Principles of Management (WBUT), 2nd Edition [2e ed.] 9789325971653, 9325971658

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VIKAS - WBUT STUDENTS’ SERIES VWAS*

Principles of

Management Second Edition

J S CHANDAN

(S^A^.W^C^^TUDF.NTS^

series

Management Second Edition

J S CHANDAN Professor of Nlanageme-nt, Medgar Evers College University- of New York

VIKAS’

VIKAS® PUBLISHING HOUSE PVT LTD

SYLLABUS MAPPING Syllabus for HU-501

Mapping in Book Principles and Practices of Management

z 'Module 1: Management Definition, nature and importance of management

Chapter 1: Basic Concepts of Management (Sections 1.1 and 1.2)

Evolution of management thoughts—pre Chapter 1: Basic Concepts of Management and post scientific era Contributions made (Section 1.6) by Taylor, Fayol, Gilbreth, Elton Mayo, McGregor, Maslow (covering time and motion study), Hawthrone experiments Chapter 1: Basic Concepts of Management Is management a science or an art (Section 1.5) Chapter 1: Basic Concepts ofManagement Functions of a manager (Sections 1.3 and 1.4) Ethics in managing and social responsibility Chapter 3: Management and Society (Sections of managers 3.1, 3.2, 3.3 and 3.4) 'Module 2: Planning and Control

Why management process starts with planning

Chapter 2: Functions of Management (Section 2.1)

Steps in planning, planning premises (including McKinsey’s 7 S approach, SWOT analysis)

Chapter 2: Functions of Management (Sections 2.3 and 2.4)

Types of planning (operational planning, strategic planning)

Chapter 2: Functions of Management (Section 2.2)

Barriers to effective planning

Chapter 2: Functions of Management (Section 2.5)

Controlling—concept, planning—control relationship, process of control, human response to control, dimensions of control

Chapter 2: Functions of Management (Section 2.9)

Management by objectives (MBO)

Chapter 2: Functions of Management (Section 2.6)

'Module 3: Decision Making and Organizing Nature and process of decision making, decision making under certainty and uncertainty

Chapter 7: Decision Making (Sections 7.1, 7.2 and 7.3)

Decision tree

Chapter 7: Decision Making (Section 7.4)

Group-aided decision, brainstorming

Chapter 7: Decision Making (Section 7.2)

Organizing—concept, nature and process; authority and responsibility, delegation and empowerment

Chapter 7: Decision Making (Section 7.6) and Chapter 2: Functions of Management (Section 2.7)

Centralization and decentralization

Chapter 2: Functions of Management (Section 2.7)

|

viii

Syllabus Mapping

S Module 4: Staffing and Motivation

Concept, Manpower planning

Chapter 4: People Management (Sections 4.} and 4.2)

Job design Recruitment Selection Training and development

Chapter 4: People Management (Section 4.2) Chapter 4: People Management (Section 4.3) Chapter 4: People Management (Section 4.4) Chapter 4: People Management (Section 4.6) and Chapter 5: Managerial Competencies (Section 5.7)

Performance appraisal Motivation (motivators and satisfaction), motivating towards organization objectives, morale building • Module 5: Leadership and Communication

Chapter 4: People Management (Section 4.5) Chapter 5: Managerial Competencies (Sections 5.2, 5.3 and 5.4)

Definition and role of leadership Should managers lead

Chapter 6: Leadership (Section 6.1) Chapter 6: Leadership (Section 6.2)

Leadership style, leadership development, leadership behaviour

Chapter 6: Leadership (Sections 6.3, 6.4,6.5, 6.6, 6.7 and 6.8)

Communication process, bridging gaps using tools of communication, electronic media in communication Module 6: Financial Management

Chapter 5: Managerial Competencies (Section 5.1)

Financial functions of management

Chapter 8: Economic, Financial and Quantitative Analysis (Section 8.4)

Financial planning

Chapter 8: Economic, Financial and Quantitative Analysis (Sections 8.4, 8.5,8,6 and 8.7)

Management of working capital

Chapter 8: Economic, Financial and Quantitative Analysis (Section 8.8)

Sources of finance

Chapter 8: Economic, Financial and Quantitative Analysis (Section 8.9)

Module 7: Marketing Management

Functions of marketing

Chapter 9: Customer Management (Section 9.1)

Product planning and development

Chapter 9: Customer Management (Section 9.4)

Marketing organization and sales organization Chapter 9: Customer Management (Section 9.6) Sales promotion

Chapter 9: Customer Management (Section 9.7)

Consumer behaviour

Chapter 9: Customer Management (Section 9.9)

Marketing research and information

Chapter 9: Customer Management (Section 9.2)

Syllabus Mapping SYLLABUS MAPPING Syllabus for HU-601

Principles of Management Basic concepts of management: definition 1 (chapter 1 essence, functions, roles, levels Functions of management: planning— 1 Chapter 2 concept, nature, types, analysis, management 1 by objectives

Organization structure concept, structure, principles, centralization, decentralization, 1 span of management, organization effectiveness Management and society: concept, external 1 Chapter 3 environment, CSR, corporate governance, ethical standards 1 People management: overview, job design, Chapter 4 recruitment and selection, training and development, stress management Managerial competencies: communication, Chapter 5 motivation, team effectiveness, conflict management, creativity, entrepreneurship Leadership: concept, nature, styles Chapter 6 1 Chapter 7 Decision making: concept, nature, process, tools and techniques 1 Chapter 8 Economic, financial and quantitative analysis: production, markets, national income accounting, financial function and goals, financial statement and ratio analysis, quantitative methods—statistical interference, forecasting, regression analysis, statistical quality control 1 Chapter 9 Customer management: market planning and research, marketing mix, advertising and brand management I Chapter 10 Operations and technology management: production and operations management, logistics and supply chain management, TQM, Kaizen and Six Sigma, MIS

ix

Mapping in Book

Contents Unit 1 = Basic Concepts of Management 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 1.12

Introduction Definition of Management Management Functions Managerial Roles Management: An Art or a Science Management as a Profession Evolution of Management Thoughts Summary Self-Assessment Questions Short Answer Questions Long Answer Questions Answers to Self-Assessment Questions

Unit 2: Functions of Management 2.1 2.2 2.3 2.4 2.5 2.6 2.7 '2.8 2.9 2.10 2.11 2.12 2.13 r 2.14 : 2.15

Introduction Planning Types of Plans Levels of Planning The Planning Process Barriers to Effective Planning Management by Objectives (MBO) Organization Structure Guidelines for Effective Organizations Control Summary Self-Assessment Questions Short Answer Questions Long Answer Questions Answers to Self-Assessment Questions

1 1 2 4 6 10 12 15 25 26 27 27 27

29 29 29 32 35 36 42 43 46 58 61 66 68 68 69 69

Unit 3: Management and Society

71

3.1 3.2 3.3 3.4 3.5 3.6 3.7 ' 3.8 3.9

71 75 83 86 88 89 89 89 90

Concept of Social and Ethical Environment Corporate Social Responsibility Corporate Governance Ethical Standards: A Programme for Action Summary Self-Assessment Questions Short Answer Questions Long Answer Questions Answers to Self-Assessment Questions

xii

Contents

Unit 4: People Management

4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.S 4.9 4.10 4.11 4.12

Overview Job Design and Human Resource Planning Recruitment Selection Performance Appraisal Training and Development Stress Management Summary Self-Assessment Questions Short Answer Questions Long Answer Questions Answers to Self-Assessment Questions

p^ p^ p^ 1q0

10j log 10s 11 j 11 j 112 112

Unit 5: Managerial Competencies

5.1 Communication 5.2 Motivation 5.3 Theories of Motivation 5.4 Team Effectiveness 5.5 Conflict in Organizations 5.6 Creativity 5.7 Entrepreneurship Development 5.8 Summary 5.9 Self-Assessment Questions 5.10 Short Answer Questions 5.11 Long Answer Questions 5.12 Answers to Self-Assessment Questions

Unit 6: Leadership 6.1 62 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 6.11 6.12 6.13

Introduction Leaders versus Managers Sources of a Leader’s Power Theoretical Approaches to Leadership Behavioural Approaches to Leadership Situational or Contingency Approaches to Leadership Contemporary Issues of Effective Leadership The Ten Commandments for Effective Leadership Summary .. Self-Assessment Questions Short Answer Questions Long Answer Questions Answers to Self-Assessment Questions

• 13 H3 H9 122 134 143

1 o>

]7] 777 777 172 174 177 181 191 193

Contents Unit 7: Decision Making 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 7.11

Concept Different Styles of Managerial Decisions Nature of Decision Making Decision Tree: Choosing by Projecting ‘Expected Outcomes’ Some Common Errors in Decision Making Organizing Summary Self-Assessment Questions Short Answer Questions Long Answer Questions Answers to Self-Assessment Questions

Unit 8: Economic, Financial and Quantitative Analysis 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 8.10 8.11 8.12 8.13 8.14

Production Markets: An Overview National Income Accounting Financial Function and Goals Financial Statement and Ratio Analysis Quantitative Methods Classification of Quantitative Techniques Management of Working Capital Sources of Finance Summary Self-Assessment Questions Short Answer Questions Long Answer Questions Answers to Self-Assessment Questions

Unit 9: Customer Management 9.1 9.2 -- 9.3 9.4 9.5 9.6 9.7 9.8 9.9 9.10 9.11 9.12

Market Planning and Research: Its Functions Marketing Information Systems (MIS) Stages in Marketing Research Process Product Planning and Development Marketing Mix Marketing Organization and Sales Organization Advertising and Sales Promotion Brand Management Consumer Behaviour Summary Self-Assessment Questions Short Answer Questions

xiii 197 197 199 210 221 222 224 227 228 229 229 230

231 231 234 236 239 240 242 244 255 257 260 263 264 264 . 264

265 265 267 269 279 -280 281 284 289 292 295 297 298

xiv 9.13 9.14

Contents Long Answer Questions Answers to Self-Assessment Questions

Unit 10: Operations and Technology Management

10.1 Operations Management 10.2 Production Planning and Control 10.3 Operations Planning 10.4 The Management of Operations 10.5 Total Quality Management 10.6 Logistics and Supply Chain Management 10.7 Summary' 10.S Self-Assessment Questions 10.9 Short Answer Questions 10.10 Long Answer Questions 10.11 Answers to Self-Assessment Questions

Model Test Paper University Question Paper and Solutions

UNIT 1

Basic Concepts of

Management 1.1

INTRODUCTION

The concept of management is as old as the human race itself. The concept of ‘family’ itself required that life be organized and resources of food be apportioned in a manner so as to maximize the utility of such resources. Study of people around the world shows good examples of organizational structures and organizational evolution over the years. A village open market in a tribe and a large department store in a modern city serve the same needs in a similar fashion, which is putting things together that people need. While tribal organization was simple in nature, modern organization is much more sophisticated and complex with many technological innovations. However, the basic form of management and organizational structure seem to have existed since the beginning of organized human activity. Even recorded history shows application of some current management techniques as far back as 5000 B.C. when the ancient Sumerians used written records in assisting governmental operations. The Egyptian pyramids, built as early as 3000 B.C., required the organized efforts of over 100,000 workers. It would be natural to assume that all functions of modern management, namely, planning, organizing, directing and controlling played a significant role in their construction. Similarly, the early civilization of India bears witness to organized living. Management, as a system, is not only an essential element of an organized society but also an integral part of life when we talk about managing our lives. Managing “life” is not much different from managing an organization and this “art” of management has been with us from times immemorial. Just as a well-managed life is much better organized, goaloriented and successful, “good” management of an organization makes the difference between success and failure of the organization.

2 1.2

Principles ofManagement DEFINITION OF MANAGEMENT

Many management thinkers have defined management in their own ways. For example, Van Fleet and Peterson define management as “a set of activities directed’ at the efficient and effective utilization of resources nfthepursuit of one of more goal.” This concept is shown in Figure 1.1.

Figure 1.1 Basics of management

Megginson, Mosley and Pietri define management as, “working with human, financial and physical resources to achieve organizational objectives by performing the planning, organizing, leading and controlling functions.” This is shown in figure 1.2.

Figure 1.2 Management

Kreitner considers management to be a problem-solving process. He defines management as follows:

“Management is a problem-solving process of effectively achieving organizational objectives through the efficient use of scarce resources in a changing environment.”

Basic Concepts of Management

3

Some integral elements of this definition can be separated and briefly explained as follows: a)'Problem-solving process: One of the most important functions of a manager is to make decisions and solve problems. Some of the major problems that management continually faces include unpredictable economic trends, changing governmental regulations, resource shortages and severe competition for these resources, employee demands, technical problems, technological developments and so on. There are other problems that are comparatively routine in nature and can be solved by some tried and tested mechanisms. For example, a change in production quality can be easily looked into and the process can be corrected or modified, if necessary. On the other hand, an increase in employees’ grievances or employee absenteeism or turnover may require carefully studied and unique solutions. ^^Organizational objectives: All organizations have a mission which is the basic reason for their existence and they also have certain goals and objectives. While the goals are long range and more general in nature, objectives are more specific, tangible and quantifiable. For example, the mission of a college may be to provide high-quality education, its goal may be to serve the educational needs of the surrounding community and its objective may be to increase the number of new students entering the college by 10 per cent in two years. The primary objective of most organizations is to provide service to the public. Of course, such service has to be profitable for the organization in monetary terms, for that is the essence of a capitalist economy. Accordingly, management must plan its activities along these lines. Additionally, it is also the management’s responsibility to integrate the personal objectives of the employees into organizational objectives. The personal objectives of employees may include higher remuneration, more challenging tasks and responsibilities and participation in the decision-making process. ^G'j'T.fficiency: Efficiency, along with effectiveness, is the most common way of measuring organizational performance. Efficiency is the ability to “get things done correctly”. An efficient manager achieves Higher output with-given resources of time, talents and capital so that these resources are fully utilized without waste. Similarly, effectiveness means “doing the right things in the right way at theright tjmes”.Accordingly, successful managers would not only be effective in terms of selecting the right things to do and the right methods for getting them done, but they would also be efficient in fully utilizing resources.

4

Principles ofManagement

djScarce resources: The resources of people, time, capital and’ raw materials are all finite and limited. They are scarce in nature and are not expandable. Additionally, there is a fierce competition for acquiring these resources. Management is a "trusteeship” of these resources and hence, must make conscious efforts to make the most of these resources. e) Changing environment: The dynamics of the environment is evidenced by the changes that have taken place in all areas in the last few years. The advent of computers and telecommunications technology has changed the ways in which the assessment of the environment is carried out for decision-making purposes. Accordingly, management must be prepared to predict accurately these changes and formulate ways to meet the new challenges more effectively. 1.3

MANAGEMENT FUNCTIONS

The management process consists of four basic functions, namely, planning, organizing, directingand control Ifng.These functions are the ‘managers tools to acliieve organizational goals and objectives. These functions are interrelated and interdependent so that a significant change in one function affects the functioning of others. This relationship is shown in Figure 1.3.

Figure 1.3 Functions of management 1.3.1 Planning

Planning is considered the central function of management and determines the organizations direction. It is a rational and systematic way of making decisionsTKaf affectthe future of the company. It involves the process of ascertaining organizational goals and objectives and deciding on activities to attain these objectives. It is also a process of preparing

Basic Concepts of Management

5

for change and coping with uncertainty by formulating future courses of action. Planning is particularly important because of scarce resources and uncertain environments with fierce competition for these resources. Planning is a kind of organized foresight and corrective hindsight. It involves forecasting the future as well as attempting to control the events. It entails the ability to foresee the effects of current actions in the long run. in the future. Peter Druckerhasdefined planning as follows:

Panning is the continuous process of making present entrepreneurial decisions systematically and with best possible knowledge of their futurity, organizing systematically the efforts needed to carry out these decisions and measuring the results of these decisions against the expectations through organized and systematic feedback.”

