more and more customers and retain them and businessmen can create more customers only by satisfying the customers and protecting the interest of consumer. The customer is the foundation of business.
## MCQs and Case Studies
1. In developing countries like India the number of consumer organisations are very less. This is related to which importance of consumer protection.
(a) Widespread exploitation of consumers (b) Consumer ignorance
(c) Unorganised consumers (d) None of the above
2. 'Grahak Shakti', an N.G.O. organized a workshop to discuss various issues relating to consumers. During the discussion, one of the members drew attention towards exploitation of consumers due to defective and unsafe products, adulteration, black marketing, hoarding, etc. To this another member argued that consumers themselves are responsible as they do not raise collective voice against the exploitation. The Chairperson of the organization was of the opinion that it was also the duty of the businessman to take care of the interests of various stakeholders. Business organizations earn money by selling goods and services to consumers. So the interests of the stakeholders have to be well taken care of.
State three points that highlight the need for consumer protection as discussed in ‘Grahak Shakti’s workshop.
[CBSE Sample Paper 2016]
(Answers at Page no. 559)
## 12.2 LEGAL PROTECTION TO CONSUMERS
Government of India has provided various laws and legislations to protect the interest of consumer and some of these regulations are:
The Consumer Protection Act 1986. Enactment of consumer protection Act 1986 was one of the most important steps taken to protect the interest of consumer. The provision of act came into force from July 1, 1987. The main features of this act are:
(i) This act has provided various rights and responsibilities to consumers.
(ii) It provides safeguard to customers against defective goods, deficients, services, unfair trade practices and other forms of their exploitation.
(iii) The act has provided three tier redressal agencies where consumer can file complaints.
These are district forum, state commission and national commission.
## 12.3 CONSUMER RIGHTS
Although businessman is aware of his social responsibilities even then we come across many cases of consumer exploitation. That is why government of India provided following rights to all the consumers under the Consumer Protection Act:
1. Right to Safety. According to this right the consumers have the right to be protected against the marketing of goods and services which are hazardous to life and property. This right is important for safe and secure life. This right includes concern for consumer's Long-term interest as well as for their present requirement. Sometimes the manufacturing defects in pressure cookers, gas cylinders and other electrical
appliances may cause loss to life, health and property of customers. This right to safety protects the consumer from sale of such hazardous goods or services.
2. Right to Information. According to this right the consumer has the right to get information about the quality, quantity, purity, standard and price of goods or service so as to protect himself against the abusive and unfair practices. The producer must supply all the relevant information at a suitable place.
3. Right to make Choice. According to this right every consumer has the right to choose the goods or services of his or her likings. The right to choose means an assurance of availability, ability and access to a variety of products and services at competitive price and competitive price means just or fair price. The producer or supplier or retailer should not force the customer to buy a particular brand only. Consumer should be free to choose the most suitable product from his point of view.
4. Right to be Heard or Right to Representation. According to this right the consumer has the right to represent himself or to be heard or right to advocate his interest. In case a consumer has been exploited or has any complaint against the product or service then he has the right to be heard and be assured that his/her interest would receive due consideration. This right includes the right to representation in the government and in other policy making bodies. Under this right the companies must have complaint cells to attend the complaints of customers.
5. Right to Seek Redressal. According to this right the consumer has the right to get compensation or seek redressal against unfair trade practices or any other exploitation. This right assures justice to consumer against exploitation. The right to redressal includes compensation in the form of money or replacement of goods or repair of defect in the goods as per the satisfaction of consumer. Various redressal forums are set up by the government at national level and state level.
6. Right to Consumer Education. According to this right it is the right of consumer to acquire the knowledge and skills to be informed to customers. It is easier for literate consumers to know their rights and take actions but this right assures that illiterate consumer can seek information about the existing acts and agencies are set up for their protection. The government of India has included consumer education in the school curriculum and in various university courses. Government is also making use of media to make the consumers aware of their rights and make wise use of their money.
Apart from the above six rights two additional rights are recommended by the UNO.
## Keywords
## Consumer Rights
(i) Right to Safety: Supply of safe goods. It is violated when consumer suffers injury or sickness after consuming the product, supply of adulterated product, expired product, etc.
(ii) Right to Information: Seller or manufacturer must give complete information regarding the content or use of product. Is violated when complete information is not given to consumer or wrong information is given to consumer about the product.
(iii) Right to Choice: Consumer must be allowed to select the product independently with his choice, violated when salesmen or marketeer insist the consumer to buy a particular brand only.
(iv) Right to be Heard: Consumer has the right to file a complaint. It is violated when marketeer makes no arrangement of filing complaint and refuse to accept complaint of consumer. The right is followed when marketeer gives toll free number to file a complaint. Set a special counter for filing of complaint.
(v) Right to Seek Redressal: Consumer has the right to get compensation for the damage he suffered due to wrong product/service.
It include:
(a) Exchange of product/service (b) Repair of product/service
(c) Paying compensation (d) Withdrawal of goods from market
Note: Main difference between Right to be heard and Redressal is that Right to be heard is concerned regarding filing of complaint and redressal focus on next step, i.e., result of complaint-compensation.
(vi) Right to Consumer Education: Consumer has right to be informed about provisions of consumer protection act, i.e., what are his rights. Generally, NGO, government educate consumer by giving advertisements in TV, magazine, newspapers, etc. conduct seminars, conferences, etc.
Note: Difference between Right to Information and Right to Consumer Education is Right to Information informs about the product its contents, use, etc. whereas Right to Consumer Education informs consumers about their right.
In Right to Information, information is given by manufacture, supplier, marketeer whereas Right to Education, information is given by government, NGO, etc.
## MCQs and Case Studies
1. Labelling, a component of product mix help the consumer to exercise:
(a) Right to safety
(b) Right to consumer education
(c) Right to information
(d) Right to be heard
2. “Jago Grahak” advertisement is highlighting which consumer right:
(a) Right to safety
(b) Right to consumer education
(c) Right to information
(d) Right to be heard
3. Himesh after completing his graduation started working with a multinational company in Delhi. But due to ill health of his parents he had to go back to his village. There he noticed that the villagers were literate but ignorant about their rights. Many vegetable vendors were using stones as weights to sell their vegetables. Some shopkeepers were selling food items without having 'FPO mark'. Villagers did not find anything wrong with these practices. So to create awareness among villagers Himesh decided to publish a weekly Journal 'Jan Jagriti'. State the 'Right' which Himesh has exercised by doing so.
[CBSE Sample Paper 2014]
4. Ronit Raj, a marketing manager is a patient of diabetes for which he takes medicines regularly. One day, on his tour to Patna, he met with an accident and was hospitalised. Due to doctors' negligence a delicate nerve of his right leg was cut rendering hum crippled throughout his life.
Identify the consumer right that has been violated by the doctors under the Consumer Protection Act, 1986 in the above situation. [CBSE Sample Paper 2016]
(Answers at Page no. 559)
## 12.4 CONSUMERS' RESPONSIBILITIES
Various efforts have been made by government and non-government organisations to protect the interest of consumer but exploitation of consumer will stop only when consumer himself will come forward to safeguard his own interest. Consumers have to bear some responsibilities which are given below:
1. Consumer must Exercise his Right. Under Consumer Protection Act the consumer is granted various rights such as right to safety, right to choose, right to be heard, etc. but these rights will be useful only when consumer exercises these rights. The consumer must select the product according to his preferences, he must file a complaint if he is not satisfied with the quality of product, he must be aware of his rights and exercise them whenever required.
2. Cautious Consumer. The consumer should not blindly believe on the words of seller. He must insist on getting full information on the quality, quantity, utility, price etc. of the goods or services.
3. Filing Complaints for the Redressal of Genuine Grievances. Most of the time consumer ignores the loss he suffers on purchase of defective good or service but this attitude of not filing complaint
encourages the corrupt businessmen to supply low standard or defective goods and services. The consumer must file a complaint even for a small loss. This awareness among consumers will make the sellers more conscious to supply quality product. Whenever consumer is filing a complaint it must be genuine. The consumer should not exaggerate the loss or defects of goods.
4. Consumer must be Quality-Conscious. The problems of supply of substandard goods, adulterated products and duplicate products can be solved only when consumer himself stops compromising the quality of product. While purchasing the goods or services consumer must look for quality marks such as ISI mark, Agmark, ISO, Wool Mark, etc.
5. Do not be Carried Away by Advertisements. The advertisements often exaggerate the qualities or features of product or service. The consumer must compare the actual use of product with the use shown in advertisement and whenever there is any discrepancy or difference it must be brought to the notice of sponsor of advertisement and insist to stop showing exaggerated qualities.
6. Insist on Cash Memo. To file a complaint the consumer needs the evidence of purchase, and cash memo is the evidence or proof that consumer has paid for the goods or service. A seller is bound to give a cash memo even if buyer does not ask for it. To file a complaint and get compensation the consumer must ask for cash memo.
7. Form consumer societies which could play an active part in educating consumers and safeguarding their interest.
8. Respect the environment, avoid waste littering and contribution to pollution.
9. Discourage black marketing, hoarding and choose only legal goods and services.
10. Be aware of variety of goods and services available in market.
## MCQs and Case Studies
1. While purchasing gold jewellery which mark one should look for
(a) Hall mark
(b) ECO mark
(c) ISI mark
(d) All of the above
2. On a packet of juice, chips, biscuits what mark should be present:
(a) Agmark
(b) FPO
(c) ISI mark
(d) None of the above
3. Neha's elder brother purchased "I Phone 11-Apple" mobile phone for ₹ 65,000 without cash memo from one of his friend-an authorised dealer with a guarantee that the mobile phone will be replaced with a new one if any of its parts become defective within 1 year from the date of purchase. Within 1 month, the mobile stopped working. When Neha's brother approached his friend for replacement of mobile, he refused.
Name the redressal agency under the consumer protection act where Neha's elder brother can file the complaint.
(Answers at Page no. 559)
## Marks indicating quality in different products:
1. ISI: On consumer durable products, electronic items, etc.
2. AGMARK: On agricultural commodities and live stock product.
3. BIS Mark (Hallmark): On gold jewellery.
4. Woolmark: It signifies 100% pure wool.
5. ECO MARK: For environmental friendly products.
## Reliefs or Remedies are available to Consumer on Complaints filed by him
Following reliefs are available to consumer:
(a) Removal of defects from the goods.
(b) Replacement of the goods.
(c) Refund of the price paid.
(d) Compensation of loss or injury suffered.
(e) Removal of deficiency in service
(f) Discontinuance of unfair trade practices.
(g) Stopping the sale of hazardous goods.
(h) Withdrawal of hazardous goods from market.
(i) Payment of adequate cost to grieved party.
(j) To pay any amount (not less than 5% of the value of defective goods or deficient services provided) to be credited to consumer welfare fund or any other organisation/person to be utilised in prescribed manner.
(k) To issue corrective advertisement to neutralise the effect of a misleading advertisement.
(1) To pay adequate cost to appropriate party.
Q. 1. Who is a consumer?
Ans. According to consumer protection act a consumer is
(a) One who buys goods or hires services for some value.
(b) Any user of such goods or beneficiary of services with approval of the buyer.
(c) Anyone who uses the goods bought or services hired for earning livelihood by self-employment.
## Q. 2. When or under what circumstances can the complaints be filed?
Ans. Complaints can be filed and compensation can be claimed by the consumer with respect to
(a) Fraudulent practices of traders and manufacturers.
(b) If goods are defective.
(c) If there is any deficiency in the services hired.
## Q. 3. Where can the complaints be filed or which judicial machineries are available to deal with consumer grievances?
Ans. There are three important judicial machineries or three important redressal forums available to deal with consumer grievances. These are:
(i) District forum to deal with complaints where the value of goods and compensation claim does not exceed ₹20 lakhs.
(ii) State commission to deal with cases where the value of goods or compensation is more than 20 lakhs but does not exceed 1 crore.
(iii) National Commission to take up all cases exceeding the value of ₹1 crore.
Appeals against district forum can be filed in State Commission within 30 days and the person who is declared guilty has to deposit ₹25,000 or 50% of fine amount whichever is less.
The appeal against the State Commission can be filed with National Commission within 30 days and the person who is declared guilty by State Commission has to deposit ₹35,000 or 50% of amount of compensation whichever is less.
## Q. 4. Within what period can the complaint be filed?
Ans. The complaint must be filed within 3 months of purchase and if some testing of goods is required then within 5 months.
## Q. 5. Who are not considered as consumer under Consumer Protection Act 1986?
Ans. Following persons are not considered as Consumer under Consumer Protection Act:
(i) The person who obtains goods for re-sale.
(ii) The person who uses the goods without the approval of the buyer.
(iii) The person who avails of the services without the approval of the hirer.
(iv) The person who obtains goods without any consideration,
(v) The person who hires or avails of any services without consideration.
## Q. 6. Who can file a complaint?
Ans. A complaint can be filed by:
(i) Any consumer.
(ii) Any registered consumer association.
(iii) The central or state government.
(iv) One or more consumers on behalf of numerous consumers.
(v) A legal heir or representative of a deceased consumer.
## Q. 7. Against whom can the complaint be filed?
Ans. The complaint can be filed against:
(a) The seller, manufacturer or dealer of goods which are defective.
(Defect means any fault, imperfection or shortcoming in quality, quantity or purity of goods.)
(b) The provider of services if they are deficient in any manner.
(Deficiency means any imperfection, shortcoming or inadequacy in the quality, nature and manner of performance of services.)