An effective planning programme incorporates the effects of both external as well as internal factors. The external factors are shortages of resources, both capital and material, general economic trends in terms of interest rates and inflation, dynamic technological advancements, increased governmentaT regulations regarding community interests, unstable international political environments and so on. The internal factors that affect planning include limited growth opportunities due to saturation which may require diversification, changing patterns of work force, more complex organizational structures, decentralization, etc. _L3.2 Organizing

Organizing requires a formal structure of authority and the direction and flow of such authority through which work sub-divisions are defined, arranged and coordinated so that each part relates to other parts in a united and coherent manner so as to attain the prescribed objectives. Thus, the function of organizing involves the determination of activities that need to be done in order to achieve the company goals, assigning these activities to the proper personnel and delegating the necessary authority to carry out these activities in a coordinated and cohesive manner. It follows, therefore, that organizing function is concerned with: • Identifying the tasks that must be performed and grouping them wherever necessary • Assigning these tasks to the personnel while at the same time, defining their authority and responsibility • Delegating such authority to these employees

2‘

6

Principles of Management

• •

Establishing a relationship between authority and responsibility Coordinating these activities

1.3.3 Directing ■■■

The directing function is concerned with leadership, communication motivation and supervision so that the emplo^esperformtheiractivities' in~tKe~rhdst efficient manner possible. The leadership element involves issuing of instructions and guiding the subordinates about procedures and methods. Communication must be open both ways so that the information can be passed on to the subordinates and the feedback can be received from them. Motivation factor is very important, since highly motivated people show excellent performance with less direction from superiors. Supervising subordinates would give continuous progress reports as well as assure the superiors that the directions are being properly carried out. The leadership style that works best varies depending upon the characteristics of the leader, the followers and the relevant situation. As the president of a top (“Fortune 500” company said, “A leader must lead, not drive. People are unpredictable, different from one another, often irascible, frequently petty, sometimes vain, but always magnificent if they are properly motivated.’^-* 1.3.4 Controlling

The function of controlling consists of those activities that are undertaken to ensure that the events do not deviate from the pre-arranged plans. It is the process of devising ways and means of assuring that planned performance is actually achieved. In essence, control involves sequentially: • < Setting up standards of performance . • Determining methods for measuring such performance . • Measuring the actual performance using these methods • ’ Comparing these measurements with the pre-established standards < »/ Taking corrective action, when necessary, to correct any deviations between the measured performance and expected performance 1.4

MANAGERIAL ROLES

Another approach to study management is to examine the roles that managers are expected to perform. These roles can be defined as the

Basic Concepts ofManagement

7

organized sets of behaviours identified with the position. These roles were developed by Henry Mintzberg in the late 1960s after a careful study of executives at work. All these roles deal with people and their interpersonal relationships. These ten managerial roles are divided into three categories: The first category of interpersonal roles arises directly from the managers position and the formal authority bestowed upon him. The second category of informational roles is played as a direct result of interpersonal roles and these two categories lead to the third category of decisional roles. These roles are shown in Figure 1.4.

Figure 1.4

Managerial roles

These roles are explained in more detail as follows: 1.4.1

Interpersonal Roles

Managers spend a considerable amount of time in interacting with other people both within their own organizations as well as outside. These people include peers, subordinates, superiors, suppliers, customers, government officials and community leaders. All these interactions require an understanding of interpersonal relations. Studies show that interacting with people takes up nearly 80 per cent of a managers time. These interactions involve the following three major interpersonal roles.

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Principles ofManagement

Figurehead: Managers act as symbolic figureheads performing socia] o r legal obligations. These duties include greeting visitors, signing lega] documents, taking important customers to lunch, attending a subordinate’s wedding or speaking at functions in schools and churches. All these are duties of a ceremonial nature but are important for the smooth functioning of the organization. Leader: The influence of the manager is most clearly seen in his role as a leader of the unit or organization. Since he is responsible for the activities of his subordinates, he must lead and coordinate their activities in meeting task-related goals and he must motivate them to perform better. He must be an exemplary leader so that his subordinates follow his directions and guidelines with respect and dedication. Liaison: In addition to their constant contact with their own subordinates peers and superiors, managers must maintain a network of outside contacts in order to assess the external environment of competition social changes or changes in governmental rules, regulations and laws. In this role, the managers build up their own external information system In addition, they develop networks of mutual obligations with other managers in the organization. They also form alliances to win support for their proposals or decisions. Liaison with external sources of information can be developed by attending meetings and professional conferences, by personal phone calls, trade journals and by informal personal contacts within outside agencies. 1.4.2 Informational Roles

By virtue of his interpersonal contacts, a manager emerges as a source of information about a variety of issues concerning the organization. In this capacity of information processing, a manager executes the following three roles. JMpnitpr: The managers are constantly monitoring and scanning their environment, both internal and external, collecting and studying information regarding their organization and the outside environment affecting their organization. This can be done by reading reports and periodicals, by asking their liaison contacts and through gossip, hearsay and speculation. Disseminator of information: The managers must transmit information regarding'changes inpolicies or other matters to their subordinates, their peers and to other members of the organization. This can be done through memorandums, phone calls, individual meetings and group meetings.

Basic Concepts of Management

9

Spokesperson: A manager has to be a spokesman for his unit and he represents his unit in either sending relevant information to people outside his unit or making some demands on behalf of his unit. This may be in the form of the president of the company making a speech to a lobby on behalf of an organizational cause or an engineer suggesting a product modification to a supplier. 1.4.3

Decisional Roles

On the baslsof the environmental information received, a manager must make decisions and solve organizational problems. In that respect, a manager plays four important roles. Entrepreneur: As entrepreneurs, managers are continuously involved in mTpYoving their units and facing the dynamic technological challenges. They are constantly on the lookout for new ideas for product improvement or products addition. They initiate feasibility studies, arrange for capital for new products if necessary, and ask for suggestions from the employees for ways to improve the organization. This can be achieved through suggestion boxes, holding strategy meetings with project managers and research and development personnel. Conflict handler: The managers are constantly involved as arbitrators in solvTng_-dTfferences among the subordinates or the employee’s conflicts with the central management. These conflicts may arise due to demands for higher pay or other benefits or these conflicts may involve outside forces such as vendors increasing their prices, a major customer going bankrupt or unwanted visits by governmental inspectors. Managers must anticipate such problems and take preventive action if possible or take corrective action once the problems have arisen. These problems way also involve labour disputes, customer complaints, employee grievances, machine breakdowns, cash flow shortages and interpersonal conflicts. Resource allocator: The third decisional role of a manager is that of a resource allocator. The managers establish priorities among various projects or programs and make budgetary allocations to the different activities of the organization based upon these priorities. They assign personnel to jobs, they allocate their own time to different activities and they allocate funds for new equipment, advertising and pay raises. Negotiator: The managers represent their units or organizations in negotiating deals and agreements within and outside of the organization.

10

Principles of Management

They negotiate contracts with the unions. Sale managers may negotiate prices with prime customers. Purchasing managers may negotiate prices with vendors. All these ten roles are important in a managers job and are interrelated even through some roles may be more influential than others, depending upon the managerial position. For example, sales managers may give more importance to interpersonal roles while the production managers may give more importance to decisional roles. The ability to recognize the appropriate role to play in each situation and the flexibility to change roles readily when necessary, are characteristics of effective managers. Most often, however, the managerial effectiveness is determined by how well the decisional roles are performed^ ^5

MANAGEMENT: AN ART OR A SCIENCE

A controversy has raged for many years over the concept of management Is it an art, which depends upon skill or is it a science which depends upon analysis? According to J. Paul Getty, “Management cannot be systematized* or practised according to a formula. It is an art, even a creative art.” Others disagree. It is also said that, “Management is the oldest of arts and the youngest of sciences.”

Management as an art: It has been propounded that like leaders, managers are also born and not made. It is an inherent trait and it cannot be learned through formal training or knowledge of certain techniques. It is similar to being a painter or a poet You cannot be trained to become a poet There have been a number of cases in which some people have become successful managers and entrepreneurs without having been specifically educated for this profession. They have depended upon intuition and experience rather than any formal preparatory education.

According to Jucius and Schlender, management was considered a pure art in the United States in the last century: “A manager was born or was made so in the hot crucible of experience. He thus relied upon intuitive guidance when faced with a decision. So in a sense, he learned nothing from the previous generations and could pass nothing on to succeeding generations as far as management skills were concerned.” The contention of management being an art was rejected by scientific management pioneers like Fredrick W. Taylor, Henry Gantt, Henry Fayol, Frank and Lilian Gilbreths who believed that the management process could be translated into a set of methodologies and techniques which

Basic Concepts of Management

11

could be learned and communicated. However, management may be a combination of both art and science elements. The science and the art of it may not be mutually exclusive. In the opinion of a Russian management expert D. Gvishiani, “the managerial activity will always remain a creative field, a field of art, even though it is becoming more and more scientific.” Management as a science: Science is systematic knowledge which explains The cause and effect phenomenon with underlying principles which have universal application. In this regard, management has developed certain principles, laws and generalizations which are universal in nature and can be applied under similar circumstances of business environment According to Luther Guelick:

“Management is already a field of knowledge, and is becoming a science, because the inter-relationships involved are being explained systematically and the emerging theories are being tested and improved by logic and the facts of life.”

Both scientific management, which is the scientific study of management principles arid management science which is based upon sophisticated quantitative “decision-making models have a common approach that subjectivity and intuition should be replaced by objectivity and scientific methodology and rule-of-thumt>, hunches, guesswork, and trial and error approach be replaced with exact knowledge and deductive decisions. Can management, however, be an exact science where the same set of rules applies under similar situations. Do similar causes result in similar effects in the area of management? Hardly so. Management cannot be an exact science because it deals with human beings and because their psychological make-up is highly complex and unpredictable. Additionally, the business environment is highly dynamic and ever-changing. Accordingly, the same rules may not always apply because the situations are never similar. Management may not be an exact science, but the application of scientific method to management problems has proved to be effective. Objectives are defined, hypothesis formulated, necessary data collected, analysed and interpreted, conclusions tested, solutions arrived at and implemented. Mathematical techniques have been successfully applied in problems involving inventories, service facilities, assignment of jobs to machines for optimal results, optimal allocation of scarce and limited resources to different projects, etc.

12 1.6

Principles ofManagement MANAGEMENT AS A PROFESSION

_____________________________________

There was a time when owners of a business managed it by themselves. Thus, they were its managers also. Virtue of ownership accorded them the status of managers. They learnt the art of managing a business from their predecessors and from experience. But soon enough, the need was felt for qualified, trained and professional managers. Over the last few decades, factors such as growing size of business units, separation of ownership from management, increasing consumer awareness, growing competition, etc., have led to an increased demand for professionally qualified managers. The task of a manager has now acquired a specialized status and management has reached a stage where everything is required to be managed professionally. A global debate has been raging over whether management ought to be considered a profession or not. But let us first understand what a profession is. Professions are made up of specific categories of people from whom we seek advice and services because they possess knowledge and skills that we do not. A doctor, for example, can prescribe a course of treatment or a dose of certain medicines for an illness; an architect can recommend the proper materials and designs to be used when constructing a house; a lawyer can advise us as to what legal action to take to address a particular situation- We are not equipped or skilled enough to make these judgments ourselves. But at the same time, often we are not in a position to judge the quality of the advice that we receive or its veracity. We have to presume that this professional advice is authentic and the best course to undertake. A profession maybe defined as “an occupation that requires specialized know]edgg__aiid _intensive acadernfcf~preparations To which entry is regulated by a representative body.” Another definition of profession is, J__specialjzed _kind of work practised through and by use^ of classified knowledge, a common vocabulary, and requiring ^standards of practice andZcode-.of.ethiGS-establishedJb.y_a -recognized body.” The essentials of a profession are: ^Specialized body of knowledge: Every profession has a well defined area of organized knowledge. Management also deals with distinct areas of knowledge which are developed around various functions of management. Techniques of management evolved by drawing upon knowledge from other branches like economics, sociology, statistics, mathematics, etc., facilitate managers to perform their job better. Coordinated decision making in organizations is facilitated

Basic Concepts of Management

13

by application of the same theory by all managers in their decision making. Managers are required to possess the right attitude in acquisition of new knowledge so as to prove successful in an ever­ changing organizational environment. Every professional must make deliberate efforts to acquire expertise in the principles and techniques of his subject-matter. Similarly, a manager must have devotion and involvement to acquire expertise in the science of management Formal method of acquiring education and training: There are a number of institutions and universities that impart education and training for various professions. No one can practise a profession without going through a prescribed course. Many institutes of management have been set up for imparting education and training in different facets of management. For example, a CA cannot audit a company’s accounts unless he has studied for and acquired a degree or diploma for the same. But as of now, no minimum qualifications and course of study has been prescribed for managers by law. MBA is preferred but not necessary. But in the present day scenario, formal education and training is critical for managers to get hired and to do well at their jobs. Transfer of knowledge gained through experience from one mind to another and intuitive knowledge are no longer considered adequate for practising managers. Representative/professional associations: Founded in the year 1957, the All India Management Association (AIMA) is an apex body of management with over 30,000 individual members, 3,000 institutional members and 63 local management associations across India and overseas. For the regulation of any profession, setting up of a representative body is a prerequisite. For example, the Institute of Charted Accountants of India establishes and administers standards of competence for all auditors. The AIMA however, does not have any statuary powers to regulate the activities of managers. 4.‘ Social obligations: Any profession is a source of livelihood but professionals are primarily motivated by the desire to serve the society. Their actions are influenced by social norms and values. Similarly, a manager is responsible not only to his or her owners but also to the society at large and thus, he is expected to provide quality goods and quality service at reasonable prices to the society. Requisite professional skills: A manager’s status in the present-day organization is linked to his or her performance and possession of

14

Principles; ofManrtgrmcTtt

requisite professional skills rather than other extraneous factors like family or political connections. These skills include qualities like leadership, sound decision making, accurate business forecasting, etc.

6% Code of conduct: Members of any profession have to abide by a code of conduct which contains certain rules and regulations, norms of honest}', integrity and special ethics. A code of conduct is enforced by a representative association to ensure self-discipline among its members. Professionals must be governed by a strict code of ethics formulated and enforced by professional bodies to protect their members’ integrity. Any member violating the code of conduct can be punished and his membership can be withdrawn. The AIMA has prescribed a code of conduct for managers but it has no right to take legal action against managers who violate it.

7. Service motive: True professionals serve their clients’ interests through dedication and commitment. Financial reward is not the measure of their success. Managers today are expected not only to serve the long-term interest of the organization but also be conscious of their social responsibilities. Besides, they are entrusted with wealth producing resources of society which they are expected to put to the most effective use. From this discussion, it is clear that management fulfills several essentials of being a profession. However, it fails to satisfy a few characteristics of a profession because: • It does not restrict entry into managerial jobs on account of one standard or another. • No minimum qualifications have been prescribed for managers. • No management association has the authority to grant a certificate of practice to various managers. • All managers are supposed to abide by the code formulated by AIMA, but there is no mechanism to ensure that this happens. • Competent education and training facilities are still lacking. • Managers are responsible to many groups such as shareholders, employees and society A regulatory code may curtail their freedom. • Managers are known by their performance and not mere degrees. • The ultimate goal of business is to maximize profit and not social welfare.

Basic Concepts ofManagement 1.7

15

EVOLUTION OF MANAGEMENT THOUGHTS

There are two approaches to management thoughts: the classical approach and the behavioural approach. 1.7.1

Classical Approaches to Management

The Industrial Revolution brought about an unprecedented growth in productivity and this gave rise to three types of contemporary management theories, which are collectively known as the “classical approach" to management. These are: scientific, bureaucratic and administrative management theories. The classical approach is based upon the fdeas generated in the late 1800s and early 1900s and is primarily based on the economic rationality of all employees. It evolved around the classical assumption of Adam Smith that people are motivated by economic incentives and will rationally consider opportunities that provide them the greatest economic gain. Thus, to get employees to work hard, managers should appeal to their monetary desires. The classical approach did not assume that people were not important, but the proponents of this approach agreed that humans had emotions that could be controlled and manipulated by providing economic incentives. As the organizations controlled economic incentives, an individual was considered primarily as a passive resource to be manipulated, controlled and motivated by the organization. 7.7.7.7 Scientific Management Scientific management focuses on production efficiency and is primarily attributed to the ideas of Fredrick W. Taylor (1856-1915), who is also known as ‘the father of scientific management*. He is well known for his work, ‘The Principles of Scientific Management’, which became the foundation of the scientific management movement. He criticized the methods of traditional management which were comprised the following: Managerial decisions were made on the basis of intuition, feelings, opinions and traditional past experiences rather than scientific investigations. Jobs were performed by rule of the thumb rather than by standard time, method or motion studies. The prevalent practices were assumed to be correct, therefore no efforts were made to introduce new and novel techniques of management or operations.

16

Prznf the problems and not the symptoms. Any corrective action should be taken promptly in order to make it most effective. Whenever and wherever possible, the corrective action should be built into the existing operations and these controls should be self-monitoring and corrective actions should be automatic. It must be understood that the goal itself is not astatic phenomenon, but is a function of the dynamics of the environment. Hence a look into the need of altering the target itself caused by shifts in the environment may be necessary. Human Response to Control

Managers must recognize several behavioral implications in the process of :ontrol and its implementation. Although an effective control system should lid in employee motivation, it can also have negative effect on employee norale and performance. These negative effects can be seen in situations vhere managers exert excessive control over their subordinates and their ictivities. This can be considered as misuse of power and would negatively iffcct their morale. Accordingly, control system should be made as fair ind as meaningful as possible and must be clearly communicated to all employees. It will be easier for employees to accept control if they participate n the formulation of the control system and process of implementation, n addition, timely feedback and objective and realistic appraisal will get >ositive worker response. The control system and performance evaluation nust be consistent with goals, policies and culture. A performance appraisal based only upon departmental variables, uch as output or percentage of waste may induce workers to give less mportance to such organizational goals as safety, equipment maintenance nd so on. Hence, cohesion of all aspects is necessary for an effective ontrol system. *

ome of the behavioral implications of control are as follows.