## 12.5 REDRESSAL AGENCIES UNDER THE CONSUMER PROTECTION ACT, 1986 AND THEIR JURISDICTION
## Three-tier Consumer Grievances Machinery under the Consumer Protection Act:
1. District Forum. District forum consists of a president and two other members. The president can be a retired or working judge of District Court. They are appointed by state government. The complaints for goods or services worth ₹20 lakhs or less can be filed in this agency. The agency sends the goods for testing in laboratory if required and gives decisions on the basis of facts and laboratory report. If the aggrieved party is not satisfied by the jurisdiction of the district forum then they can file an appeal against the judgement in State Commission within 30 days.
2. State Commission. It consists of a president and atleast two other members. The president must be a retired or working judge of high court. They all are appointed by state government. The complaints for the goods worth more than ₹20 lakhs and less than ₹1 crore can be filed in State Commission on receiving complaint the State commission contacts the party against whom the complaint is filed and sends the goods for testing in laboratory if required. In case the aggrieved party is not satisfied with the judgement then they can file an appeal in National Commission within 30 days.
3. National Commission. The national commission consists of a president and four members one of whom shall be a woman. They are appointed by Central Government. The complaint can be filed in National Commission if the value of goods exceed ₹1 crore. On receiving the complaint the National Commission informs the party against whom complaint is filed and sends the goods for testing if required and gives judgement. If aggrieved party is not satisfied with the judgement then they can file a complaint in Supreme Court within 30 days.
| Basis | District | State Commission | National Commission |
| 1. Composition | It consists of a president and two other members; one of the member has to be a woman. | It consists of a president and not less than two other members; one of the member has to be a woman. | It consists of a president and atleast four other members and one of the member has to be a woman. |
| 2. Who can be a President | A working or retired Judge of District Court. | A working or retired Judge of High Court. | A working or retired Judge of Supreme Court. |
| 3. Appointment of President | The president is appointed by the state government on the recommendation of the selection committee. | The president is appointed by the state government after consultation with the Chief Justice of the High Court. | The president is appointed by the central government after consultation with the Chief Justice of India. |
| 4. Jurisdiction | Entertain complaints where the value of goods or services does not exceed ₹ 20 lakhs. | Entertain complaints when the value of goods or services exceeds ₹ 20,00,000 and upto ₹ 1 crore. | Entertain complaints where the value of goods or services exceeds ₹ 1 crore. |
| 5. Appeal against orders | Any person who is aggrieved by the order of District Forum can appeal against such order to State Commission within 30 days. | Any person who is aggrieved by the order of State Commission can appeal against such order to National Commission within 30 days. | Any person who is aggrieved by the order of the National Commission can appeal against such order to Supreme Court within 30 days only cases where value of goods or services exceeds ₹ 1 crore can file appeal in Supreme Court. |
## MCQs and Case Studies
1. Who can be a Judge of State Commission
(a) Retired or working Judge of District Court
(b) Retired or working Judge of High Court
(c) Both (a) and (b)
(d) None of the above
2. Mukul purchased a house for ₹30 lakhs from a housing company and found it being defective. Despite many complaints the defect was not rectified. He filed a complaint in the state commission but was not satisfied with the order. Where can he appeal and in how many days.
3. A farmer purchased seeds worth ₹ 20,000 from “Bharat Fertilisers” for agricultural purposes. The seeds were very costly as they were of hybrid variety. After 6 months he noticed that the agricultural produce was not upto expected standard. He reported this matter to the seller, but he refused to accept the liability. Mention the redressal agency in which he can file a complaint.
(Answers at Page no. 559)
## 12.6 ROLE OF CONSUMER ORGANISATIONS AND NGOs
In India there are about 500 consumer organisations working in the field of consumer protection. The most popular are: Consumer Guidance Society of India (Mumbai), Citizen Action Group (Mumbai), Consumer Education and Research Centre (CERC) Ahmedabad, Common Cause (New Delhi) etc. Consumer Unity and Trust Society (CUTS). These associations are performing following functions:
(i) Educating the villagers/general public about consumer rights by organising training programmes, seminars and workshops.
(ii) Publishing periodicals and other publications to impart knowledge about consumer problems, reliefs available and other matters of interest.
(iii) Carrying out comparative testing of consumer products in accredited laboratories to test relative qualities of competing brands and publishing the test results for the benefit of consumers.
(iv) Encouraging consumers to strongly protest and take an action against exploitative and unfair trade practices of sellers.
(v) Providing legal assistance to consumers by way of providing aid, legal advice, etc., in seeking legal remedy.
(vi) Filing complaints in consumer courts on behalf of consumers.
(vii) Taking an initiative in filing cases in consumer courts in the interest of the villagers/general public, not for any individual.
(viii) Helping government agencies to resolve cases of consumer exploitation and to carry on consumer awareness programs.
(ix) Motivating people to ask for quality marks such as ISI mark, Agmark, etc.
## Case Study
1. Aman, a degree holder in Entrepreneurship came to know about Piplantri Village located in Rajasthan, where in 2006 an initiative was started, in which 111 trees are planted every time a girl child is born.
To keep termites away from the trees the villagers have planted 2.5 million Aloe Vera plants around the trees. This has turned the village into an oasis, as the planting of trees led to higher water levels.
Aman decided to visit the village to start a business unit, for the processing and marketing of Aloe Vera into juices, gels and other products.
However, on visiting the village Aman found that the villagers were suffering exploitation at the hands of local merchants who were engaged in unscrupulous, exploitative trade practices like hoarding and black marketing of food products and also selling unsafe, adulterated products to the villagers.
After looking at their plight instead of a business organisation he decided to set up an organisation for the protection and promotion of the consumer interest of the villagers.
State the functions that the organisation established by Aman will be performing. (Any six points.) [CBSE Sample Paper 2015]
(Answers at Page no. 559-560)
## Quick Revision
Meaning. Consumer protection means protecting the consumer from the clutches of fraud producers or sellers.
Importance of Consumer Protection
I. From Consumer's point of view:
(i) Consumer ignorance.
(ii) Unorganised consumers.
(iii) Widespread exploitation of consumers.
II. From Businessmen's point of view:
(i) Long-term interest of business.
(ii) Businessman uses society's resources.
(iii) Social Responsibilities
(iv) Moral/Ethical justification,
(v) Government intervention.
(vi) Consumer is the purpose of business.
Need for Consumer Protection in India. There is more requirement of consumer protection in India and other developing countries because of:
(i) Poverty and unemployment
(ii) Illiterate consumer
(iii) Consumers are not organised.