1. Control affects individual freedom. Hence, it is common for individuals to resist certain controls if they put constraints on their freedom.

k.4?~.troi carries certain status and power implications. For example, j cualrty control inspector may carry more power than a line supervise and this mav be resented. 3

When controls are based upon subjective and personal judgments aj cgsmst quantified performance. standards and appraisals, these ma? create interpersonal or mtcr-group conflicts within the organization

4. Excessive number of controls may limit flexibility and creativity Ulis mav lead to low levels of employee satisfaction and persona] c eve. opm enL 5. Controls may influence the generation of invalid and inaccurate mformation. For example, if the top management habitually reduces budget requests when reviewing them (a control activity), then the management, when proposing a new project may overstate the co< of resources needed.

i i

C Controls can be resented by employees if they have no control over the situation. For example, a manager will become highly frustrated if his performance evaluation is based upon profits achieved by his department but he does not have the authority and control to mah operation^] changes such as hiring and firing of workers. 7. The control system must be synchronized to create a balance anion? ah affecting and inter-connected variables. The standards should compliment each other and not contradict each other. For example,a control sj-stem which emphasizes increased sales as well as reduction in advertising expenditure at the same time may seem contradictor)' io the marketing manager.

211

SUMMARY

Planning is a decision-making activity entailing the process of ascertaining objectives and deciding on activities to attain these objectives. In planning managers assess the future, determine the goals of the organization and develop the overall strategies to achieve these goals. Organizational plans are usually divided into two types, namely standing plans and single-use plans. Standing plans are those which remain roughly the same for long periods of time and are used in organizational situations that occur repeatedly. Single-use plans focus on relatively unique situations within the organization and may be required to be used only once.

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There arc four levels of planning associated vzith different managerial levels. These arc strategic planning, tactical planning, operational planning and contingency planning. The mission of an organization sets out why the organization exists and what jt should be doing. The goals of an organization are refinements ofits miss i on. McKinsey 7S Framework is a model of management that propounds a strategic vision that organizations can leverage to improve their efficiency and effectiveness. The 7S included in this framework are: structure, strategy,-systems, skills, style, staff and shared values. SWOT analysis method can be effectively used to evaluate the Strengths, Weaknesses/Limitations,-Opportunities, and Threats involved in a project of in an organizational venture. It entails specifying the objectives of the business Endeavour or project and matching them with the internal and external factors that are either favourable or unfavourable to attain that objective. Despite good intentions, planning often fails to be effective in achieving the desired results. In other words, there are several barriers to effective planning like poor communication, insufficient resources, resistance, lack of creative thinking and so on. MBO is the philosophy of management that emphasizes that managers and subordinates work together in identifying and setting up objectives and make plans together in order to achieve these objectives. These objectives should be consistent 'with the organizations mission and goals. Management must form a structure so that processes and activities can be coordinated and efforts directed through such a structure towards achieving organizational goals. To facilitate communication between different levels, certain elements are considered as integral to vertical organizations. These basic elements are: (a) chain of command, (b) authority, (c) span of control and (d) centralization and decentralization. “Centralization” means that the "authority for most decisions__is concentrated at the top of the managerial hierarchy and “decentralization” require~S~such authority to be dispersed by. extension and delegation through all levels of management. ~^C6iffr611ing establishes standards of performance and compares actual results with the planned results to determine whether operations are being performed according to plans. Controlling is a universal management function. The controlling process involves sequential steps that include

Principles of

establishing standards, measuring performance, comparing actual and intended performance and taking corrective action. Managers must recognize several behavioral implications in the process of control and its implementation. Although an effective control system should aid in employee motivation, it can also have negative effect on employee morale and performance. 2.12

SELF-ASSESSMENT QUESTIONS________________________________________

1. Planning is particularly important on account of and environment.

resources

2. Planning is helpful to organizations in anticipating problems and uncertainties. True/False 5. Procedures belong to the category of single-use plans. True/False 4. It is the loxver-level management of an organization that is involved in strategic planning. True/False

5. Robert Waterman Jr and Tom Peters developed the ________ _ framework in the 1980s. 6. The *W* in SWOT analysis stands for. 7. If customers of an organization are located far apart geographically, then decentralization would be more appropriate. True/False 8. Organizations with immaterial assets but no people can still continue to exist True/False 9. Organizational objectives should be attainable but. 10. ‘Management by results’ and goal management’ actually mean

2.1 3

SHORT-ANSWER QUESTIONS

— I. What are policies, procedures and rules? 2. Is a budget a single-use programme’? Why? 3. What are mission, goals and objectives of an organization? 4. What is the gang plank principle’?

5. What do you understand by span of control? 6. What is SWOT analysis? 7.

Name the four steps involved in the controlling process.

Functions ofManagement 2.14

69

LONG-ANSWER QUESTIONS

1. Why is planning extremely important in modern organizations? 2. Discuss the four levels of planning associated with different managerial levels. 3. What are the various barriers to effective planning? 4. What do you mean by ‘management by objectives’? How is it implemented? 5. Discuss the various advantages and disadvantages of decentralization in management. 6. What are the established guidelines for effective management? 7. What are the various standards against which performance can be measured in the controlling process? 2.15

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

ANSWERS TO SELF-ASSESSMENT QUESTIONS

Scarce, Uncertain True False False McKinseys 7s Weaknesses True False Challenging Management by objectives

IO’

Th,s p,,t, has been intentionally |eft

UNIT 3

Management and Society

3.1

CONCEPT OF SOCIAL AND ETHICAL ENVIRONMENT

Ethics is probably the most difficult concept to define. It is as intangible to assess as the idea of morality or the concept of right and wrong. It may have some basic foundations that are universal in nature, but much of it can be defined only with reference to the values established by a particular society. For example, accepting bribes may be unethical in some societies and may be a way of life in others. Sex before marriage in India may be immoral, while it is morally acceptable in America. It is considered proper for women in some societies to be subservient to men, while in other societies, there is emphasis on equality of gender. Artificial birth control may be a moral taboo in Catholic Christian and Islamic societies, while other societies may have more liberal attitudes towards the issue, and it may be mandatory in China. The determination of ethical conduct is subjective and vague, varying among different cultures and different environmental conditions. 3.1.1

Managerial and Business Ethics

Over the centuries, businessmen have been perceived as ruthless, profit oriented people, whose primary purpose is to make money with little respect for the welfare of the people whom these businesses serve. This is especially true in underdeveloped countries where big businesses wield tremendous power over government and society. In India and Pakistan, for example, there are millions of people working as “bonded labour”, where workers have absolutely no freedom. They cannot change or leave their jobs. They are paid minimum wages and are exploited. On account of monopolized industries in some developing countries, materials of sub-standard quality are deliberately produced without proper regard to the interests of the community. The hoarding of grains, cement and other consumer commodities and then inflating their prices are well known tactics of businesses in India.

■M

'

Principles ofManagement

Even in the developed countries, there have been many questionable business practices that may not stand up to high ethical standards. The way John D. Rockefeller eliminated bis competitors in the oil industry has been branded as ruthless and unethical. As recently as 1991, a Wall Street scandal at Salomon Brothers involved illegal transactions in the bond market. These transactions a von Id certainly be ethically questionable and they occurred in the organizational context that focused on making money and controlling information which would put the customer at a disadvantage. Only recently, and because of many well-publicized and questionable business practices, institutions have placed greater emphasis on developing higher ethical standards for business behaviour. In the organizational context, the concept of right and wrong, fair and unfair, just and unjust is reflected by the managers own ethical standards as well as by organizational policies and the social reactions to such policies. Some such issues of ethical conduct for consideration have been raised by Archie B. Carroll. These are:

1. Suppose a firm is advertising vegetable soup on television. Is it ethical to put small marbles at the bottom of the bowl of soup so that the soup looks thicker? 2. A salesman for an electrical machine is anxious to sell his equipment. Is it ethical for him to offer a bribe to the purchasing agent as an inducement to buy? Suppose that instead of bribe, he gives the money out of his own commission; does it make the transaction ethical?

3. Is it ethical for a production manager to overlook minor contract and safety violations in order to get on with the job?

-5

!

4. Is it ethical for some one to understate his educational qualifications in order to get a job during hard times for which the candidate would be considered overqualified? 5. Is it ethical to write personal letters during company time or use company telephone for private use? 6. Is it ethical for a company employee to remain silent while knowing that the company is violating its own rules, simply to keep his job? 7. Is it ethical for an accountant to add expenses in .the company income tax returns that were not incurred, knowing that they will get away with it?

In addition to questions about ethics in the business world, some ethically questionable situations have been studied in the academic world. An

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extensive study conducted by a Task Force on Ethics headed by Professor Mary Ann Von Glinowof University of Southern California and supported by the Organizational Behaviour Division of the Academy of Management in 1981 has delved into the subject very deeply. For example, in the area of research and publication, the Task Force has isolated certain behaviours and activities that it believes to be clearly unethical. These include: 1. The use of an idea or a concept by a reviewer of an article rejected by that reviewer 2. Doctoral advisers listing themselves as co-authors of papers where they had little or no input beyond normal advisory responsibility 3. Use by an author of a key concept or principle from an unpublished manuscript of a colleague, without prior citation 4. Simultaneous submission of an article to multiple journals 5. Falsification or fabrication of data

6. Attaching ones name to a paper to which no commensurate contribution was made 7. Conscious misstatement of facts from previous studies 8. When acting as an editor or reviewer, attempting to suppress publication of research that refutes one’s pet theory 9. Plagiarism Similarly, some of the ethically ambiguous behaviours include:

1. Suppression of disconfirming data or selective presentation of data 2. Repeated publishing of marginally different data, perhaps with some overlap

3. Taking advantage of friendship with editors or relying on reward or coercive power over editors 4. Assignment of term paper topics to students, corresponding to the outline of a book an individual is writing so as to obtain a literature review done that way 5. Giving students who collect and analyse data, nothing more than a footnote acknowledgement used in the publication 6. Using organizational records, with organizational approval and with confidentiality protected but without obtaining the consent of the individual employees

14

Principle?: of ^^napemcnt

s * Circulation to colleagues by a reviewer of a submitted manuscript without the authors approval Similarly, such behaviours can be isolated for other professionals such as consultants. attorneys, politicians and so on. 3 .12 Code of Ethics

A code of ethics is a formal statement that acts as a guide which describes the genera] value system, ethical principles and specific ethical rules that people within an organization are expected to follow. Also known as company "Credo”, it is a declaration of business principles, statement of core values and other written statements involving ethics which commonly address such issues as conflict of interest, privacy of information, gift giving or bribes, political contributions and so on. Most American firms have such ethical codes. For example, Martin Marietta, a major defence contractor in America has the following credo. «

b’;

.


Figure 6.1 Consideration and structure in leadership Thus, a manager with high structure and high consideration rates high in directing and controlling his subordinates and has a high level of concern and warmth towards them. Such managers have subordinates who are more satisfied, have fewer grievances and stay longer with the organization. There is also evidence that such managers generate higher levels of subordinate performance. One advantage of this approach is that these two dimensions of leadership behaviour are tangible and observable and account for a major part of the leader behaviour. Even though a casual connection of these two dimensions with performance has not been clearly demonstrated, their relationship to leadership effectiveness has been quite obvious.

6.5.2 The Leadership Grid Another behavioural approach to studying leadership was developed by Robert Blake and Jane Mouton. Originally called the “Managerial Grid”, the “Leadership Grid” is widely recognized typology of leadership styles. In general, behavioural scientists have separated the two primary concerns in organizations, namely, the concern for production and the

179 concern for people. They believed that high concern for production necessarily meant low concern for people, and high consideration for workers meant tolerance for low production. However, the leadership grid model emphasized that both concerns should be integrated to achieve the objectives of the organization. It assumes that people and production factors are complementary to each other, and not mutually exclusive. Concern for production is not limited to things only, and concern for people cannot be confined to narrow considerations of interpersonal warmth and friendliness. Production can be measured in terms of peoples creative ideas that turn into useful products, processes or procedures, efficiency of workers and quality of staff and other auxiliary services. Similarly, concern for people includes concern for the degree of personal commitment of complementing the work requirement assigned to each person, accountability based upon trust rather than fear of force, sense of job security and friendship with co-workers leading to a healthy working Leadership

climate.

The leadership grid is built on two axes, one representing the “people” and the other representing the “task”. Both horizontal as well as vertical axis are calibrated on a scale from 1 to 9 where 1 represents the least involvement and 9 represents the most involvement so that coordinates( 1,1) would indicate minimum standards for worker involvement and task design and coordinates (9,9) would indicate maximum dedication of workers and highly structured operations. Such an involvement would reflect

upon managerial orientation towards tasks and towards workers who are expected to perform such tasks. Blake and Mouton have identified five such coordinates that reflect various styles of leader behaviour. The leadership grid figure and these styles are shown in Figure 6.2.

The leadership grid diagram can be interpreted as follows: • Co-ordinates (1,1,) “Impoverished Management”: The manager gives minimum efforts to get the required work accomplished. There is minimum standard of performance and minimum worker dedication. • Coordinates (9,1). “Authority Compliance”: Excellent work design, efficiency in operations, well-established procedures, orderly performance, human element interference to a minimum degree. • Coordinates (1,9) “Country Club Management”: Thoughtful attention to the needs of people, personal and meaningful relationship with workers, friendly atmosphere and high morale,

ISO

Pn’nHpies ofManagement

(9,9)

(5,5)

1 -

(1,1)

(9,1)

i i 12

i 3

r 4

"I

5

I 6

i-------- 1------- -r—

7

8

9

Concern for production

Figure 6.2 Leadership grid

loosely structured work design, primary concern for people, production secondary. • Coordinates (9,9). “Team Management”: Ultimate in managerial efficiency, work accomplishment from thoroughly committed people, trustworthy and respectful atmosphere, highly organized task performances, interdependence of relationships through a “common stake” in organizational purpose. • Coordinates (5,5). “Middle-of-the-Road Management”: This leadership style is concerned with balancing the necessity to get the work done while maintaining worker morale at a satisfactory level. Moderate concern for both production and people. The leadership grid provides a reasonable indication of the health of the organizations as well as the ability of the managers. The model assumes that there is one best or most effective style of management, which is the style indicated by coordinates (9,9). The leadership grid model, however, has become controversial on the basis of lack of empirical evidence supporting whether the team

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management style is the best management style. One study with an extremely large sample size (16,000) found that only about 13 per cent of the total executives were high-achievers who cared about both people and profits and low achievers were obsessed only with their own security. High achievers viewed their subordinates optimistically while low achievers displayed a basic distrust in the ability of their subordinates. High achievers were listeners while low achievers avoided communication relying primarily on policy manuals.

6.6 SITUATIONAL OR CONTINGENCY APPROACHES TO LEADERSHIP Leadership approaches discussed so far attribute leaders performance on the basis of certain traits or behaviour. Contingency theories propose that an analysis of leadership involves not only individual traits and behaviour but also a focus on the given situation. Effectiveness of leader behaviour is contingent upon the demands imposed by the situation. The focus is on the situation and not on the leader. Different types of situations demand different characteristics and behaviours because each type of leader faces different situations. A successful leader under one set of circumstances may be a failure under a different set of circumstances. For example, Winston Churchill was considered a successful prime minister and an effective leader of England during World War II. However, he turned out to be much less successful after the war when the situation changed. Contingency approach defines leadership in terms of the leaders ability to handle a given situation and is based upon the leaders skill in that particular area that is pertinent to the situation. This approach can best be described by a hypothetical example developed by Robert A Baron. Imagine the following scenario. Top executives of a large corporation are going in their limousine to meet the president of another large company at some distance. On the way, their limousine breaks down many miles from any town. Who takes charge of the situation? Who becomes the situational leader? Not the president or the vice-president of the company, but the driver of the car who knows enough about the motor to get the car started again. As he does the repairs, he gives direct orders to these top echelons of the organizations, who comply. But once the car starts and they arrive at the meeting, the driver surrenders his authority and becomes a subordinate again. This example makes it clear that in a given situation, the person most likely to act as a leader is the one who is most competent for the situation • or for a given group as the case may be.