Legal Protection for Consumers
(i) The Consumer Protection Act 1986
(ii) The Contract Act 1982
(iii) The Sale of Goods Act 1930
(iv) The Essential Commodities Act 1955
(v) The Agricultural Produce
(vi) The Prevention of food Adulteration Act 1954
(vii) The Standard of Weights and Measure Act 1976
(viii) The Trade Mark Act 1999
(ix) The Competition Act 2002
(x) The Bureau of Indian Standard Act 1986
Consumer Rights. Consumer Protection Act 1986 has provided following rights to consumers:
(i) Right to safety
(ii) Right to information
(iii) Right to make choice
(iv) Right to be heard
(v) Right to seek redressal
(vi) Right to consumer education
Two more rights given by UNO are:
(vii) Right to basic needs
(viii) Right to healthy environment.
Consumers' responsibilities. Some responsibilities of consumer are:
(i) Consumer must exercise his rights
(ii) Cautious consumers
(iii) Filing complaints for the redressal of genuine grievances
(iv) Consumer must be quality conscious
(v) Do not be carried away buy advertisements
(vi) Insist on cash memo.
Three-tier Judicial Machinery to Provide Protection to Consumers
(i) District forum
(ii) State commission
(iii) National commission.
Role of Consumer Organisations and NGOs. There are about 500 consumer associations which are working in the field of consumer protection. These organisations are performing various functions to protect the interest of consumers and spread awareness among the consumers.
Consumer Protection — A Flow Chart
## Objective Type Questions
## Multiple Choice Questions
1. The Provisions of Consumer Protection act came into force from
(a) 1986
(b) 1987
(c) 1988
(d) 1991
2. Informing consumer about their rights is part of
(a) Right to Safety
(b) Right to Information
(c) Right to Consumer Education
(d) Right to be Heard
3. Informing consumer about the contents of the product, its usage, etc. is part of
(a) Right to Safety
(b) Right to Information
(c) Right to Consumer Education
(d) Right to be Heard
4. Right to safety
(a) Protects consumer from physical damage or injury
(b) Informs the consumer
(c) Both (a) and (b) (d) None of the above
5. If the value of product is ₹10 lakhs the consumer can file case in
(a) District Forum
(b) State Commission
(c) National Commission
(d) All of the above
6. If the value of goods or services is more than 20 lakhs but less than one crore, then consumer can file case in
(a) District Forum (b) State Commission
(c) National Commission (d) All of the above
7. If a customer is not satisfied with the judgement of state commission, he can file appeal in
(a) District Forum
(b) Supreme Court
(c) High Court
(d) National Commission
8. As per Consumer Protection Act, the retailer or wholeseller is
(a) A consumer
(b) Not a consumer
(c) Both (a) and (b)
(d) None of the above
9. To avail the benefits of Consumer Protection Act, the consumer
(a) Must insist on cash memo (b) No necessity for cash memo
(c) Need a certificate of consumer (d) None of the above
10. If goods require no testing, then complaint must be filed within
(a) 1 month
(b) 2 months
(c) 3 months
(d) 4 months
11. The consumer must be assured whenever possible access to a variety of goods and services at competitive prices.
(a) Right to Consumer Protection Act (b) Right to choose
(c) Right to safety (d) Right to be heard
12. Consumer Protection Act is applicable:
(a) Immovable goods (b) Movable goods
(c) specific goods and services (d) All goods and services.
13. Which of the following is importance of consumer protection in the view of business:
(a) Unorganised consumers (b) Consumer ignorance
(c) Moral justification (d) Organised consumers
14. Right of consumer protection are protected under
(a) CPA, 1988
(b) CPA, 1986
(c) CPA, 1982
(d) CPA, 1984
15. Consumer should use ISI marked electrical appliance, is an example of
(a) Right to safety
(b) Right to be informed
(c) Right to choose
(d) Right to be heard
16. The members of the District Forum are appointed by:
(a) Central Government (b) State Government
(c) Local authority (d) None of the above
(Answers at Page no. 560)
## Fill in the Blanks
1. In district forum, president can be
2. The president and member of National Commission are appointed by
3. District Forum entertains complaints for the goods or services, whose value does not exceed
4. State Commission entertains complaints of goods or services, whose value exceeds and less than \_\_\_\_.
5. The consumer must insist on \_\_\_\_.
(Answers at Page no. 560)
## True or False
1. Consumer can file direct case in Supreme Court.
(True/False)
2. In place of consumer, NGO can also file a case on behalf of consumer. (True/False)
3. Appeal against district forum can be filed in National Commission. (True/False)
4. The right to be heard provides compensation to consumers. (True/False)
5. Consumer Protection Act is beneficial only for consumer; it is a penalty for businessmen.
(True/False)
6. NGOs does not take initiative in filing cases in consumer courts in the interest of general public.
(True/False)
7. Resale goods are covered under CPA.
(True/False)
8. Service provided by a lawyer or doctor are covered under CPA. (True/False)
9. CPA is not fruitful for producers.
(True/False)
10. NGO's provide workshops, training programmes for educating consumer. (True/False)
## Remembering and Understanding-based Questions with Answers
Q. 1. Which consumer right gives the business firm freedom to set up their own consumer services and grievance cell.
[CBSE Sample Paper]
Ans. Right to be heard.
Q. 2. Sandeep purchased a Diesel Car for ₹7 lakhs from an Automobile Co. and found that engine is defective. Despite many complaints the defect was not rectified. Suggest him the appropriate authority where he can file the complaint under Consumer Protection Act. [CBSE Sample Paper]
Ans. District forum.
Q. 3. Name any two consumer rights.
Ans. (i) Right to safety, (ii) Right to choice.
Q. 4. Can a consumer file a complaint in consumer court without having the cash memo?
Ans. No, without cash memo he cannot file the complaint. Cash memo is the proof of transaction.
Q. 5. Name the three consumer grievance agencies.
Ans. (i) District forum, (ii) State commission
(iii) National commission.
Q. 6. Explain any two points of responsibilities of a consumer.
Ans. (i) Consumer must exercise his rights, (ii) Insisting on cash memo.
Q. 7. Give names of two consumer organisations.
Ans. (i) Consumer Guidance Society of India (Mumbai),
(ii) Common Cause (New Delhi).
Q. 8. Suggest any two remedies available under Consumer Protection Act.
Ans. (i) Removal of defects from goods, (ii) Replacement of goods.
Ans. According to consumer protection act, a consumer is:
(i) One who buys goods or hires services
(ii) Any use of such goods or service with approval of buyer
(iii) Anyone who bought the goods for earning livelihood.
Q. 10. "Bhuvan, who was a vegetarian went to a snack bar for having French fries and later found out that it had non vegetarian content. Neither the advertisement nor the packing of the product displaced that the product has non vegetarian content. Will Bhuvan be able to claim compensation, which right of the consumer is violated"?
Ans. Bhuvan will be able to claim the compensation as the seller has violated the right to information according to this right.
Explain the consumer rights, refer to page no. 532-533.
Q. 11. What is the need for consumer protection?
Ans. Explain importance of consumer protection, at page no. 529-531.