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Principles ofManagement

While this approach emphasizes that external pressures and situational characteristics and not personal traits or personality characteristics determine the emergence of successfill leaders in performing a given role, it is probably a combination of both types of characteristics that sustains a leader over a long period of time. A leader is more successful when his personal traits complement the situational characteristics. According to Szilagyi and Wallace, there are four contingency variables that influence a leaders behaviour. First, there are the characteristics of the leader himself. These characteristics include the personality of the leader relative to his ability to respond to situational pressures as well as his previous leadership style in similar situations. The second variable relates to the characteristics of the subordinates. They are important contributors to a given operational situation. The situation will depend upon whether the subordinates prefer a participative style of leadership and decision making and what their motivations in such a situation are. Are the subordinates motivated by intrinsic satisfaction of performing the task well or do they expect other types of extrinsic rewards? The third factor involves group characteristics. If the group is highly cohesive, it will create a more cordial situation than if the group members do not get along with each other and the leadership style will vary accordingly. The fourth situational factor relates to the organizational structure. The organizational structure is the formal system of authority, responsibility and communication within the company. Factors such as hierarchy of authority, centralized or decentralized decision making and formal rules and regulations would affect leader behaviour. All these factors are diagrammatically shown in Figure 6.3. Contingencies

Figure 6.3 Leader behaviour and contingencies

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Contingency theories of leadership attempt to account for any relationship between situational factors and leadership effectiveness. There are four such main theories that have been proposed. These are: Ml Fiedler's Contingency Theory The first major contingency model that clearly demonstrated discipline of situational thinking was developed by Fred Fiedler in 1967. He proposed a theoretical explanation for interaction of three situational variables which affect leader effectiveness. These three variables are leader-member relations, task structure and leader’s positional power. These variables determine the extent of the situational control that the leader has. • Leader-member relations: This relationship reflects the extent to which the followers have confidence and trust in their leader. A situation in which the leader-member relationships are relatively good with mutual trust and open communication is much easier to manage than a situation where such relations are strained. • Task structure: It measures the extent to which the tasks performed by subordinates are specified and structured. It involves clarity of goals as well as clearly established and defined number of steps required to complete the task. When the tasks are well structured and the rules, policies and procedures are clearly written and understood, then there is little ambiguity as to how the job is to be accomplished. • Position power: It refers to the legitimate power inherent in the leaders organizational position. It refers to the degree to which a leader can make decisions about allocation of resources, rewards and sanctions. Low position power indicates limited authority. A high position power gives the leader the right to take charge and control the situation as it develops. The most favourable situation for the leader would be when the leader-group relations are positive, the task is highly structured and the leader has substantial power and authority to exert influence on the subordinates. Fiedlers contingency theory of leadership states that leadership orientation and effectiveness is measured in terms of an attitude scale which gauges the leader s esteem for the “least preferred co-worker” or LPC, as to whether the person who is least liked by the leader is viewed in a positive or negative way. For example, if a leader would describe

1S4

Principles of Management

his least preferred co-worker in a favourable way with regard to sV factors as friendliness, warmth, helpfulness, enthusiasm and so on,th< he would be considered high on LPC scale. In general, a high LPC sea leader is more relationship-oriented and a low LPC score leader is ma task -ori ented. A high LPC leader is most effective when the situation is reasonab! stable and requires only moderate degree of control. The effectivena of a high LPC leader stems from motivating group members to perforr better and be dedicated towards goal achievement. A low LPC lead* would exert pressure on the subordinates to work harder and produc more. He would be highly effective when situational control is either ver low or very high- Under conditions of low situational control, group need considerable guidance and direction to accomplish their tasks, h such situations, a task-oriented leader will be more successful. Similarly under conditions of high situational control, successful task performance is practically assured. This requires very little interference by low LPC leaders, which is appreciated by the subordinates thus enhancing the leader’s effectiveness. This relationship of leadership effectiveness and degree of situational control is shown in Figure 6.4.

1. Low LPC leaders are highly effective under low situational control 2. High LPC leaders are highly effective under moderate situational control 3. Low LPC leaders are highly effective under high situational control.

Figure 6.4 Leadership effectiveness and situational control Source: Jerald Greenberg and Robert A Baron, “Behaviour in Organizations” Prentice Hall, 1995, p.515.

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Path-Goal Theory

fhe path-goal theory of leadership is another contingency model that tries to explain leadership effectiveness as a function of the situation. Proposed by House and Mitchell, this model emphasizes that the leader’s behaviour be such as to complement the group work setting and group aspirations so that j» increases the subordinates’ motivation to attain personal and organizational tfds. The leader sets up clear paths and guidelines through which subordinates tan achieve these goals. This will make the leaders behaviour acceptable and satisfying to the subordinates since they see the behaviour of the leader as an immediate source of satisfaction or as a source of obtaining future satisfaction. To motivate workers, the leader would: • Recognize subordinate needs for outcomes over which the leader has some control • Arrange for appropriate rewards to his subordinates for goal achievement • Help subordinates in clearly establishing their expectations • Demolish as far as possible any barriers in their path of goal achievement • Increase opportunities for personal satisfaction which are contingent upon satisfactory performance The leaders role in the Path-Goal model is shown in Figure 6.5. Path clarification

Increase rewards

Figure 6.5 Path-goal model Source: Based upon B. M. Bass, “Leadership: Good, Better, Best” Organizational Dynamics, Volume 13 (Winter 1985) p. 26-40.

186

Principles ofManagement

The Path-Goal model takes into consideration different types Of leadership behaviour. There are four leadership styles that would suppo^ this approach depending upon the nature of the situation. These are: i) Directive: Directive leadership is the style in which leader provides guidance and direction to subordinates regarding job requirements as well as methodology for job accomplishment. This style is required when demands of the task on hand are ambiguous and not clearly defined. However, when the task is inherently clear or clarification is available, then a high level of directive leadership is not required and may, in fact, impede performance. ii) Supportive: In supportive leadership, the leader is concerned with the needs and well-being of his subordinates. The leader is friendly and approachable and treats his subordinates as equals. This approach has the most positive effect, specifically on the satisfaction of those followers who are working on unpleasant, stressful or frustrating tasks that are highly repetitive.

1

iii) Achievement-oriented: This type of support helps subordinates to strive for higher performance standards and increases confidence in their ability to meet challenging goals. This is especially effective for followers who have clear-cut and non-repetitive assignments.

iv) Participative: This leadership approach encourages subordinates participation in the decision-making process. The leader solicits subordinates suggestions and takes the suggestions into consideration before making decision.

6.6.3 Situational Leadership Theory (SLT) The third contingency approach is the situational leadership theory. Developed by Paul Hersey and Kenneth Blanchard, it was originally known as the “Life-cycle-theory” and it focuses on the “maturity of followers as a contingency variable affecting the style of leadership.” The maturity of subordinates can be defined as their ability and willingness to take responsibility for directing their own behaviour in relation to a given task. The level of such maturity would determine the leader’s emphasis on task behaviour (giving guidance and direction) and relationship behaviour (providing socio-emotional support). “Task behaviour” can be defined as the extent to which the leader engages in specifying and clarifying the duties and responsibilities of an individual or a group. This includes telling people what to do, how to do it, when to

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do it, where to do it and who is to do it. Task behaviour is characterized by one-way communication from the leader to the follower and this communication is meant to direct the subordinate to achieve his goal. Similarly, “relationship behaviour” is defined as the extent to which the leader engages in two-way or multi-way communication. Such behaviour indudes listening, facilitating and being supportive. “Maturity” is the crux of situational leadership theory. It has been defined as reflecting the two elements of ability and willingness on the part of the followers. Ability is the knowledge, experience and skill that an individual or a group has in relation to a particular task being performed and willingness refers to the motivation and commitment of the individual or the group to successfully accomplish the given task. The style of leadership would depend upon the level of maturity of the followers. Figure 6.6 suggests four different styles of leadership for each stage of maturity and a particular style in relationship to its relative level of maturity is considered to be the “best match.”

Figure 6.6 Leadership and maturity Source: Adapted from Paul Hersey and Kenneth Blanchard, "Management of Organizational Behavior: Utilizing Human Resources!' Center for Leadership Studies, 1993. p.306

1SS

Priru~Tpk$ of M finfigrrrich f

These various combinations of leadership styles and levels of maturity are explained in more detail as follows: (S.) Telling: The "idling" style is best for low follower maturity. The followers feel insecure about their task and are unable and unwilling to accept responsibility in directing their behaviour. Thus, they require specific instructions as to what, how and when to do various tasks so that a directive leadership behaviour is more effective in such a situation. The leadership style involves high task behaviour and low relationship behaviour.

(S„) Selling: "Selling" style is most suitable where followers have low to moderate level of maturity. The leader offers both task direction as well as socio-emotional support for people who are unable but willing to take responsibility. The followers are confident but lack skills. It involves high task behaviour and high relationship behaviour. It combines a directive approach with reinforcement for maintaining J enthusiasm.

(SJ Participating: This

leadership approach also involves high relationship behaviour as well as high task behaviour and is suitable for followers with moderate to high level of maturity where they have the ability but not the willingness to accept responsibility, requiring supportive leadership behaviour to enhance their motivation. It involves sharing ideas and maintaining two-way communication to encourage and support the skills that the subordinates have developed.

(Sz) Delegating: Here the employees have both job maturity as well as psychological maturity They are able and willing to be accountable for their responsibility toward task performance and require little guidance and direction. It involves low relationship and low task behaviour and it is appropriate for the leader to use delegating style.

Situational leadership requires that leaders should be flexible in choosing a leadership style and they attend to demands of the situation as well as feelings of the followers, and adjust their styles with changing levels of maturity of the followers so as to remain consistent with the actual levels of maturity 6.6.4 Vroom-Yetton Model

One of the major tasks performed by leaders is making decisions. This model is normative in nature for it simply tells leaders how they should behave in decision making. The focus is on the premise that different

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problems have different characteristics and should therefore be solved by different decision techniques. The effectiveness of the decision is ii function of leadership style which ranges from the leader making decisions himself to a totally democratic process in which subordinates fully participate, depending upon contingencies of the situation which describe the attributes of the problems to be dealt with. After careful study of available evidence, Vroom and Yetton concluded that leaders often adopt one of the five distinct methods for making decisions, ranging from totally individualized decision making on one extreme to totally participative decision making style at the other extreme. These styles are described as follows. (A stands for autocratic, C for consultative and G for group). Al. The leader or manager makes the decision himself and his decision is based upon whatever information or facts are available to him. All. The leader or manager makes the decision himself but gets all the information needed personally from his subordinates. The role of the subordinates is limited to input of data only. They do not take any part in the decision-making process. They may not even know what the problem is.

CI. While in All style, the manager simply gets the information from his subordinates, in CI style, he consults his subordinates, who are expected to be involved with the outcome of the decision or are knowledgeable about certain elements of the problem. He consults them individually, getting their ideas and suggestions without bringing them together as a group. The manager may or may not take their suggestions into consideration when making the final decision. CII. In this style of decision making, the manager meets with his subordinates as a group, instead of meeting with them on an individual basis, and gets their ideas and suggestions. He makes the decision unilaterally and this final decision may or may not reflect their input.

GIL This is a participative style of decision making. The problem is shared with the group and solutions and alternatives are generated and evaluated together. The final solution is decided by the group by consensus and such solution is implemented.

Vroom and Yetton propose that leaders should attempt to select the best • approach out of these five approaches by asking basic questions about the situations in which they find themselves. These questions relate primarily

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Pri’idples qfMcnflccmrnr

190

to two variables. namely. the "quality of the decision” and "acceptance of

the decision." "Qualin- of the decision' refers not only to the importance of the decision to performance of subordinates relative to organizational goals but also whether such performance is optimal in nature and whether all relative inputs bad been considered during decision-making process. "Decision acceptance” refers to degree of commitment of the subordinates to the decision. Whether the decision has been made by the leader himself or with the participation of subordinates, it must be accepted whole-heartedh’by those who will implement it The decision itself has no value unless it is efficiently executed. When subordinates accept a decision as their own, they will be more committed to implementing it effectively. The bask questions relating to decision quality and decision acceptance are as follows. First three questions relate to the quality of the decision and four questions protect decision acceptance by the subordinates. These

questio ns are. • Is there a quality requirement such that one solution is likely to be more rational than another? < Is the problem structured? ! • Does the manager have sufficient information to make a high quality decision? Is acceptance of decision by subordinates critical to effective


l

5 Improve constantly the system of production and service to improve quality and productivity, thus constantly decrease costs. The system includes design, quality of incoming material, maintenance, training, supervision, and so on.

6. Institute modern methods of training on the jobs. Make sure that die people who are training the new workers are themselves highly skilled and well trained. 7. Institute leadership. Supervisors should help the workers in every facet of operation and be attentive to the needs of workers and provide them with the necessary tools and instructions.

8. Drive out fear, so that everyone may work effectively for the company. People perform their best when they feel secure in their work environment. The workers should not be afraid to ask questions or bring problems to the attention of the management. 9. Break down barriers between departments. People in various departments such as research, design, production and marketing must work as a team to foresee problems of productions and find solutions to such problems. 10. Eliminate slogans, exhortations and arbitrary numerical goals and targets for the workforce to achieve new levels of productivity and quality. Simply asking the workers to improve their work is not enough. The whole system must be refined so that the workers understand how to improve the quality.

H. Eliminate work standards that prescribe numerical quotas. Quotas are purely quantitative. Quality can be sacrificed when workers are expected to meet the quota and they attempt to do so at any cost. 12. Remove barriers that rob employees of pride in their workmanship. People must be treated as human beings rather than simply machines. The conceptual environment of work must be such that the workers take pride in their work as well as with their affiliation with the company.

Institute a vigorous programme of education and self-improvement Continuous improvements require continuous learning. Top management, down to workers, must all be continuously learning new methods of quality improvement.

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Principfrs ofManagcmcnt

14. Get everybody in the company to take all necessary steps to accomplish the transformation from the old system of thinking to die new work ethic. Develop a plan and an organizational structure that will facilitate arid enhance this transformation.

The area of statistical quality control (SQC) can be categorized into two groups. One group primarily deals with the quality of incoming material knoxsm as acceptance sampling. For example, let us assume that General Motors buys windshields of certain dimensions for their automobiles from various suppliers in lots of 1000 each. They are willing to accept the entire lot if it has less than 2 per cent defective windshields. They would develop a sampling plan and procedures to ensure that the incoming shipments meet this condition. The second category of the SQC involves control of quality of product during its production process. This is achieved with the help of statistical quality control charts and is known as statistical process control. 8.7.4.7 Variation In statistical quality control, various methods are used to measure, quantify and rectify the variation from the desired norm.

Trend analysis

While the chance variations are difficult to identify, separate, control or predict, a more precise measurement of trend, cyclical effects and seasonal effects can be made in order to make the forecasts more reliable. Smoothing Techniques

Smoothing techniques improve the forecasts of future trends provided that the time series are fairly stable with no significant trend, cyclical or seasonal effect, and the objective is to smooth out the irregular component of the time series through the averaging process. There are two techniques that are generally employed for such smoothing; moving averages and exponential smoothing. 8.7.4.2 Types of variations

There are four broad categories of variations. These are: Secular trend: The trend is a general long-term movement in the time series value of the variable (Y) over a fairly long period of time. The variable ( Y) is the factor that we are interested in evaluating for the future. It could be sales, population, crime rate and so on.

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tjcfll fluctuations: These refer to regular swings or patterns that C) ^over a long period of time. 7.he movements arc considered cyclical / if they occur aftcr time intervals of more than one year. These are

o’Ranges that take place as a result of economic booms or depressions. |hc c variations are generally unpredictable in relation to the time of

r rrence, duration as well as amplitude. However, these need to be °cC rated and identified. 5£ jsonal variations: Seasonal variation involves patterns of change that

$e*cat over a period of one year or less. Then they repeat from year to and are brought about by fixed events. For the measurement of onal variation, the time interval involved may be in terms of days, s ekS> months or quarters. Because of the predictability of seasonal '^nds, we can plan in advance to meet these variations. For example, f of seasonal variations in the production data makes it possible to

5 for hiring of additional personnel for peak periods of production or Jo accumulate an inventory of raw materials or to allocate vacation time t0 personnel, and so on. Regular (or random) variations: These variations are accidental, random simply due to chance factors. Thus, they are wholly unpredictable, yhese fluctuations may be caused by such isolated incidents as floods, famines, strikes or wars. Sudden changes in demand or a breakthrough technological development may be included in this category. Accordingly, it is almost impossible to isolate and measure the value and the impact of these erratic movements on forecasting models or techniques. On account of its unpredictability, it is generally not measured or explained mathematically. Usually, subjective and logical reasoning explains such variations. However, the irregular component can be isolated by eliminating other components from the time series data. 87.4.3 Control chart

A control chart is designed to display successive measurements of a process with a centre line and control limits. The control limits are above and below the centre line and are equidistant from the centre line and are known as Upper Control Limit (UCL) and Lower Control Limit (LCL). The control chart helps us decide whether the process of production is in control or not. Whenever an out of control situation is detected, adjustments can be made and corrective actions can be taken to bring the process back into control.