Q. 12. Rajiv, a consumer purchased medicines without noticing the date of expiry. He also did not obtain the cash memo. Do you think he will be able to protect himself by the loss caused due to expired medicine? Give reasons to support your answer.
Ans. Rajiv will not be able to protect himself by the loss caused due to expired medicine because Rajiv did not fulfil his responsibility on following grounds:
(i) He did not go through the packing instructions mentioned on the label of the packet.
(ii) He did not obtain the cash memo from the seller. Cash memo is a proof of purchase and it is must for filing any complaint.
## HOTS (Higher Order Thinking Skills) and Case Studies
Q. 1. Sirajuddin purchased a car for ₹ 15 lakhs from an automobile company and found that its airbags were defective. After many complaints with the company that went unheard, he filed a case in the District Forum. He was not satisfied with the orders of the District Forum. He then appealed before the State Commission and on being dissatisfied with the orders of State Commission, he appealed before the National Commission. Sirajuddin was not satisfied with the orders of National Commission.
Suggest him the highest authority where he could appeal against the decision of the National Commission.
[CBSE Sample Paper 2016]
Ans. He cannot appeal to any other higher authority as only those matters which have been directly filed in the National Commission and where the value of goods and services in question along with the compensation claimed exceed ₹1 crore, are appealable before Supreme Court.
Q. 2. State any two reliefs that the Consumer court can grant to consumers in case of genuine complaints in each of the following situations:
(i) Divya was charged more than the printed maximum retail price (MRP) for a bottle of water.
(ii) Clara was sold a car with a defective engine.
(iii) Antony suffered injury while using newly bought defective electric heater. [CBSE (D) 2017(C)]
Ans. (i) Reliefs that the Consumer court can grant to the customers are: (Any two)
(a) To refund the price paid.
(b) To pay punitive damages.
(c) To discontinue the unfair/ restrictive trade practice and not to repeat the same in future.
(d) To pay any amount (not less than 5% of the value of the bottle of water) to be credited to the Consumer Welfare Fund or any other organisation/person, to be utilised in the prescribed manner.
(e) To pay adequate costs to the appropriate party.
(ii) Reliefs that the Consumer court can grant to the customers are: (Any two)
(a) To remove the defect in engine.
(b) To replace the defective engine with a new one, free from any defect.
(c) To refund the price paid.
(d) To pay punitive damages.
(e) To pay any amount (not less than 5% of the value of the defective engine) to be credited to the Consumer Welfare Fund or any other organisation/person, to be utilised in the prescribed manner.
(f) To pay adequate costs to the appropriate party.
(iii) Reliefs that the Consumer court can grant to the customers are: (Any two)
(a) To remove the defect in electrical heater.
(b) To replace the defective electrical heater with a new one, free from any defect.
(c) To refund the price paid.
(d) To pay a reasonable amount of compensation for any loss or injury suffered by the consumer due to negligence of the opposite party.
(e) To pay punitive damages.
(f) To discontinue the unfair/ restrictive trade practice and not to repeat the same in future.
(g) Not to offer hazardous goods like defective electrical heater for sale.
(h) To withdraw hazardous goods like defective electrical heater from sale.
(i) To cease manufacture of hazardous goods like defective electrical heater.
(j) To pay any amount (not less than 5% of the value of the defective goods) to be credited to the Consumer Welfare Fund or any other organisation/person, to be utilised in the prescribed manner.
(k) To pay adequate costs to the appropriate party.
Q. 3. Sonu purchased a medicine from 'Alpha Medical Stores' for his wife who had stomach pain. But even after giving the medicine, wife's condition did not improve and she had to be admitted to a nearby hospital for treatment. Doctors on examination found that the medicines given to Sonu's wife were spurious. Sonu complained about this to 'Alpha Medical Store'. As a result Alfa medical decided to file a complaint against the manufactures in the consumer court. Can Alpha Medical Store lodge the complaint? Give reason.
Ans. No, Alpha Medical Store is a retailer and retailer is not a consumer. Only consumer can file a complaint.
Q. 4. Rama, who was a vegetarian, went to a bakery and bought a vanilla cake. On reaching home. She found that it had non-vegetarian content. Neither the advertisement nor the packaging of the product displayed that the product had non-vegetarian content. Will Raman be able to claim compensation? Which right is violated here?
Ans. Yes, Right to Information.
Q. 5. Name the Consumer Court where the complaint will be filed by the consumer.
Ans. (i) District Forum, (ii) State Commission, (iii) National Commission
Q. 6. Naresh purchased a 'BMW' car for ₹ 50,00,000 on instalments. He found that the engine of the car was defective. Despite many complaints to 'BMW Motors', the defect was not rectified. He filed a complaint in state commission but was not satisfied with its order. Where can he appeal and within how many days?
Ans. National Commission, with in 30 days.
Q. 7. On securing 95% marks in class XII, Ram's father gifted him a gold chain. But after 2 months, Ram noticed that the gold chain was loosing the shine. He checked the mark on chain and found that it was not a proper hall mark (BIS). He lodged a complaint in the district forum, which rejected it. Not satisfied by the decision of district forum, he was very much disturbed and after 45 days, he decided to appeal further.
Can Ram appeal against the decision of the district forum? Give reasons in support of your answer. Explain feature of district forum.
Ans. No, as appeal must be filed within 30 days of decision.
Q. 8. On the occasion of 'Dhan Teras' Mr. Aakash went to market for purchasing utensils. He bought pressure cooker from a shop. The shop was over-crowded on the festival, so he did not obtain the cash-memo for the purchase and did not check its certification. Next day, his wife used the cooker, which bursted and his wife suffered injuries.
(i) Identify and explain the Consumer liabilities which have not been discharged by Mr. Aakash.
(ii) Mention the values which have been ignored by the seller as well as of Mr. Aakash.
Ans. (i) Insist on cash memo (ii) Cautious Consumer, concern for quality.
Q. 9. Tanya purchased some household goods from a 'General Store'. On reaching home, she found that one face cream, (₹ 250) had not been billed. She became happy that, she got it without paying for. After checking the expiry date and other details, she started using it. Her face burnt due to the use of cream.
Where should Tanya file the complaint for the cream? Justify.
Ans. She can not file as no cash memo.
Q. 10. Smriti purchased a hand blender from an electronic store and got the cash memo of ₹1,500 which she paid for the blender. Later, she found that the actual price of the blender was ₹1,200 but the shopkeeper had pasted a sticker of ₹ 1,500 on the original price. Can Smriti recover the extra money that she paid? What other options are available to her against the shopkeeper?
Ans. Yes.
Q. 11. Joseph had got a confirmed ticket of Jet Airways. The flight was later cancelled on account of technical problem. Is it a deficiency in service? What relief can Joseph seek in this regard?
Ans. Refer to Page no. 537-538.