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Principle* of Management

Broadlv speaking, there are two primary control charts, namely control charts by variables and control charts by attributes. However, control charts can equally be applied to any other form of data. The most common kinds of data, listed in order of sensitivity, arc as follows: 1. Ranges (difference between the highest and the lowest values in a small group of measurements) 2. Averages 3. Percentages or proportions or counts 4. Individual numbers such as temperatures, pressures, records of earnings, chemical analysis, and so on. Different types of control charts include the X chart, (which displays the average of each sample with the appropriate central line and control limits’), the R chart (which shows variation in the ranges of the samples; it is used to determine if the dispersion of the process has changed), control chair by attributes or p chart (the most popular control chart developed for use with qualitative output variables; it is used when the output variable is categorical such as defective or not defective, working or not working and so on), and the c bar chart, simply called the c-chart, (which displays the number of defects per unit rather than the number or the proportion of defective units). 8.7.5 Contribution of Quantitative Methods

Thus, we see that the contribution that quantitative techniques make to management decision-making is comprehensive. There is extensive empirical evidence that the relevant application of such techniques has resulted in significant improvements in efficiency, particularly at the microeconomic level, and has led to improvements in decision making in both profit and not-for-profit organizations. Numerous professional journals regularly provide details of ‘successful’ applications of such techniques to specific business problems. Coupled with this development has been the revolution that has occurred in making available powerful and cost-effective computing power on the managers desktop. Not only has this meant that the manager now has instant direct access to available business information but also that techniques which used to be the prerogative of the specialist can be applied directly by the manager through the use of appropriate and relatively cheaper and user-friendly computer software. On account of the increasing complexity of the business environment in which organizations have to function, the information needs of a manager

Economic, Financial and Quantitative Analysis

255

more complex and demanding. With the pace of increasing .^petition, and with continual improvements in telecommunications, time available to a manager to assess, analyse and react to a problem ^opportunity is much reduced. Managers, and their supporting information systems, need to take and appropriate decisions. Finally, to add to the problems, the ^sequences of talcing wrong decisions become more serious and costly. Mering the wrong markets, producing the wrong products or providing •appropriate services will have major and often disastrous consequences organizations. This implies that anything which can help the manager of an organization in facing up to these pressures and difficulties in the decision making process must be seriously considered. Not surprisingly, this is where quantitative techniques have a role to play. This is not to say that such techniques will automatically resolve such problems. But, they can provide both information about a situation or problem and a , different way of examining that situation that may well help. Naturally, such quantitative analysis will produce information that must be assessed and used in conjunction with other sources. Business problems are rarely, if ever, tackled solely from the quantitative perspective.

88

MANAGEMENT OF WORKING CAPITAL______________________________________________

of working capital—gross and net. • Gross working capital refers to the firms investment in current assets. Cunent assets are the assets which can be converted into cash within an accounting year and include cash, short-term securities, debtors (accounts receivable or book debts), bills receivable and stock (inventory). • Networking capital refers to the difference between current assets and

There are two concepts

current liabilities.

Current liabilities are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors (accounts payable), bills payable and outstanding expenses. Net working capital can be positive or negative. A positive net working capital will arise when current assets exceed current liabilities. A negative net working capital occurs when current liabilities are in excess of current assets.

The two concepts of working capital—gross and net—are not exclusive; equal significance from the managements viewpoint.

rather, they have

256

Principles ofManagement

8.8.1 Management of Current Assets

The gross working capital concept focuses attention on two aspects of

current assets management: • How to optimize investment in current assets? * How should current assets be financed? The consideration of the level of investment in current assets should avoid two danger points—excessive or inadequate investment in current assets. Investment in current assets should be just adequate to the needs of the business firm. Excessive investment in current assets should be avoided because it impairs the firm’s profitability, as idle investment earns nothing. On the other hand, inadequate amount of working capita! can threaten solvency of the firm because of its inability to meet its current obligations. It should be realized that the working capital needs of the firm may be fluctuating with changing business activity. This may cause excess or shortage of working capital frequently. The management should I be prompt to initiate an action and correct imbalances. I Another aspect of the gross working capital points to the need of I arranging funds to finance current assets. Whenever a need for working I capital funds arises due to increasing level of business activity or for any I other reason, financing arrangement should be made quickly. Similarly, if I suddenly, some surplus funds arise, they should not be allowed to remain idle, but should be invested in short-term securities. Thus, the financial manager should have knowledge of the sources of working capital funds as I well as investment avenues where idle funds may be temporarily invested. I 8.8.2 Liquidity Management

Net working capital is a qualitative concept. It indicates the liquidity position of the firm and suggests the extent to which working capital needs may be financed by permanent sources of funds. Current assets should be sufficiently in excess of current liabilities to constitute a margin or buffer for maturing obligations within the ordinary operating cycle of a business. In order to protect their interests, short-term creditors always like a company to maintain current assets at a higher level than current liabilities. It is a conventional rule to maintain the level of current assets at twice the level of current liabilities. However, the quality of current assets should be considered in determining the level of current assets visa-vis current liabilities. A weak liquidity position poses a threat to the solvency of the company and makes it unsafe and unsound. A negative

Economic, Financial and Quantitative Analysis

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working capital means negative liquidity, and may prove to be harmful for the company’s reputation. Excessive liquidity is also bad. It may be due to mismanagement of current assets. Therefore, prompt and timely action should be taken by management to improve and correct the imbalances in the liquidity position of the firm. Net working capital concept also covers the question of judicious mix of long-term and short-term funds for financing current assets. For every firm, there is a minimum amount of net working capital which is permanent. Therefore, a portion of the working capital should be financed with the permanent sources of funds such as equity share capital, debentures, long-term debt, preference share capital or retained earnings. Management must, therefore, decide the extent to which current assets should be financed with equity capital and/or borrowed capital. In summary, it may be emphasized that both gross and net concepts of working capital are equally important for the efficient management of working capital. There is no precise way to determine the exact amount of gross or net working capital for any firm. The data and problems of each company should be analysed to determine the amount of working capital. There is no specific rule as to how current assets should be financed. It is not feasible in practice to finance current assets by short-term sources only. Keeping in view the constraints of the individual company, a judicious mix oflong and short-term finances should be invested in current assets. Since current assets involve cost of funds, they should be put to productive use. Working capital management refers to the administration of all components of working capital-cash, marketable securities, debtors (receivable) and stock (inventories) and creditors (payables). The financial manager must determine levels and composition of current assets. He must see that right sources are tapped to finance current assets, and that current liabilities are paid in time.

8.9

}

.

SOURCES OF FINANCE

External funds available for a period of one year or less are called short­ term finance. In India, short-term funds are used to finance working capital. Two most significant short-term sources of finance for working capital are: trade credit and bank borrowing. The use of trade credit has been increasing over the years in India. Bank borrowing is the next important source of working capital finance. Before the 1970s, bank credit was liberally available to firms. It became a restricted resource in the

y. J .

/ >7

258

Principles ofA

t

1980s and 1990$ because of the change in gowmment policy. Banks required to follow the government prescribed norms in financing workin capital requirements of firms. Now there are no government norms, an; banks are free to take business decisions in granting finance for working capital. One more short-term source of working capital finance which ha! recently developed in India is commercial paper. 8.9 J Trade Credit

This refers to the credit that a customer gets from suppliers of goods in the normal course of business. In practice, the buying firms do not have to pay cash immediately for the purchases made. This deferral of payments is short-term financing called trade credit. It is a major source of financing for firms. Small firms are heavily dependent on trade credit as a source of finance since they find it difficult to raise funds from banks or other sources in the capital markets. Trade credit is mostly an informal arrangement, and is granted on an open account basis. A supplier sends goods to the buyer on credit which the buyer accepts, and thus, in effect, agrees to pay the amount due as per sales terms in the invoice. However, he does not formally acknowledge it as a debt as he does not sign any legal instrument. Once the trade links have been established between the buyer and the seller, they have each others mutual confidence, and trade credit becomes a routine activity which may be periodically reviewed by the supplier. Trade credit may also take the form of bills payable. When the buyer signs a bill—a negotiable instrument—to obtain trade credit, it appears on the buyers balance sheet as bills payable. The bill has a specified future date, and is usually used when the supplier is less sure about the buyers willingness and ability to pay, or when the supplier wants cash by discounting the bill from a bank. A bill is formal acknowledgement of an obligation to repay the outstanding amount. Credit terms refer to the conditions under which the supplier sells on credit to the buyer, and the buyer is required to repay the credit. These conditions include the due date and the cash discount (if any) given for prompt payment. Credit terms indicate the length and beginning date of the credit period. Cash discount is the concession offered to the buyer by tire supplier to encourage him to make payment promptly. As stated earlier, trade credit is normally' available to a firm; therefore, it is a spontaneous source of financing. As the volume of the firms purchase increases, trade credit also expands.

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259

g92 Accrued Expenses and Deferred Income

In addition to trade credit, accrued expenses and deferred income are other spontaneous sources of short-term financing. Accrued expenses ut more automatic sources since they permit the firm to receive services before paying tor them. Accrued expenses represent a liability that a firm has to pay for the services which it has already received. Thus they represent a spontaneous, interest-free source of financing. The most important components of accruals are wages and salaries, taxes and interest. Accrued wages and salaries represent obligations payable by the firm to its employees. The firm incurs a liability the moment employees have rendered services. They are, however, paid afterwards, usually at some fixed interval like one month. The longer the payment interval, the greater the amount of funds provided by the employees. Accrued taxes and interest constitute another source of financing. Corporate taxes are paid after tire firm has earned profits. These taxes are paid quarterly during the year in which profits are earned. This is a deferred payment of the firm’s obligation and thus, is a source of finance. Like taxes, interest is paid periodically during a year while the firm continuously uses the borrowed funds. Thus accrued interest on borrowed funds requiring semi-annual interest payments can be used as a source of financing for a period as long as 6 months. Deferred Income represents funds received by the firm for goods and services which it has agreed to supply in future. These receipts increase the firms liquidity in the form of cash; therefore, they constitute an important source of financing. Advance payments made by customers constitute the main item of deferred income.

i

8.9.3 Bank Finance

1

Banks are the main institutional sources of working capital finance in India. After trade credit, bank credit is the most important source of financing working capital requirements. A bank considers a firms sales and production plans and the desirable levels of current assets in determining its working capital requirements. The amount approved by the bank for the firm’s working capital is called credit limit. Credit limit marks the maximum funds which a firm can obtain from the banking system. In the case of firms with seasonal businesses, banks may fix separate limits for peak level credit requirement and normal, non-peak level credit.

1

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f h v; ’!, j .

Principles of Management

260

Forms of Bank Finance A firm can draw funds from its bank within the maximum credit limit sanctioned. It can draw funds in the following forms: («) overdraft, (b) cash credit, (c) bills purchasing or discounting, and (tf) working capital loan. 8.9.4 Commercing Paper

Commercial paper (CP) is an important money market instrument in advanced countries like USA to raise short-term funds. The Reserve Bank of India (RBI) introduced the commercial paper scheme in the Indian money market in 1989. Commercial paper is a form of unsecured promissory note issued by firms to raise short-term funds. The commercial paper market in the USA is a blue-chip market where financially sound and highest rated companies are able to issue commercial papers. The buyers of commercial papers include banks, insurance companies, unit trusts and firms with surplus funds to invest for a short period with minimum of risk. Given this investment objective of the investors in the commercial paper market, there would be a demand for commercial papers ofhighly creditworthy companies. 8.10

SUNWiARY

Achieving optimum efficiency in production or minimizing cost for a given production is one of the prime concerns of business managers. In fact, the very survival of a firm in a competitive market depends on its ability to produce at a competitive cost. Production theory deals with quantitative relationships—technical and technological relations—between inputs (especially labour and capital) and output ‘Production means transforming inputs (labour, capital, raw materials, time, etc.) into an output. This concept of production is however limited to only ‘manufacturing’. The working of the market system is governed by certain fundamental laws called the laws of demand and supply. The laws of demand and supply play a crucial role in determining the price of a commodity and the size of the market. The demand side of the market for a product refers to all its consumers and the price that they are willing to pay for buying a certain quantity of the product during a period of time. The quantity that consumers buy at a given price determines the market size. The law of demand can be stated as all other things remaining constant, the quantity demanded of a commodity increases when its price decreases and decreases when its price increases.

Economic, Financial and Quantitative Analysis

261

Supply means the quantity of a commodity that its producers or sellers offer for sale at a given price, per unit of time. Supply is the function of price and production cost. The law of supply can be stated as: The supply of a product increases with, the increase in its

price and decreases with the decrease in its price, other things remaining constant. National income is the final outcome of all economic activities of a nation valued in terms of money. National income is the most important macroeconomic variable and determinant of the business level and economic status of a country. The GNP is defined as the value of all final goods and services produced during a specific period, usually one year, plus incomes earned abroad by the nationals minus incomes earned locally by the foreigners. The GNP so defined is identical to the concept of gross national income (GN7). Thus, GNP = GNI. The Gross Domestic Product (GDP) is defined as the market value of all final goods and services produced in the domestic economy during a period of one year, plus income earned locally by the foreigners minus incomes earned abroad by the nationals. National income may be measured by three different corresponding methods: Net product method; Factor-income method and Expenditure method. The role of financial management has increased substantially in importance in the recent past. The pressures applied by unpredictable economic upheavals, fluctuating interest rates, inflation, etc., demand that every organization and its managers possess financial skills. The aligning of the interest of the external investor point of view with the internal management orientation is one of the main goals of financial management. It must make those decisions and engage in those activities that will maximize the overall value of the company for the benefit of the stockholders. All successful and ambitious entrepreneurs constantly think about measuring their performance. Benchmarking, executing, monitoring x and measuring entrepreneurial performance are constant exercises done i, differently by different executives. Analysis and interpretation of various accounting ratios give a skilled g and experienced analyst a better understanding of the financial condition and performance of the firm than what he could have obtained only 5: through a perusal of financial statements.

262

Principles of Management

Quantitative techniques use mathematical and statistical took for systematically analysing different business related problems and help the management in taking appropriate decisions. They also help the management in exploring new policies to achieve the predetermined goals. The use ofquantitative techniques for taking business-related decisions provides accuracy to the decisions. The quantitative techniques can be categorized into four broad classes: Statistical Inference, Forecasting, Regression Analysis and Statistical Quality Control. Inferential statistics can be defined as those methods that are used to estimate a characteristic of a population or for making of a decision concerning a population on the basis of the results obtained from a sample taken from the same population. The measured characteristics of the sample are known as sample statistics, while the measured characteristics of the population are known as population parameters. Managers and business heads are involved in the constant process of trying to forecast the future of the business. Business leaders engage in this process because much of what happens in businesses today depends on what is going to happen in the future. Regression analyris is the mathematical process of using observations to hnri the line of best fit through the data in order to make estimates and predictions about the behaviour of the variables. This technique is used to determine the statistical relationship between two or more variables and to make prediction of one variable on the basis of one or more other variables. Quality is multi-dimensional. It is not a single characteristic. Total goal ity ofthe product b asically means that all characteristics of quality must be individually high on the quality criteria. Some of these characteristics are functionality. reliability, durability, aesthetic characteristics and safety. The area of statistical quality control (SQC) can be categorized into two groups. One group primarily deals with the quality of incoming material known as acceptance sampling. The second category of the SQC involves control of quality of product during its production process. This is achieved with the help of statistical quality control charts and is known as statistical process control. In statistical quality control, various methods are used to measure, quantify and rectify the variation from the desired norm, for example, trend analysis and smoothing techniques. There are four broad categories of variations. These are: secular trend, cyclical fluctuations, seasonal variations and irregular or random variations.

Economic, Financial and Quantitative Analysis

263

control chart is designed to display successive measurements of a with a centre line and control limits. The control limits are above and f? • the centre line and are equidistant from the centre line and are known

Control Limit (UCL) and Lower Control Limit (LCL). The control w helps us decide whether the process of production is in control or not ^0ross working capital refers to the firm’s investment in current assets. irking capital refers to the difference between current assets and Irrent liabilities. Net working capital can be positive or negative. A. net working capital will arise when current assets exceed current Abilities. A negative net working capital occurs when current liabilities in excess of current assets. JJv *** Both gross and net concepts of working capital are equally important the efficient management of working capital There is no precise way to jetermine the exact amount of gross or net working capital for any firm. External funds available for a period of one year or less are called short-term finance. Major sources of finance include trade credit, accrued expenses and deferred income, bank credit and commercial paper. 8.11 SELF-ASSESSMENT QUESTIONS

1. Managers constantly endeavour to quantity of inputs.

the output from a given

2. Production process may take a variety of forms other than manufacturing. True/False 3. Production function is a_____________ presentation of input-output relationship. 4. Delhi Stock Exchange is not a market in the economic sense. True/ False 5. Law of demand states that the quantity demanded of a product as its price decreases.

6. Gross Domestic Product is always equal to the Gross National Product. True/False

7. The Method measures national income by considering the entire economy as an aggregate of producing units. 8. Operating profitability is one of the key financial parameter for assessing corporate performance. True/False

9. Statistical Inference is not a quantitative method of solving business problems. True/FaLf1 2 3 4 5 6 7 8 9

Principles ofManagement

264

10. In Regression Analysis, the variable to be predicted is called p, dependent variable and the variable on which prediction is based is called the variable.

SHORT-ANSWER QUESTIONS

8.12

1. 2. 3. 4. 5. 6.

What is meant by the production function? What are the goals of financial management? What are the advantages of ratio analysis? What are the limitations of qualitative techniques? What is regression analysis? What is commercial paper?

8.13

LONG-ANSWER QUESTIONS

--------- -

.

—

Discuss the concept of market. What is national income? How is it measured? What are financial ratios? How is ratio analysis helpful to managers? Discuss the various quantitative methods that used for solving business-related problems. 5. ‘Quality is multi-dimensionaE Discuss this statement from the point of view of statistical quality controL 6. Discuss the concept of management of working capital.

1. 2. 3. 4.

8.14

ANSWERS TO SELF-ASSESSMENT QUESTIONS_ _ _ _ _ _ _ _ _ _ _ _

1. Maximize

2- True 3. Mathematical 4. 5. 6. 7. 8. 9. 10.