Q. 12. 'Sehaj bought Teak wood furniture for his drawing room from "Akshay Decors" of Kirti Nagar, Delhi for ₹ 4 lakhs. At the time of purchase the firm assured Sehaj about the best quality of the said furniture and gave 2 years warranty stating that if anything goes wrong, the firm shall replace it with a new one or refund the purchase amount. But the dining table and chairs started developing cracks at various places and the polish' became very dull within 30 days of purchase. Sehaj reported the matters to the firm and requested a number of times to replace the furniture. The firm neither paid attention to these requests nor replaced the furniture.
(i) Identify the consumer rights which have been violated by the furniture manufacturer.
(ii) Where can Sehaj lodge complaint for this?
Ans. (i) Right to be Heard and Right to Seek Redressal.
(ii) District forum
Q. 13. Name the products to which the following quality certification marks are associated.
(i)
(ii)
(iii)
(iv)
(v)
Ans. (i) Food product (ii) Electronic
(iii) Agricultural Product (iv) Woollen garment
(v) Gold (vi) Eco mark
Q. 14. What are two major activities of Bureau of Indian Standard Act?
Ans. (i) Formulation of quality standard of goods.
(ii) Certification of goods through B's.
Q. 15. Name the ministry which introduced eco mark.
Ans. Ministry of environment and forest.
Q. 16. Name the quarterly journal published by Government of India on consumer awareness.
Ans. Upbhokta jagran.
Q. 17. Name two mass media programmes telecasted on T.V. or radio based on consumer awareness.
Ans. (i) Apne adhikar, (ii) Jago grahak.
Q. 18. What can serve as a proof of purchase made for filing a complaint against defective goods?
Ans. Cash memo.
Q. 19. To publish a magazine on consumer rights is example of which consumer right?
Ans. Right to consumer education.
Q. 20. To publish a magazine under the title Upbhokta Jagran is the example of which consumer right?
Ans. Right to consumer education.
Q. 21. Name the quality certification mark used in case of food products.
Ans. FPO.
Q. 22. The earlier approach of Caveat Emptor which means, "let the buyer beware" has now been changed to what?
Ans. It is changed to 'let the seller be ware'.
Q. 23. Which Act has replaced MRTP Act?
Ans. 'The Competition Act 2002' has replaced MRTP act.
Q. 24. Bhuvan saw an advertisement in the newspaper regarding a steam iron and ordered for the purchase of the same to shopkeeper. What will be his responsibilities as a consumer so that he should not be exploited by the shopkeeper? Write any four such responsibilities.
Ans. The four responsibilities which must be taken care of by Mr. Bhuvan are, refer to topic responsibilities of consumer, at page no. 535-536.
Q. 25. The owner of a restaurant is charging ₹30 for a bottle of water from customer. Whereas the MRP of the bottle is ₹10. One of the consumers objected to it but the owner did not agree and continued with that malpractice.
(i) What are the possible reasons that other consumers are not agreeing.
(ii) Which right of consumer can remove this ignorance of consumer?
Ans. (i) The other consumers may not be aware of their rights.
(ii) Right to consumer education can help to spread awareness to consumers.
Q. 26. Anita purchased a book from 'Satish Book Stores'. While reading the book she found that ten pages were missing. She approached the seller of the book and complained about the missing pages. The seller promised that if the publisher was ready to change the book he would change the same. After a week the seller informed Anita that the publisher had refused to change the book.
Where can Anita file a complaint against the seller of book? Give reason in support of your answer. Also, explain who is a ‘consumer’.
Ans. 1. District forum
2. Define consumers, see answer page no. 538.
## Guidelines to NCERT Questions
## State True or False
1. Consumer protection has a moral justification for business.
(True)
2. In addition to rights, a consumer also has some responsibilities. (True)
3. A complaint can be made to a District forum when the value of the goods or services in question, along with the compensation claimed, exceeds ₹20 lakhs. (False)
4. The consumer protection act provides for six consumer rights. (True)
5. ISI is the quality certification mark used in case of food products. (False)
6. Under the consumer protection act, a complaint can be filed by a consumer for a defective goods and also for deficiency in service.
(True)
## Short Answer Questions
1. Explain the importance of consumer protection from the point of view of a business.
[Refer to page no. 530-531]
2. Enumerate the various acts passed by the government of India which help in protection of consumers' interests.
[Refer to page no. 532]
3. What are the responsibilities of a consumer?
[Refer to page nos. 535-536]
4. Who can file a complaint in a consumer court?
5. What kind of cases can be filed in a State Commission?
[Hint: Case for goods or services whose value exceeds ₹20 lakhs and is less than 1 crore.]
6. Explain the role of consumer organisations and NGOs in protecting and promoting consumers' interests.
[Refer to page no. 541]
## Long Answer Questions
1. Explain the rights and responsibilities of a consumer. [Refer to page nos. 532-536]
2. What are various ways in which the objective of consumer protection can be achieved? Explain the role of consumer organisations and NGOs in this regard. [Refer to page nos. 541]
3. Explain the redressal mechanism available to consumers under the Consumer Protection Act, 1986.
[Refer to page no. 539-540]
## TEST YOURSELF
## Short Answer Questions
1. Explain the need of consumer protection.
2. Why is consumer protection required in India?
3. Give three points showing the importance of consumer protection.
4. Explain any three responsibilities of a consumer.
5. Which type of complaints can be lodged by the consumer?
6. List any three consumer organisations in India.
7. Explain the role of universities and schools in consumer protection.
8. Explain the role of press in consumer protection.
9. What types of judicial machinery is available to deal with consumer grievances and disputes?
10. List the various reliefs available to consumer on his complaints.
11. Describe briefly the features of state commission.
12. Describe briefly the features of national commission.
13. Who is a Consumer?
## Long Answer Questions
1. What are the salient features of consumer protection act?
2. Explain ways and means of consumer protection.
3. Explain in brief the following rights:
(a) Right to representation (b) Right to information
(c) Right to make choice.
4. Explain all the rights of consumers.
5. Explain briefly the ways and means of consumer protection.
6. Enumerate the various acts passed by the government of India which helps in protection of consumer interest.
7. Explain following rights of consumer:
(a) Right to safety.
(b) Right to consumer education.
## Previous Years' Examination Questions (2014–2019)
## One Mark Questions
1. Give the constitution of the District Consumer Disputes Redressal Forum under the Consumer Protection Act, 1986.
[CBSE 2018]
2. Suman bought a box of cheese of a reputed brand from a local shopkeeper. On opening the box she found a piece of stone in the cheese. She reported the matter to the shopkeeper who forwarded her complaint to the concerned company. Within a week the representative of the company visited Suman's residence with an apology and as a replacement offered her a new cheese pack with four other varieties of cheese as compensation for the inconvenience to her. State the consumer right which Suman exercised. [CBSE (AI) 2016]
3. Pankaj purchased a car from 'Abhishek Motors' for ₹ 50 lakhs. The company offered many attractive gifts to Pankaj like — free insurance for first two years, free pick-up and drop facilities for free servicing upto 20,000 km, etc. But after a few days Pankaj noticed that the pick-up of the car was not good and there was some problems in the engine. The company serviced the car free of cost but even then Pankaj was not satisfied with its performance. 'Abhishek Motors' is not giving him the due response. So he filed a complaint in the State Commission but was not satisfied with its decision also. He was very much disturbed and after two months decided to appeal against it. Can Pankaj appeal against the decision of the State Commission? Give reason in support of your answer.
[CBSE (F) 2015]
4. On Sonika's birthday her mother gave her a pair of gold earrings. After one month Sonika observed that the ear-rings are losing their shine. She checked the mark on the ear-rings and found that it was not a proper Hallmark and her mother had been cheated by the shopkeeper. So, she filed a complaint in the district forum which rejected it. Not satisfied by the decision of district forum, she was very much disturbed and after two months decided to appeal further. Can Sonika appeal against the decision of the district forum? Give reason in support of your answer. [CBSE (D) 2015]
5. Manuj bought a packet of chips from a local shopkeeper and found that the ingredients given on the label were not legible. He complained about it to the company. The company sent a written apology stating that they will make sure that existing packets are withdrawn from the market and new packets with legible lables are soon made available.
State the consumer right which Manuj exercised.
[CBSE (D) 2016]
6. Manvendra always went to a specific shop to buy all consumable and non-consumable goods. In this shop variety of products of different brands were displayed nicely and the sales person available also gave good sales presentation if required. But this shop was quite far off from his residence. His friend Annant always wondered why Manvendra wastes so much time in going to that shop whereas there were many big brand shops situated near his residence having consumable and non-consumable goods.
Annant asked Manvendra the reason of going to that particular shop. Manvendra told that he was exercising one of his 'Rights' which he could not exercise in nearby big brand shops. State the consumer's right which Manvendra had exercised. [CBSE (F) 2016]
7. State any one function performed by non-governmental organisations for protection and promotion of interest of consumers. [CBSE 2019 (66/4/1)]
8. Vivek purchased a bike from Saranath Automobiles with a written guarantee to repair or replace, if necessary, within six months or 5,000 kms of distance travelled whichever is earlier. After covering the distance of 400 kms in two months, the gears of the bike started giving problems. Vivek took the bike to the dealer who refused to listen to his complaint. He was confused about what he should do.
Suggest the rights that Vivek may exercise in the above case. [CBSE 2019 (66/5/1)]
## Three Marks Questions
9. Explain briefly any two points of importance of consumer protection from the point of view of business.
[CBSE 2018]
10. State any three functions performed by non-governmental organisations for consumer protection.
[CBSE (D) 2016]
11. State any three direction which can be issued by the consumer court to the opposite party if it is satisfied about the genuineness of the complaint. [CBSE (F) 2016]
12. Gopal, Mohan and Shyam are three friends having their separate small manufacturing units in an industrial estate. They are hard-working and honest and undertake their respective production activities following the good practices of business. They use good quality raw materials and adopt standardised process. They fix the prices of their products with a reasonable profit margin. But all of them are worried about the malpractices like manufacturing sub-standard, duplicate and defective goods by the fellow manufacturers. Therefore, they decided to form an organisation with a constitution of its own which is free from government interference. This organisation would encourage consumers to strongly protest and take action against unscrupulous, exploitative and unfair trade practices of sellers. State three other functions which may be performed by this organisation in addition to those mentioned above.
[CBSE 2019 (66/5/1)]
## Four Marks Questions
13. Sumit purchased an ISI marked washing machine of a famous brand 'MG' from TG Electronics Ltd. The shopkeeper asked him to wait for two days for installation of the machine. His friend, Vivek, was very fond of experimenting with new electronic products. He told Sumit that there is no need to wait for the company's representative to install the machine and that he could do it. So, both of them installed the machine without following the manufacturer's instructions. Initially, the machine worked effectively and the wash was good. But after two days, the machine started stopping in between the wash cycle. Sumit and Vivek tried their best to start the machine but failed in their efforts. Sumit, therefore, approached TG Electronics Ltd., which refused to provide any service on the plea that installation of the machine was not done by the company.
(a) State the responsibility which Sumit has to fulfil as an aware consumer to get the services of the company.
(b) Explain briefly any two rights which Sumit could have exercised, had he fulfilled his responsibility identified in part (a). [CBSE 2018]
14. Explain the following rights of a consumer as provided under Consumer Protection Act, 1986
(a) Right to Safety (b) Right to Consumer Education [CBSE (F) 2015]
15. Explain the following rights of a consumer as provided under Consumer Protection Act, 1986:
(a) Right to be informed; and (b) Right to seek redressal.
16. Explain any four points of importance of ‘consumer protection’ from the point of view of business.
[CBSE (AI) 2015]
17. Define a 'Consumer' according to the provisions of the Consumer Protection Act, 1986.
[CBSE 2019 (66/2/1), (AI) 2016]
OR
State any eight reliefs available to the consumer, if the court is satisfied about the genuineness of the complaint.
[CBSE 2019 (66/2/1)]
18. Describe the following rights of a consumer as per consumer protection Act, 1986:
(a) Right to be Heard
(b) Right to Safety
[CBSE 2019 (66/4/1)]
## Five/Six Marks Questions
19. 'RO Youth Club' organised a visit of its members to an Old Age Home to inculcate the habit of social work among them. The visit revealed that the living conditions of the inmates of the Old Age Home were not hygienic. So, the RO Youth Club members decided to clean the premises. During their cleanliness drive, they realised that the Old Age Home also required pest control. But some of the inmates of the Old Age Home were reluctant for it because they believed that the pest control may create health problems for them. RO Youth Club, therefore, decided to provide ethical, safe and odourless pest control. They showed to the inmates of the Old Age Home a pamphlet of the proposed pest control product which promised easy, inexpensive and long-lasting pest control. The inmates happily agreed and the pest control was carried out. The effect of the pest control started wearing off after a fortnight. RO Youth Club contacted the pest control company which kept on postponing their visit. After waiting for a month, RO Youth Club filed a case in the consumer court. The consumer court was satisfied about the genuineness of the complaint and issued necessary directions to the pest control company.
State any six directions that might have been issued by the court. [CBSE (AI) 2017]
20. 'VOICE' is an important consumer organisation. It organised workshops in the months of December in Delhi/NCR for consumers. The theme was 'Organic Food –From Farm to Plate' to spread awareness on the importance of organic farming and to encourage consumers to switch from conventional food that contains chemicals and pesticides to organic food. Expert speakers from farmers' community explained the harmful effects of usage of pesticides in farming and the importance of organic food. People were informed that the organisation regularly tests samples to detect adulteration like presence of heavy metals or pesticides. The results of the tests are published in their monthly magazine' Consumer Voice' to make people aware of quality of different products. It also provides aid and legal advice to the consumers in seeking a remedy.