False Increases False Net Product True False Dependent, indpnpr.^^4-

UNIT 9

Customer Management

91 MARKET PLANNING AND RESEARCH: ITS FUNCTIONS Marketing is the process of finding out customer needs and serving those needs profitably. If an organization is obsessed with looking for profits, it will never find them. But if it is focused on satisfying its customers, profits will come automatically. Profit is an outcome of serving customer needs well. Gathering market information through questionnaires, advertising, etc, provides reliable information about what kind of consumers buy a product, what they value in the product, where they shop from, and so on. The company can hire outside agencies or get its own marketing department to conduct surveys. The research has three main purposes: exploratory, descriptive and experimental The data then needs to be analysed and interpreted correctly.

A prerequisite for adoption of marketing orientation is knowledge about customers and other aspects of the marketing environment that affect the company s operations. Questions like what kind of people buy the company s products, what they value in the product, and where they buy from, are important and should be answered. It is dangerous to rely solely on internal views of managers. The company needs to find real views of the customer and only then should the company design its marketing initiatives. This information is obtained by formal and informal means. As the customer base grows, informal means like casual discussion with customers, reports of salespeople, observation of competitor activities are inadequate to provide the necessary in-depth market knowledge. A more formal approach, like collection of data through questionnaires, must be applied to supply information systematically to managers. But it is becoming increasingly difficult to collect data about customer needs behaviour and satisfaction through structured methods like questionnaires. Companies have enhanced the performance and quality

ofManagement

of their products to the extent that most customers are ostensibly h with the products they are using. And they say so in their inter with researchers. And in any case, if anything useful gets reported I questionnaire and interviews, such data is so easy to capture that companies would already have them. Sustainable differentiation has built on customer information which is not easy to obtain, and sot company cannot have iC Such customer information is revealed bi frustrations and the joys that the customer experiences when he is i the product. These emotions are too subtle to be captured through w< Customers have to be observed in their natural settings to be able to k their emotions. These emotions will form the basis for differentia! Marketing research has to move beyond its current methods. There is another problem with traditional marketing resea Customers can talk only about the experience that they have had. 1 they can talk eloquently about the products that they use but they car talk about their latent needs, or whether they would like the product the company is contemplating making. Marketers and developers 1 to be intuitive and take the risks of developing products without prompting from the customers. Customers can then do a good jot evaluating the product. Thus, we can summarize the functions of marketing as: • Understand and analyse customer needs • Meet customer needs better than competition • Champion the case of the customer 9.1.1 Marketing Research is Central to Customer Strategy

Traditional marketing research is myopic in nature and scope. It tr to decipher whether there is a particular need waiting to be served, whether a particular product is serving its stated purpose, or set answers to similarly focused questions about customers’ needs a product performances. But these answers are not very useful. A success! relationship with customers requires a deep understanding of the contf in which products and services are used in the course of customers da to-day lives. It requires a comprehensive view of customer behaviour. Companies are fond of measuring customer satisfaction. But customer satisfaction simply a question of expectation versus actu performance on a given attribute of a product or service? Is it a stati context-free rating on a scale? Customers are not simply pleased ( displeased with their computers or their vacation trips. They are satisfie

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or dissatisfied with the quality of their lives. For customers, product utisfaction is linked inextricably with life satisfaction and companies must attend to and measure both these dimensions if they expect to win. Problem-focused research studies are misleading. They will not reveal the discontent that customers are experiencing in their daily lives as they use and live with a plethora of products. In fact they may get in the way of developing insights about their customers’ lives. Isolated ratings of product performances tell nothing about despairing customers and the role that marketing policies play in aggravating their discontent. To get inside people’s heads, marketers need to turn to qualitative social science methods dedicated to richly describing and interpreting people’s lives. The role and status of a market researcher has to change. He cannot be seen as a tactician or a data cruncher. He should have the mandate to develop and communicate an empathetic understanding of target customers throughout the company. He has to ensure that the customer is represented accurately and responsibly in the company’s value creation and delivery process. A company can also tap into data scattered within the organiyation to develop complete pictures of customers. Customer-service hotlines are a good source of customer insights, but few companies use them for that purpose and many have outsourced this service, losing a slice of their customer s lives. Discussion groups on the web are also revealing as they are not maintained by companies. There could be formal use of trend analyses done by ad agencies and other specialized agencies. And above all, understanding the customer will require the executives like the chief executive, senior managers, middle-level managers and engineers of the company and not only the market researchers, to be out in the field. Company executives will have to live with their customers if they want to have an idea of how their product is fitting in with the lives of their customers, and whether it is a source of joy and convenience, or it is causing annoyance and displeasure in their lives. It is time the philosophy of customer visits’ practised in business-to-business marketing is embraced in consumer markets. 9.2 MARKETING INFORMATION SYSTEMS - MIS

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Managers are introduced to marketing information which is collected, analysed, distributed and stored for them. This is in accordance with their informational needs at regular intervals on a planned basis.

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Information is transferred through a system which helps the manager* to get marketing information when, how and where they need It. The data required by the manager for decision making is derived from t|le marketing environment which is later transferred as information to them 9.2.1 Element? of MIS

MIS comprises four elements: • Internal continuous data • Internal ad-hoc data • Environmental scanning ► Marketing research Internal continuous data

MIS can convert financial data like profitability of a particular product, I customer or a distribution channel into a form usable by marketing department. This is done by means of disaggregating the database of sales of products to customers. Information like allocation of discounts, promotional and transport costs to products and customers, etc., are stored in the MIS. The detailed description of transaction with customers and the associated costs allow marketers to carry out analysis of their marketing activities. Sales forces are monitored by means of recording sales achieved, number of new accounts opened, size of orders, number of calls made, etc. This can be recorded in total or broken down by product or customer, This data can provide information on sales force effectiveness. Internal ad-hoc data

The data of customer transact ions and associated costs can be utilized for a particular purpose. A change in advertising copy or the reaction of sales on price rise can be used as internal data by the management. Capturing data on MIS allows specific analysis to be conducted when needed. Environmental scanning

MIS should be considered a part of environment analysis whereby social, technological and economic forces are monitored. These are the forces that shape the context within which suppliers, company, distributors and the competition do business. Environmental scanning provides an early warning system for the forces which may impact a company’s products and markets in the future. Scanning enables an organization to act upon rather than react to opportunities and threats. The focus is on the longer

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,crspecllvc allowing a company to be in the position to plan ahead. Input for strategic decisions.

Mating research feting research focuses on instant situations, while environmental inning considers the long-term view. Marketing research provides 5 formation on markets and how these markets react to the numerous fodiicis. distribution cost and promotional actions. Marketing research Contributes heavily to marketing mix planning. There arc two types of marketing research: . External continuous data includes television audience monitoring and consumer panels where household purchases are recorded over time. • External ad hoc data is gathered by means of surveys into specific marketing issues including usage and attitude studies, advertising, product testing, etc.

9,3 STAGES IN MARKETING RESEARCH PROCESS 9,3,1 Initial Contact it is truism that a marketing problem requires information to help find its solution. 1 he marketing department may contact the internal marketing research staff or an outside agency. Assuming that the research requires the assistance of a marketing research agency, a meeting is arranged to discuss the nature of the problem and the client’s research needs. If the client and its market arc new to the agency, some rudimcntaryexploratory research, like a search on the Internet, is conducted prior to the meeting.

9.3.2 Research Brief Al the meeting, the client explains the marketing problem and the research objectives. The marketing problem may be to attract new customers to a product and the research objectives would be to Identify customers who can use the product and to identify the features of the product that appeal to them the most. The client may also provide the product’s history and competitive strategy, list of industries that might be potential users of the product, whether the client is looking for modest research or an exhaustive study, and when the information is required. The client should produce a specific written brief stating his requirements. This Is used as a benchmark if disputes arise. Commissioning good research is similar

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to buying any other product. The marketing department and the agency should agree on why research is needed, what it will be used for, when it js needed and how much is to be paid for it. Prerequisites for commissioning good research

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Terms like market, market share, competitors should be clearly defined for the purpose of research. Some researchers in the MR agency may be specialist in a particular data gathering method like group discussion and they may bend research problems to use their favourite methods. This may be expensive in addition to the method being inappropriate for the research. The company must familiarize itself with the MR agency and people handling the research project. Allow the researcher to ask even naive questions. Clearing doubts about the problem to be examined or related background information can avoid costlier problems in the future. Brief two or three agencies to get diverse viewpoints on the research problems.

9.3.3 Research Proposal

The research proposal defines what the marketing research agency promises to do for its client and how much it will cost. It should be written to avoid misunderstandings. It should demonstrate an understanding of the clients marketing and research problem. It should contain an unambiguous description of research design including the survey method, type of sample, sample size, collection and analysis of data, when the report will be produced and how much the research will cost. Vagueness should be avoided in the proposal. The agency should state very clearly what it is going to do and why, who is going to do it and when. The agency should avoid using jargon. It is the responsibility of the agency to make the proposal understandable to the client. The client should beware of omissions. The client should also check if everything that is required from the agency is mentioned in the proposal. Anything which is not specified will not be provided. If there is any doubt about an issue, the client should ask the agency for clarification. The research proposal should first define the problem. For doing this, the researcher must consider the purpose for which the study is being conducted, the available information, additional information required and how such information would aid the client in the decision-making

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The problem can be formulated without much consultation, frequently it may involve discussions with decision makers in the company experts outside the client’s company, use of secondary data or even some exploratory research. This should be followed by developing an approach to the problem. This involves developing a framework for analysing the problem. Relevant questions for which answers are needed by conducting the research must be dearly propounded in this step. The research design should explain the methods of collecting data, sampling plan and a plan for data analysis. The client should be clearly told about the sources from where the relevant data can be obtained, the time frame within which the entire study will be completed and the modus operand! of conducting the study.

9.3.3.1 Types of research methods Marketing research is primarily used to enable managers to take decisions. However, some limitations such as the inability to define the problem accurately, unavailability of past researches, etc., may force researchers to gather more background information about the problem at hand. In such cases, exploratory research is used first. Thereafter, conclusive research is done either through surveys or experiments enabling managers to take decisions. Decision-making is not possible through exploratory research.

Exploratory research Exploratory research is the preliminary exploration of the research area prior to main quantitative data collection. But it can also take place before the client-agency briefing meeting and submission of the proposal. It can also be used in the problem definition process. Hypothesis generated in this stage can be tested further by undertaking quantitative research. Exploratory research allows the researcher to understand the people who are to be interviewed in the main data collection stage and the market that is being researched. The researchers ill-informed prejudices and guesswork can be avoided if exploratory research has been done diligently.

Secondary research Secondary data is compiled by other people and for other purposes and is not meant specifically for the research in question. Internal records and reports of previous research carried out by the company, external sources like government, trade associations, newspapers, magazines, the Internet, etc mav be sources of obtaining secondary data. Secondary data is easy to access and is relatively inexpensive. If secondary research is not carried

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out an expensive primary research may be commissioned to provide data that 5$ already ax-ail able. Secondary data is generally used to understand the problem, to define the problem better, to develop an appropriate approach to the problem, to formulate a suitable research design or to ansxver certain questions. It can also be used to interpret primary data more insishtfullv.

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316 Prin cipics of Man agemen t too much materials and too little inventory of materials at hand. Even a small item of low value, not available at the needed time can cause work stoppage, delay and inconvenience. The selection of proper vendors or sub-contractors is the responsibility of the purchasing department which keeps an eye on new trends in design, substitutes, change in price structure and so on, and takes advantage whenever it presents itself. The primary objective is to minimize the total investment on materials. Schedules should be set up in such a manner as to make the materials available when needed so as to minimize storage and handling. The most optimal purchasing schedule would be “just-intime” (JIT) purchasing. In the traditional flow of material through the transformation process, there are a number of potential delays such as time spent in receiving, inspecting and testing incoming materials. If a proper job is done in selecting and developing vendors, the purchased items can be received without formal counting, inspection and testing procedures. If the supplies are reliable, then virtually no raw materials inventory is necessary'. Materials Requirements Planning (MRP): An important development in getting the right materials to the right place at the right time has been achieved through materials requirement planning. MRP concept takes the systems approach to inventory in that it coordinates such sub-system units as inventory, purchasing, manufacturing, scheduling and planning. It helps to establish valid order due dates and order priority planning system. The MRP system examines the master planning schedule (MPS) for required input resources such as raw materials, parts, sub-assemblies and assemblies for each period covered by the plan. It then examines the materials requirements and inventory levels of each item and develops a schedule for ordering and receiving the necessary items. MRP, when properly implemented, results in: • Reduced inventory levels due to advance planning and by synchronizing production and sales activities • Planned production which results in reduced idle times thus lowering costs • Improved customer service and satisfaction due to maintenance of proper inventory levels of finished goods • Reduced sub-contracting and purchasing costs due to more time available for contacting, evaluating and selecting various vendors

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10 4.2 Work Design and Measurement One of the most challenging functions of management is the design of optimal man-machine system and interface. Proper work designs and measurements are especially critical for jobs that are routine and repetitive and with short cycle times so that the elimination of only a few seconds of unnecessary activity can result in tremendous savings. This can be achieved by making improvements in the methods of operation. These improvements can be achieved by applying some of the following techniques. . Time study: The purpose of time study is to determine as to how much time is required to perform a job that would be considered as average time or normal time. The process of time study itself is the process of systematically recording, analysing and synthesizing the times required to perform a motion or a series of motions relevant to the given job. Time study was pioneered by Frederick W. Taylor, known as the father of scientific management, when he began a systematic study of how the workers performed their jobs in 1881. In one of his studies of 120 girls who were working 10 hours a day inspecting ball bearings for bicycles, he was able to reduce the work force down to 35 girls and the time of work to 8 hours a day, with appreciable improvement in inspection accuracy for the same amount of output. This he was able to achieve by studying the job scientifically and by improving upon the methods of operations. • Motion study: Motion study is the science of eliminating ineffective and wasteful motions, resulting in simpler, easier and more efficient ways of performing a job. Frank Gilbreth and his wife Lillian Gilbreth contributed extensively to the study of work performance motions necessary and required for a given job. As Frank Gilbreth put it, “there is no waste of any kind in the world that equals the waste from needless, ill-directed and ineffective motions. The objectives of motion study are: • To eliminate all non-productive, ineffective and superfluous motions To develop and substitute more effective and productive patterns of movements To modify tools, shapes of work locations, lighting and other factors to help in optimizing the effects of motions W rk sampling1 Work sampling is a frequently used engineering tech­ nique in improving the efficiency of work operations. The methodology

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estimates the percentage of time that a worker spends on working and the percentage of time the worker is idle. Experience has shown that work sampling technique is most useful for jobs that have long cycle times as against time study methods which are more suitable for repeti­ tive short cycle jobs. The method involves random observations of workers and their idle as well as productive times are recorded. This distribution of random observations can be used to compute standard time required to complete a job as well as the proportion of time that the worker spends on productive activity. This data can be studied and analysed to improve the effectiveness of operations and reduce costs. • Value engineering: Value engineering technique involves selecting a project and accumulating complete cost data about this project. The project is split into its elemental functions and alternative methods of accomplishing each function are developed. Each method is carefully evaluated and refined until a workable low-cost method of accomplishing each function is found. Eventually, a final course of action is selected that would achieve the best possible solution for the entire project.

10.4.3 Manufacturing Operations There are several ways to categorize manufacturing operations. Some of these categories are discussed as follows: • Customer involvement: One way to look at the manufacturing process is in the light of direct customer involvement with the product. For example, some operations produce only after the order for the product is received from the customer. It would be a custom-made product and may be one of a kind. Another type of manufacturing operations would be make-to-stock products and these items are produced in anticipation of demand with a common design and known price. Most products in the stores are from this type of operation. Examples of such products would be groceries, clothing, shoes and so on. These are most of the goods we buy as consumers. • Volume and variety: Another way to categorize manufacturing operations is on the basis of flexibility in operations in terms of volume and variety of products. Some different manufacturing systems are: • Continuous production: Continuous process manufacturing is an operation in which the output is not in discrete units. The product is made in a continuous stream. An oil refinery would be an example where oil is continuously refined. Other examples are

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er plants and chemical plants. Enormous capital investments are involved and special purpose machinery is utilized. Assembly line production: These are operations for mass * produced items for all kinds of consumer and industrial use. There is a high volume of similar units. Examples are automobiles, refrigerators, television sets and so on. There is some flexibility in the manufacturing process, for example, in an automobile assembly plant, a manual transmission or an automatic transmission could be installed in the same assembly process. . Batch manufacturing: In this type of system of operations, items can be produced in batches and the equipment can be easily converted to produce different items of a similar category. For example, a plant may be producing household furniture and the machinery may be flexible enough to produce various items of furniture in required number of batches. ' Job-shop production: The items produced in job-shop operations are low volume, high variety and require small to moderate amount of resources. The system is characterized by general purpose equipment and a work force with a variety of skills. An example would be a sign shop that custom fabricates neon advertising signs for small businesses. • Project manufacturing: These systems produce items that consume massive amount of resources and long periods of time to complete. Usually, the resources are moved to the fixed project. Examples would include construction companies that develop shopping centres or build skyscrapers, or build roads and bridges. Other examples would include building an oil tanker or a super computer, which are usually managed as projects. 0.5

TOTAL QUALITY MANAGEMENT

10.5.1 Introduction The dynamic environment of rapid change, global competition and more knowledgeable customers has made it necessary for the management organizations to be visionary and strive for excellence in all areas of organizational operations. For an increasing number of companies, this /ision focuses on Total Quality Management (TQM), that is, creating an nt of continuous improvement for ever-increasing product and mvironme order to achieve full customer satisfaction. tri

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Top management is increasingly aware of customer perceived quality as critical to organizational success. Companies that have implemented TQM programmes have reported a strong relationship between quality and organizational success. Being a buyers market in most items of production, high quality has become the most important ingredient of any marketing programme. People are willing to pay a higher price for a high quality product because of its reliability of service over a longer period of time. Quality is important both for the buyer as well as the producer. When a defective item is returned, it creates a bad impression in the mind of the buyer who might lose faith in the image of the company. The producer is equally unhappy due to this defective returned merchandise, not only because he may have lost a customer and his goodwill, but also because quality control during the production of the item was not seriously enforced and this is a highly undesirable activity for the producer. 105.2 Defining Quality

Quality as defined by the American Society for Quality Control (ASQC) is “the totality of features and characteristics of a product or service that bears on its ability to satisfy’ given needs.” Quality not only measures the level of satisfaction in meeting the customer’s needs but is also a function of time period in which it continues to meet the customer’s needs. Even though the ASQC definition of quality is widely accepted, there are some who believe that definition of quality falls into several categories. Marketing people believe that quality “lies in the eyes of the beholder,” just as beauty does. To them, higher quality is user-based and means better performance, nicer features and aesthetic appeal. To production managers, quality is “manufacturing based”. They believe that quality means conforming to specifications. 105.3 Dimensions of Quality

Quality is multi-dimensional. It is not a single characteristic. Total quality of the product basically means that all characteristics of quality must be individually high on the quality criteria. Some of these characteristics are defined by Ruch, Fearon and Wieters as follows: 1. Functionality: Functionality refers to the performance of the product. It can be measured either on a yes-no basis such as whether a radio works or not or it can be measured on a continuous basis such as how many miles a car goes on a gallon of gasoline.

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liability: Reliability can be measured from different angles. Some

I- of the considerations are: How long will the product function as claimed, under normal working conditions? (Durational reliability) Does the product function every time it is used or does it fail to function occasionally? (Functional reliability) . If a product has many components, such as a car, with each component having its own probability of failure, then what can be said about the probability of failure of the assembled product? (System reliability) • Consistency in the level of quality of each successive unit produced by a given process. (Process reliability) 3. Durability: Durability involves not only the time period in which the product is expected to function, but also the conditions under which it must operate such as heat, cold, dust, vibrations and so on. 4. Aesthetic characteristics: A quality product cannot be shabby looking, even if it functions well. Aesthetic component refers to smoothness of surface, symmetry and absence of dents or scratches. 5. Safety: A high-quality product should perform its function without endangering the safety of the user. For example, under normal use, electrical appliances should not produce any electrical shock by having loose protruding wires and so on. 10.5.4 Why Quality is Important

Quality of the product is one of the most important characteristics that determine demand for the product and is of strategic importance for the economic health of companies as well as countries. In particular, quality affects a firm in the following ways: 1. Improved profitability: Improved quality results in improved profitability due to potential increase in market share as well as cost savings. The cost savings are a result of lower rework and scrap costs, less wastage and lower warranty costs. The increase in market share is a result of higher volume in sales. 2. Image and reputation of the company: Quality not only promotes the products but also the company. An organization can expect its reputation for quality—good or bad—to follow it. Based on quality, people develop certain perceptions about the firm’s new products, employment practices and concern for consumers.

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3. Product liability: A defective item which causes damage or injury to the consumer can be very expensive for the company in terms of law suits and litigation, rhe courts generally hold the organizations responsible for any injuries caused by faulty products designed, produced or distributed by them,

4. International implications: I n this technological age and continuous global interaction, quality is an international concern. To meet global competition, the product must meet quality and price expectations. Export of products to other countries is an important economic factor for any country,

1055 Total Quality Management (TQM) Total quality management is a real and meaningful effort by an organization to change its whole approach to business to make quality a guiding factor in everything the organization does. It stresses on com mitment by management to havc a conti n u i ng d rive towards excellence in all aspects of products and services. Total quality management has been defined as follows: "It is a people-focused management system that aims at continual increase in customer satisfaction at continually lower real cost, TQ is a total system approach (not a separate area or programme), and an integral part of high-level strategy. It works horizontally across functions and departments involving all employees, top to bottom, and extends backwards and forwards to include the supply chain and the customer chain,” The major ingredients in TQM arc shown in Figure 10,2,

Figure 10.2 TQM

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Strategic commitment: A vital element of any total quality management ' programme is the commitment of top management to the success of the programme. Such commitment is important for several reasons. First, the organizational mission and goals must change to include quality as a high priority goaL This can only be done by top management Second, the organizational culture must change so that all persons in the organization recognize quality as the ultimate goal of their efforts. Third, pursuit of total quality requires high capital expenditure which can only be authorized by top management. Hence, quality improvement necessarily requires commitment from top management. • Employee involvement: TQM requires that all employees be involved in every step of the production process. Studies have shown that high degree of worker involvement reduces the number of quality problems. Most quality problems have to do with materials and processes and these problems can only be eliminated by serious and sincere commitment of all workers who understand the shortcomings of the system. Techniques for building employee involvement include: • Building communication networks with open channels including all employees • Supportive supervisors • Delegating responsibility to people who are closer to the theatre of operations • Developing a highly motivated workforce • Formal techniques such as quality circles A quality circle is a small group of employees, including workers and supervisors who volunteer to meet regularly to solve work-related problems. Their suggestions and recommendations are taken very seriously by the top management. • Technology: New forms oftechnology are very useful in TQM programmes because of precision and consistency that the advanced equipment creates in the products. Automation, computers and robotics perform the jobs more accurately than people and make fewer mistakes. Hence, investment in higher-grade machines capable of doing jobs more precisely and reliably is justified as the quality of the output is highly improved. • Materials: The output cannot be of high quality unless the input is also of high quality. All raw materials for production and all finished goods for final assembly are acquired from outside suppliers. Accordingly, it is

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m^rv to have a kind of partnership with suppliers. Many firms have increased the quality requirements they impose on their suppliers as a way of inipro>*ine the qualitv o! their own products. Suppliers arc often involved with biovrs as members of quality improvement teams. Most automobile manufacturers, lor example, depend on suppliers for more than "0 per cent of the parts they use in their automobiles. • Methods: Methods arc operating systems used by the organizations during the actual transformation process. Improved methods result in improved qualitv. Methods can be improved by method analysis, which focuses on how a task is accomplished. How a task is done makes a difference in performance, safety and quality. Methods engineers arc charged with ensuring that quality and quantity standards are achieved efficiently and safely. 103.6 Quality Improvement Process

There are two approaches that can be taken to improve quality. One, known as “incremental improvement” advocates improvement in quality in increments either one at a time or many improvements can be undertaken simultaneously throughout the organization. This means that we start with the organization as it is and then keep on improving upon it. The second approach is advocated by Michael Hammer who suggested complete reengineering of a process and a complete rethinking of the operations and methodology as if starting with a “clean sheet of paper.” 70.5.6.7 Incremental improvement process Incremental improvement process involves certain steps from identifying the area needing improvement and finding methods for improvement. There may be a variety of specific approaches to achieving excellent quality and one of these approaches involves the following general steps shown in Figure 10.3.

Figure 10.3: Incremental improvement process

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the nrca which requires improvement: Either the management or ft quality circle team can identify the area. Some areas that might be chosen for quality improvement may include: Identify

. Significant decrease or elimination of defective units produced . Reduction in idle time of machines as well as personnel , Reduction in employee absenteeism or tardiness • Reduction in production cycle time • Reduction in inventory on hand 2. Organize a quality improvement team: Such a team must be skilled in the art of analysing situations under study and creatively thinking of improving such situations. This team may include specialists in the area as well as those who are either involved in the situation or are affected by it. Members of this team might include: • Associates directly responsible for the work being done * A- representative of the customers receiving the benefit of the work, if necessary A- representative of the suppliers providing input for the work A- representative from management who can either make decisions or serve as a liaison between the team and the top management One or more experts in the area under study 3. Identification of the extent of improvement required: Improvement can only be done within given resources and there is always an upper limit beyond which no improvement is possible. Accordingly, the extent of improvement required must be realistic and attainable. 4. Analyse current performance: All aspects of current operations are to be analysed in order to determine as to which aspects are alreadyoperating in an optimal manner and which aspects are in need of improvement and can be improved. Some factors include problems related to equipment, materials, work methods, people and any other environmental constraints such as legal requirements. Then, by using work study methods such as time and motion study, the work can be divided into its elements and then the elements can be studied for improvement in saving time or reducing waste and so on. 5. Test selected solutions: Once the area of operation under consideration has been analysed and possible steps for improvement have been specified, the next step for the quality team is to test such solutions

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in the form of pilot studies to determine the best solution. Before the final solution is implemented, howven it is necessary to make a costbenefit analysis and answer the question: is the improvement worth the cost? For example, if adding one more cashier window al the bank reduces the average waiting time of a customer by only one minute, then such an improvement may or may not be worth it.

6. Implement the improvement: If the improvement is determined to be beneficial, then it must be implemented. Many such incremental improvements can greatly enhance a company’s competitive position in a highly quality demanding market The idea is to use incremental approach in a continuous effort to keep on improving both products and processes.

10.5.6.2 Reengineering improvements Reengineering actually means “starting all over”. It does not mean making incremental changes that have basic structures intact. It does mean, however, breaking away from outdated rules and assumptions and abandoning long established procedures and looking afresh at the work. It involves going back to the beginning and inventing a better way of doing work. Reengineering, as defined by Hammer, “is the fundamental rethinking and radical redesign ofbusiness processes to achieve dramatic improvements in critical contemporary measures of performance, such as cost, quality, service and speed.” The first key word in this definition is “fundamental”. The most fundamental questions a company asks itself is, “why do we do what we do?” Reengineering begins with no assumptions. It first determines what a company must do and then how to do it. It concentrates on what “should be” rather than what is. The second key word is “radical”. Radical redesign means disregarding all existing structures and procedures and developing completely new ways of doing work and not simply improving on old methodology. The third key word is dramatic. Reengineering is not about making incremental and conservative changes. It is about drastic and complete overhaul of the system. Marginal improvements require simply finetuning; dramatic improvements demand replacement of old with the new. Finally, the fourth key word is “processes”. Most businesses are taskoriented. The task-oriented thinking is based upon division of labour where the work is fragmented into its simplest components which are

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then assigned to specialist workers. The business process is a collection of activities that transform input into an output that is of value to the customer. Accordingly, instead of focusing on individual tasks in the process, the management should focus on the process for the sole purpose of delivering goods to the customer as needed. In general, Hammer has outlined seven principles of reengineering. 1. Organize around outcomes, not tasks. The workers would be responsible for the process rather than elements of a given task.

2. The work teams which are responsible for the output of the process should also perform the entire process. For example, a production department may do its own purchasing and even its own cost accounting. This way, other departments will not be blamed for any mistakes committed. 3. Use the modern computer technology to process various types of information simultaneously thus securing the accuracy of various interdependent tasks. For example, scanners at checkout counters in grocery stores or department stores process customer purchases and update inventory and accounting records at the same time. 4. Centralize some tasks that are separately done by various branches of the same company, so that better cost control can be achieved. For example, if a company has 50 manufacturing plants in the country with each plant having its separate purchasing department, then centralized purchasing would result in scale discounts thus reducing costs. It would also ensure that quality of input materials is centralized for the purpose of consistency. 5. Link parallel activities instead of integrating their results. Products require several processes separately before the end result is produced at the final assembly point. A problem at one of these processes would delay the final product. Hence, it is better to link and coordinate various processes so that such problems are avoided. 6. Let the people doing the work make decisions regarding their work. Traditionally, decision authority and control lies with people other than those involved directly with work. This causes delay. For example, a sales person should be given the authority and responsibility for credit approval on customer applications. 7 Collect information from the source and fast. Computer technology has made it easier to collect information from the sources at the same

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10.5.7 International Quality Standards

The entire world has become one global village. Many political, ethnic and geographic barriers have been broken and international trade as well as multinational investment is encouraged by most countries. Quality is so important internationally that a number of quality standards have been developed. Leaders in the quality area are Japan, United States and the European Community (EC). The Japanese specification for quality management is published as Industrial Standard Z 8101-1981. The standard states: “Implementing quality control effectively necessitates the cooperation of all people in the company, involving top management, managers, supervisors and workers in all areas of corporate activities such as market research, research and development, product planning, design, preparation for production, inspection, sales and after services as well as financial control, personnel administration and training and education.” The American Quality Control Society has developed a list of quality specifications coded as Q90, Q91, Q92, Q93 and Q94. Q90 provides an overview and introduction to the other standards, definitions and concepts related to quality. Q91 is the general standard for design, development, manufacturing, installation and servicing of products and services. Q92 is more detailed and sets standards for organizations specifically involved in production, installation and servicing of products and services. Q93 deals with organizations specifically involved in inspection and tests. Q94 provides guidelines for managing and auditing a quality control system. Europe’s ISO 9000 standard refers to the quality standards established by the International Standards Organization (ISO). These are generic in nature and can be applied in all industries. It is a set of five worldwide standards that establish requirements for the management of quality. Unlike product standards, the ISO standards are for “quality management systems.” These are being used by the 12-nation European Economic Community (EEC) to provide a universal framework for quality assurance primarily through a system of internal and external audits.

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0 5 Q TQM Tools and Techniques

Total quality management requires a never-ending process of continuous improvement. The end goal is perfection which is never achieved but always sought. The concept of continuous improvement has become the cornerstone of the Japanese approach to production. The Japanese use the term “Kaizen” to describe the ongoing process of continuous improvement. While the concepts of continuous improvement and total quality management require a complete overhaul of management philosophy and organizational culture, managers can rely on several specific tools and techniques for improving quality. Some approaches and methodologies for quality improvement are discussed as follows: • Benchmarking: Benchmarking is the continuous process of comparing a companys strategy, products and processes with other similar organizations which are the best in that class in order to learn how they achieved excellence and then setting out with changes in strategies, products and processes to match them and then surpass them. A benchmark demonstrates the degree to which the customers of other similar organizations are satisfied. It identifies an organization whose operations are so superior that it enjoys the highest degree of customer satisfaction. The goal is to beat such an organization in performance. The benchmarking process usually involves the following steps.

1. Identify a critical area in your own organization that needs improvement. 2. Identify some other organization that excels in quality in that area. 3. That organization would then become your benchmark for that area for improvement. Study the organization carefully and especially its benchmark activity. 4. Analyse the data so gathered from the benchmark organization and compare it with your own activity. 5. Improve the critical area in your own organization. Outsourcing: Outsourcing is the process of subcontracting operations and services to other firms that specialize in such operations and services and do better. Since there are a number of operational and administrative functions that an organization is involved in, it is quite possible that some of these functions are not being performed in an optimal manner because of lack of resources or expertise. If such

330

Principles ofManagEmenf

inefficient areas can be identified and outsourced, the oiganizations can realize a higher quality service or operation.

. Speed: Speed refers to the time needed by the organization to get something accomplished without sacrificing its quality. An organization which produces fester, distributes faster and adapts to new ways of doing things will be ahead of competition. One recent survey identified speed as the number one strategic issue confronting managers in the 1990s.. * Quality Function Deployment (QFD): The quality function deployment defines the relationship between customers desires and products supplied. Defining this relationship clearly is the first step in building a world-class production system. Then the products and processes can be built with features desired by the customers. - Taguchi Technique: Named after a Japanese engineer, Genichi Taguchi, this approach is built around three concepts namely, quality robustness, quality loss factor and target-oriented quality. "Quality robust” products would continue to retain quality even in adverse manufacturing and environmental conditions. Taguchis idea is to remove the “effects” of adverse conditions instead of removing the causes. Removing causes can sometimes be very costly and time consuming, and hence it may be cheaper and faster to remove such effects. The "quality loss function” (QLF) identifies all costs connected with poor quality including the costs of customer dissatisfaction, warranties and services, scraps, waste and repairs and possibly some social costs. "Target-oriented quality” is philosophy of continuous improvement to bring the product up to the most realistic but high quality target. • Flow Diagrams: A flow diagram serves as a visual representation of a system or a process and it allows one to see the flow of steps in a process from the beginning to the end and serves as a kind of a road map for locating and solving problems for improving quality. For example a simple flow chart for producing a new item might be as shown in Figure 10.4. • Pareto Analysis: Vilfredo Pareto, a 19th century economist suggested that 80 per cent of the problems are the result of only 20 per cent of the causes. Pareto analysis organizes errors, problems or defects so that attention can be focused on the most important problem areas. The idea is to classify these problems according to the degree of their importance so that the most important problems can be resolved first. The 80-20 rule, as stated above, suggests that by removing 20 per cent of the causes, 80 per cent of the errors can be removed. For example, if 80 per

Operations and Technology

Figure 10.4 A flow diagram cent of machine breakdowns come from 20 per cent of the machines then attention should be focused on these 20 per cent machines. • Cause-and-Effect Diagrams: Cause-and-effect diagrams offer a structured approach to problems solving. These are also known as “fishbone diagrams” because of their shape. The diagrams help organize problem solving efforts by providing several layers of categories that may be factors in causing problems. The four major categories are methods, manpower, materials and machines. Each category can then provide more information about specific causes of problems in that category. A simple fishbone diagram may be as shown in Figure 10.5. • Statistical Process Control: Statistical process control is primarily concerned with managing quality, rather than improving quality. It consists of a set of statistical techniques that can be used to monitor quality. It involves control charts which are graphic presentations of data over time and sets acceptable limits, both upper as well as lower, of acceptable quality.