State the functions performed by the Consumer Voice for the protection and promotion of consumer interest by quoting lines from the above para. [CBSE 2019 (66/1/1)]
21. Suman wanted to purchase a sandwich toaster. She checked about the various sandwich toasters available online and compared the prices so that an intelligent and wise choice could be made. Then she went to a nearby market to buy the sandwich toaster. Being an informed consumer, she looked for the correct standardisation mark. The shopkeeper showed her different toasters but was quoting higher price than the price she had checked online. After negotiating with the shopkeeper, she was able to bring the price down. As a responsible consumer, she asked for a cash memo against the amount paid for the product and took the toaster home. On opening the package, she found an instruction booklet, which she read carefully. Then she followed all instructions step by step and made nicely toasted paneer sandwiches for her family.
(a) State the consumer responsibilities, which have been discharged by Suman besides asking for a cash memo.
(b) Explain the two rights being discussed in the above case. [CBSE 2019 (66/3/1)]
## Hints of the Answers for Case Studies
2. Right to safety which states that the consumer has a right to be protected against goods and services which are hazardous to life and those which do not conform to the safety norms.
## OR
Right to seek redressal which states that a consumer has a right to get relief such as replacement of product, removal of defect in the product, compensation for any loss or injury suffered by the consumer in case the product or service falls short of his expectations.
3. No, Pankaj cannot appeal now as the appeal has to be filed within 30 days of passing of the order by the State Commission.
4. No, Sonika cannot appeal now as the appeal has to be filed within 30 days of passing of the order by the district forum.
5. Right to be informed which states that a consumer has a right to have complete information about the product he intends to buy such as, ingredients, date of manufacture, price, quantity etc.
## OR
Right to be heard which states that a consumer has right to file a complaint and to be heard in case of dissatisfaction with a product or a service.
6. Right to choose which states that the consumer has the freedom to choose from a variety of products at competitive prices.
8. (a) Right to Safety (b) Right to seek redressal
12. Three other functions which may be performed by this organisation in addition to those mentioned above are: (Any three)
(i) Educating the general public about consumer rights by organising training programmes, seminars and workshops.
(ii) Publishing periodicals and other publications to impart knowledge about consumer problems.
(iii) Carrying out comparative testing of consumer products in accredited laboratories.
(iv) Providing legal assistance to consumers.
13. (a) Responsibility which Sumit has to fulfill as an aware consumer to get the services of the company: Learn about the risks associated with products and services, follow manufacturer's instructions and use the products safely.
(b) Two rights which Sumit could have exercised, had he fulfilled his responsibility:
(i) Right to be heard:
The consumer has right to file a complaint and to be heard in case of dissatisfaction with a product or a service.
It is because of this reason many firms have set up their own consumer service and grievance cells.
(ii) Right to seek redressal:
The consumer has a right to get relief in case the product or service falls short of his expectations.
The Consumer Protection Act, 1986 provides reliefs to consumers such as replacement of product, removal of defect in the product, compensation for any loss or injury suffered by the consumer.
19. Directions that might have been issued by the court: (Any six)
(i) To remove the deficiency in service.
(ii) To refund the price paid for the service provided.
(iii) To pay a reasonable amount of compensation for any loss suffered by the inmates of old age home.
(iv) To pay punitive damages.
(v) To discontinue the unfair/ restrictive trade practice and not to repeat the same in future.
(vi) To pay any amount (not less than 5% of the value of the service provided) to be credited to the Consumer Welfare Fund or any other organisation/person, to be utilised in the prescribed manner.
(vii) To issue corrective advertisement to neutralize the effect of misleading pamphlet.
(viii) To pay adequate costs to RO Youth Club
20. Functions performed by the Consumer Voice for the protection and promotion of consumer interest:
(a) Educating the general public about consumer rights by organising training programmes, seminars and workshops. 'Organised consumer workshops in the months of December in Delhi/ NCR on the theme, of 'Organic Food –From Farm to Plate', as a part of its initiative to spread awareness on the importance of organic farming'
(b) Publishing periodicals and other publications to impart knowledge about consumer problems, legal reporting, reliefs available and other matters of interest. 'The results of the tests are published in their monthly magazine' Consumer Voice' to make people aware of quality of different products'
(c) Carrying out comparative testing of consumer products in accredited laboratories to test relative qualities of competing brands and publishing the test results for the benefit of consumers. 'People were informed that the organisation regularly tests samples to detect adulteration like presence of heavy metals or pesticides'
(d) Providing legal assistance to consumers by the way of providing aid, legal advice, etc., in seeking legal remedy. 'It also provides aid and legal advice to the consumers in seeking a remedy'
21. (a) Consumer responsibilities, which have been discharged by Suman besides asking for a cash memo: (Any three)
(i) She was aware about various goods and services available in the market and made an intelligent and wise choice.
(ii) She bought standardised product as standardisation provides quality assurance.
(iii) She learnt about the risks associated with product and followed manufacturer's instructions
(iv) She asserted herself to get a fair deal.
(b) Rights discussed in the above case are:
(i) Right to choose
(iii) Right to safety
(ii) Right to be informed
## ANSWERS OF MCQs AND CASE STUDIES
## Page 531
1. (c) Unorganised consumers
2. (i) Widespread exploitation of consumers
(ii) Unorganised consumers
(iii) Social responsibility.
## Page 534-535
1. (c) Right to information
2. (b) Right to consumer education
3. Right to consumer education.
4. Right to safety
## Page 536-537
1. (a) Hallmark
2. (b) FPO
3. He can not file a complaint as he did not take cash memo.
## Page 540-541
1. (b) Retired or working Judge of High Court
2. National Commission within 30 days of passing of the order of State Commission.
3. District forum.
## Page 541-542
1. Functions of an NGO/Consumer organisation: (Any six)
(i) Educating the villagers/general public about consumer rights by organising training programmes, seminars and workshops.
(ii) Publishing periodicals and other publications to impart knowledge about consumer problems, reliefs available and other matters of interest.
(iii) Carrying out comparative testing of consumer products in accredited laboratories to test relative qualities of competing brands and publishing the test results for the benefit of consumers.
(iv) Encouraging consumers to strongly protest and take an action against exploitative and unfair trade practices of sellers.
(v) Providing legal assistance to consumers by way of providing aid, legal advice, etc., in seeking legal remedy.
(vi) Filing complaints in consumer courts on behalf of consumers.
(vii) Taking an initiative in filing cases in consumer courts in the interest of the villagers/general public, not for any individual.
## ANSWERS OF OBJECTIVE TYPE QUESTIONS
## Multiple Choice Questions