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Prrm’ipJfy of

Figure 10.5 A cause-and-effect diagram It monitors standards, makes measurements and takes corrective action as a product or service is being produced. Samples of process outputs are taken and analysed and ifthey are within the acceptable limits, the process is considered to be under control. Variation of quality measurements within acceptable limits must be random. However, if there is a pattern of movement in one direction or the other or if the values fall outside the control limits then the process is not considered to be under control and corrective actions are taken to bring the process back under control. • Kaizen: This is a Japanese concept meaning continuous improvement. The basic tenet of Kaizen is that large number of small improvements over a period will result in substantial improvement in organizational performance. The cumulative effect of these small but consistent improvements may lead to quantum improvement in performance, changing the vision of the company and morale of the employees.

An expert team, called ‘Kaizen Organization is formed to sustain Kaizen activities. The team for improvement handles projects in identified areas, often receiving strategic goals for improvement set by the top management from time to time. Kaizen teams are characteristically crossfunctional, and follow similar structuring of process for improvement as the practice of horizontal customer-focused processes in TQM practice. This is because of the necessity of cutting across the barrier of functional

Operations and Technology Management

333

b undaries in achieving the target result within the set time limit Each horizontal process dealing with a specific improvement plan has its crformancc target at the end of the process. These targets could relate to the company’s key performance areas, such as quality, cost, service efficiency, cycle-time reduction and supply-chain management. . Six-Sigma: ‘Six-Sigma’ is a quality matrix that counts the number of defects per million opportunities (DPMO) at six levels. Higher the ‘sigma level’, better is the quality with lower DPMO. To illustrate this point, a sigma level of 3.5 means that a process has the chance for 22,700 DPMO, whereas a sigma level of 4.5 would mean only 1,350 DPMO. A perfect sigma level of six would mean a DPMO of just three per million. What it signifies is that it is possible to continually stretch the capability of a process by systematically eliminating and changing the process deterrents and environment. It is obvious that this quality improvement initiative must be driven by high degree of creativity and innovation in the organization. Six-Sigma practice is interwoven with many TQM principles, such as customer-focus, data-based management and decision, improved design and manufacturing capability and a supportive work culture and employees. The efforts aim to drastically reduce defect levels to only a few DPMO for strategic products and processes. Six-Sigma practice: General approach for this daunting task is to work in terms of reduction of variations and defects by following a fourphase approach: 1. Measure: Select critical quality characteristics, determine the frequency of defects, define performance standards, validate measurement system, establish process capability and evaluate current performance. 2. Analyse: Understand what, when, where and why of defects and causes by analysing sources of variation vis-a-vis target objectives. The process of analysis includes process mapping, identifying root causes and establishing cause-and-effect relationships. 3. Improve: Brainstorm and generate ideas, narrow the list of potential solutions and then select the best solution, validate the solution (use mathematical modeling, if necessary), and develop implementation strategy. 4 Control: Maintain improvements by revalidating measurements, determining improved process capability and implementing statistical process control system to monitor performance.

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Principles of Mtwagernrrif

10.6 LOGISTICS AND SUPPLY CHAIN MANAGEMENT

Logistics is the method of controlling the supply of products, energy, information and other resources like services and people from the source of production to the market. Wikipedia defines logistics as “time-related positioning of resources." However, a formal definition of logistics management is “Design and operation of the physical, managerial and informational systems needed to allow goods to overcome time and space (from the producer to the consumer).” In 199 k the Council of Logistics Management defined logistics as follows: "Logistics is the process of planning, implementing and controlling the efficient and effective flow and storage of goods, services and related information from the point of origin to the point of consumption for the purpose of conforming to customer requirements.” These definitions imply that an integrated view of a number of different activities or functions may be required. No activity that relates to marketing or manufacturing can take place without the support of logistics. Logistics comprises activities like integration of information, transportation, inventory, warehousing, material handling and packaging. The functioning work of logistics is geographical repositioning of raw materials, in-process inventory and finished inventories, wherever needed, at minimal costs. 10.6.1 Business Logistic

In business, there are essentially two different forms of logistics. They may either have an internal focus or an external focus that covers the flow from the producer to the consumer. Those with internal focus coordinate a series of resources in order to set a project into action. On the other hand, those with external focus optimize steady flow of matter through an arrangement of transport links and storage nodes. From a firms point of view, these activities are represented as parts of the value chain. The value chain is a systematic method of examining the growth of competitive advantage. It was developed by M.E. Porter. The chain comprises a sequence of activities that create and build value. They result in the total value delivered by a firm. In Figure 10.6, ‘inbound logistics’ and ‘outbound logistics’ are two of the five primary activities of a business firm. Goods are received from the suppliers of the firm and are stored until they are required on the production or assembly line. Goods are moved around the firm. ‘Sourcing and procurement’ make up inbound logistics.

Operations and Technology Management

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Primary activities

Support Activities

Figure 10.6: The Value Chain Source: M.E. Porter, Competitive Advantage, 1980.

10.6.2 Role and Importance of Logistics Management Logistics management activities typically include inbound and outbound transportation management, fleet management, warehousing, materials handling, order fulfilment, logistics network design and inventory management of third-party services providers. To varying degrees, logistics function also includes sourcing and procurement, production planning and scheduling, packaging and assembly and customer service. It is involved in all levels of planning and execution—strategic, operational and tactical. Logistics management is an integrating function, which coordinates and optimizes all logistics activities as well as integrates logistics activities with other functions like marketing, manufacturing, finance and information technology. Logistics are involved every time you purchase a product, whether it is food, medicine or clothing. It does not matter how you shop—at a store, by mail order, through direct sales or via the Internet—you are being served by the logistics pipeline.

1. Logistics has huge impact on domestic and global economy: Logistics facilitates market exchanges, provides a major source of employment and is a major purchaser of assets and materials.

2. Logistics is of critical importance to human survival: Logistics systems enable continuous availability of food, water, medicine and other key materials that you need to survive.

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2014 PRINCIPLES OF MANAGEMENT Full Marks: 7q

- tarj^pcnss frx Fze rzar^m indicate full marks. crr_rucrus cro rop-irod fe? gh.v their unswcrs in their own words as ~ar as rractzcar.c.

GROUP-A

^Multiple Choice Type Questions) 2.

.dd-c'ss. the cnrrect Crerroffives for any ten of the following :

10 x 1 = io £) Thus?on of work promotes a Lrduzzeziro b) Specialisation c- Ccmmsic-n d) Wastages The retro ofcuirent assets and current liabilities is called a) Leaned Ratio b) Acid Test Ratio c) Current Ratio d) Debt-Equity" Ratio

When snzharity fioves from top executive to lower level employees, it is known as a) Line Orgaris?T~ion b) Staff Organisation c) Project Organise Hon d) Nfatrix Organisation

hr) V-nicfa one of the following is NOT the main concern of ‘Scientific a) Production c) Mechanistic Nfethods

b) Efficiency d) Rationality

v) Narrow span of management leads to a) Mat Structure a) Mechanistic Structure c) Tall Structure d) Organise Structure

Question Paper

vi) One of the most popular ways of defining management is that it involves getting work done a) As quickly as possible b) With as little effort as possible c) Through the efforts of other people d) Through the efforts of other managers vii) Theory X and Theory Y were put forward by a) McGregor b) Ouchi c) Mayo d) Maslow viii) Sigma of sigma represents a) Standard Deviation c) Correlation

*

b) Mean d) Regression *

ix) Two Regression lines intersect at a) SD of x and y b) Mean of x and y c) MD of x and y d) No fixed point

x) When there is a high level of concern for a groups own interests along with a moderate concern for the interests of other partners, conflict resolution approach is called a) Collaboration b) Compromise c) Avoidance d) Accommodation xi) Which of these is not a function of marketing department? a) Selling b) Grievance handling c) Product Packaging d) Advertising

xii) Which one of these is a Quality control tool? a) Pareto diagram b) Fish bone diagram c) Ishikawa diagram d) All of thase.

GROUP -B (Short Answer Type Questions) Answer any three of the following.

3 x 5 = 15 L

Differentiate between recruitment and selection.

>.

Write the difference between Abraham Maslows hierarchy of needs theory & Herzberg’s Two factor Theory of Motivation.

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».

Write short note on Quality circles. What do you mean by production and Operations Management?

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What are the ways of managing stress in an organization?

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(Short Answer T\ pc Questions) Answer anv

TAhpf

of the following. 3x5-15

a) What are control charts? Write the different types of control charts? bl

10 samples, each of size 50 of a pipe were inspected in pressure testing. The results of the inspection arc given below:

Sample No.

1

No. of defectives:

23

23

2

4

5

6

7

0232

8

910

123

(5+10)

Draw a p-chart and slate your conclusion.

a

8.

What arc the different tools and techniques of decision making?

b) An item has a yearly demand of 2000 units The different cost in respect of make and buy are as follows. Determine the best option.

Item cost/unit

Procurement cost/order

Buy

Make

^8.00

^5.00

^120.00 ^60.00

Set. up cost/set up Annual carrying cost/item/year

^1.60

Production rate/year 9.

10. 11.

T1.00 8000 units

(7 + 8) Describe in details the various training methods? How does training differ from development? (12 + 3)

What are the various reasons of conflict in an organization? Describe the various strategies for resolving conflicts. (7 + 8)

Write short notes on any three of the following:

a)

MIS

b)

Barries to effective communication

c)

Brand Management

d)

Decentralization

e)

Team Effectiveness

(3 x

Question Paper 36?

SOLUTIONS GROUP - A Answers to Multiple Choice Type Questions

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i) (b) vii) (a)

ii) (c) vili) (a)

iii) (a) ix) (d)

iv) (c) x) (c)

v) (c) Xi) (b)

vi) (c) xii) (d)

GROUP -B

Answers to Short Answer Type Questions

Recruitment is the process that is designed to attract qualified applicants freer the available pool of labor, making sure that there is compatibility between the job and the applicant. Before recruitment can begin the requirements for th< job to be filled must be clearly specified. Selection is the next step in the process to make sure that the right candidat is chosen for the job. It is important to find the right match between the jol requirements and the selected candidate’s skills- Such selected candidat should also fit in with the organizational culture.

2.

3.

Maslow’s Model of Hierarchical Needs. After a careful study and analysi

of what motivates workers, Abraham Maslow developed 5 sequential huma needs as engines for motivation. These needs are assigned in the shape of pyramid so that lower needs are satisfied before upper level needs becorr motivators. These needs in order are:

1.

Physiological

2. Safety and security 3. Social needs for love and affection

4. Self-esteem needs 5. Self-actualization. Maslow further developed a sixth need of aesthetics before he died. Herzberg developed two factor theory of motivation and named these factoi hygiene factors and motivational factors. Hygiene factors such as wages, goo working environment good inter-relationships at work and so on are factoi which prevent dissatisfaction with work but do not motivate. Motivation! factors are recognition, achievement, respect and responsibility. 4.

Quality Circles. This concept is a part of Total Quality Management (TQM

and consists of superiors and subordinates getting together even outside c the work environment to discuss quality problems and improvements of th product or service offered by the organization. These are informal in natui and most often the group members sit in a circle and talk about the qualit issues encountered at work and try to collectively find a solution for sue

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Principles of Management

problems. This informal setting creates a feeling of togetherness and ci cates bonds of croup spirit where superiors and subordinates meet at a social level rather than work lex-el. 5. Production/Operations Management. It refers to the art and science of producing goods and services for consumption. It implies efficient management of any operation where operation involves some kind of transformation from certain inputs to certain outputs so that the value of the output is greater than the cost of the inputs and the transformation process adds this value to the output OM is the management of activities specifically related either directly or indirectly to the organizations production of goods and services. 6.

Ways of Managing Organizational Stress. It is important for organizations to develop programs that would help employees reduce their stress. These programs include:

(A) Health maintenance. Many organizations provide facilities at their premises for physical fitness and psychological counselling.

(B) Selection and placement. The hiring process should be based upon matching the skills and the personality of employees with work environment The employee must be happy with the job. (C) Equitable performance appraisals and rewards. Equitable treatment of employees with similar jobs in terms of performance appraisal and rewards reduces dissatisfaction with the job thus reducing tension and stress. Each employee must know what is expected of him and for what exactly is he responsible and accountable for. This eliminates role conflict which is one cause of stress.

(D) Participation in decision making. This would make the employees feel that they are doing what they themselves decided to do. Participation in decision making means involvement in the job and it reduces ambiguity and conflict. (E)

Building team spirit. Management must create a work environment in which the members of the work group consider themselves as members of the same family. This would eliminate personal conflict which is sometimes the ver)'' cause of stress.

a)

A control chart provides a basis for deciding whether any variation in the specified characteristics of the output is due to random causes or due to assignable causes. It will assist us in making decisions whether to adjust the process or not.

A control chart is designed to display successive measurements of a process with a central line and the control limits, which are above and

Question Paper

below the central line and are known as Upper Control Limit (UCL) and Lower Control Limit (LCL). Broadly speaking, there are two types of primary control charts. These are control charts by variables and control charts by attributes. The most common types of control are x chart, R-chart and p-chart. x chart has the average in the central line and UCL = x + 3Zx LCL = x — 3Lx . R-chart has variations in the ranges of the samples. It has R as the central line UCL = R +D 4 LCL = R - D3 The values of D4 and D3 are found in statistical tables. p-chart displays the percentage of defectives together with the appropriate central line and control limits. p is the central line UCL = p + 4 S p and LCL = p — 3 X p . b) Answer p is .04 UCL limit is .123 LCL is zero. a) Different techniques of decision making: Individual — Rational decision making — Bounded rationality decision model — Political model Group Decision Making — Brain storming — Delphi technique Nominal Group Technique (NGT) — Improved Nominal Group Technique (INGT) —- Synectics — Fishbowling — Didactic

Principles of Management

b) BUY:

Yearly demand Ordering cost Carrying cost Cost per item Then,

D S H C

= = = =

2000 120 1.60 8.00/unit

Q = Square root of 2DS/H = Square root of (2 x 2000 x 120)/1.60

9.

Then, the total cost of this option, TC is: TC = S(D/Q) + H(Q/2) + DC = 120(2000/547.7) + (547.7/2) + (8x2000) = 438.19 +438.16 + 16,000= 16,876.35 PRODUCE: Yearly demand = 2,000 Item cost = 5.00 Set up cost S = 60 Carrying cost H = 1.0 Production rate per year, P = 8,000 Then, Q = Square root of 2DS/H(1 - D/P) = Square root of (2 x 2000 x 60)/l(l - 2000/8000) = Square root of (2,40,000)/ .75 = 565.68 Then, Q^t = Maximum inventory = Q(1 - D/P) 565.68(.75) = 424.26 The total cost TC is: TC = S(D/Q) + (Qmax/2) + DC = (60 x 2,000)/565.68 + (424.26/2) + (2,000 x 5) = 212.13 + 212.13 + 10,000 = 10424.26 Producing the product has lower cost. Training Methods. Training and development is the process of developing knowledge and skills and behaviors in people that will enable them to perform their current and future jobs better. While training programs are mostly geared toward enhancing current job performance, development programs are created towards building skill for the future.

Question Paper

69

Training Methods On the job training

— — — —

Coaching Job rotation Junior board meetings Planned work assignments

Off-the-job training

— — — — — —

Lectures Case studies Role playing Gaming approach In-basket method Programmed learning

10. Reasons for Conflict.

Organizational conflict is structural in nature and consists of: Size of the organization Line and staff distinction Participation in decision making process: Role ambiguity Design of work flow Scarecity of resources. These conflicts can be resolved by re-designing organizational structure and work flow. A general strategy would be to move towards decentralization, Inter­ dependency among departments should be reduced. Plan ahead for distribution of limited resources and establish liaison officers.

11. a) Management Information Systems (MIS). MIS can be defined as a formal method of collecting timely information in a presentable form in order to facilitate effective decision making and implementation in order to carry out organizational operations for the purpose of achieving organizational goals. 11. b) Barriers to Effective Communications Noise barriers — Poor timing — Inappropriate channels — Improper or inadequate information — Physical distractions __ Organizational structure __ Network break down

Principles of Manage^

Semantic barriers Feedback barriers

Cultural barriers

Perception Sender credibility Multi-meaning words 11.

.