Modern Business Practices Notes, Study notes for Business Ethics

Modern Business Practices Notes, Study notes for Business Ethics

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1. Business Organization

1.1 Concept of Business

Business may be defined as any economic activity on a continuous basis which involves

production or purchase of goods for sale, transfer or exchange goods, or supply of services

for the purpose of earning profit.

Business has a wider meaning beyond goods, services and profit. A business does not become

a business without a customer. Therefore any definition of business is complete only when it

includes the customer in it. The customer determines what a business is. The revenue of

business comes from the customer, when he pays for the goods or services of the business.

No business can exist without customer.

The existence of a business depends on its customers. Therefore it can be said that the

purpose of business is to create and retain customers. To fulfill this purpose a business

enterprise should concentrate on two basic functions – marketing and innovation.

Marketing is a specialized activity which covers the entire business. All activities in a business

balanced according to the needs of market. Therefore marketing include identifying the

needs of the customers, planning the product or service and selling the goods at price which

satisfies the customer.

The second function of business in customer creation is innovation. Products available to

customers are continuously improving due to technology. Therefore a business must strive

for improving the quality of product and reducing the price continuously to stay ahead of


Technology helps the business to innovate design, production and marketing techniques.

Investment in technology will ultimately reduce cost and bring in more profit. Innovation is

possible in every aspect of business. There can be innovation in distribution methods,

advertising, selling and every other area of business. Thus business is not restricted to only

dealing with goods and services. Creating customer, marketing and innovation are more

important aspects of business.

1.2 Characteristics of Business

Business activities are different from all other economic activities in several respects. Following are the main characteristics of business activities:

i. Sale or Exchange of Goods and Services

Business activities mainly revolve round the sale or exchange of goods and

services one way or other. It includes producing goods and selling it to the

consumer. If the goods are produced for the producers’ personal use it cannot be

called business. Food cooked at the businessman’s house is not business as long

as he does not sell it. When goods are given free to somebody it is not business

for the simple reason that it is not a sale. Thus the most essential feature of

business is sale or exchange of goods or services.

ii. Regularity of Dealings

An economic activity is recognized as business only when it is done on

regular basis. One single transaction of sale or purchase is not considered

business. A person selling his old car and buying a new one is not doing car

business. But if he does it regularly for purpose of making profit he is doing car

business. The term business includes dealings in goods and services. Goods

include consumer goods of daily use and capital goods like machinery and

equipment. Services include facilities offered to business such as transportation

of goods, banking, warehousing, electricity etc.

iii. Profit Earning

The main purpose of business is earning profit. No business can survive

long without adequate profit. Profit is the reward for taking the risk of doing

business. It is the driving force for continuing the business. The businessman will

always attempt to maximize his profit by selling more goods and reducing his cost.

iv. Uncertainty or Risk

Risk is part of business. A businessman always faces the possibility of lack

of adequate return or even no return for his hard work. He may even lose his

investment or more than his investment in the business. Business conditions

cannot be predicted accurately. There can be change in trend, fall in demand,

change in technology, better products from competitors and hundreds of other

reasons that can turn unfavorable to a business. Profit is actually the reward for

taking risk.

1.3 Forms of Business Organization

A business can be organized in one of several ways, and the form its owners choose will affect the company and owners' legal liability and income tax treatment. Here are the most common options and their major defining characteristics.


Sole proprietorship is a simple and oldest form of business organization. Its

formation doesn’t require any complicated legal provision like registration etc. It is a

small-scale work, as it is owned and controlled by one person, and operated for his profit.

It is also known as "sole ownership", "individual partnership" and "single proprietorship".


i. Capital:

In sole proprietorship, the capital is normally provided by the owner

himself. However, if additional capital is required, such capital can be increased

by borrowing.

ii. Easy Dissolution:

The sole proprietorship can be easily dissolved, as there are no legal

formalities involved in it.

iii. Freedom of Action:

In sole proprietorship, single owner is the sole master of the business,

therefore, he has full freedom to take action or decision.

iv. Formation:

Formation of sole proprietorship business is easy as compared to other

business, because it does not require any kind of legal formality like registration


v. Legal Entity:

In sole proprietorship, the business has no separate legal entity apart from

the sole traders.

vi. Limited Life:

The continuity of sole proprietorship is based on good health, or life or

death of the sole owner.

vii. Management:

In sole proprietorship, the control of management of the business lies with

the sole owner.

viii. Profit:

The single owner bears full risk of business, therefore, he gets total benefit

of the business as well as total loss.

ix. Size:

The size of business is usually small. The limited ability and capital do not

allow the expansion of business.

x. Secrecy:

A sole proprietorship can easily maintain the secrecy of his business.

xi. Unlimited Liability:

A sole proprietor has unlimited liability. In case of insolvency of business,

even the personal assets are used by the owner to pay off the debts and other




Following are the advantages of sole proprietorship:

1. Contacted with the customers:

In sole proprietorship a businessman has direct contact with the customer and

keeps in mind the like and dislikes of the public while producing his products.

2. Direct Relationship with Workers:

In sole proprietorship a businessman has direct relationship with workers. He can

better understand their problems and then tries to solve them.

3. Easy Formation:

Its formation is very easy because there are not legal restrictions required like

registration etc.

4. Easy Dissolution:

Its dissolution is very simple because there are no legal restrictions required for

its dissolution and it can be dissolved at any time.

5. Easy Transfer of Ownership:

A sole proprietorship can easily be transferred to other persons because of no

legal restriction involved.

6. Entire Profit:

Sole proprietorship is the only form of business organization where the owner

enjoy 100% profit.

7. Entire Control:

In sole proprietorship the entire control of the business is in the hands of one

person. He can do whatever he likes.

8. Flexibility:

There is great flexibility in sole proprietorship. Business policies can easily be

changed according to the market conditions and demand of people.

9. Honesty:

The sole master of the business performs his functions honesty and effectively to

make the business successful.

10. Quick Decisions:

Sole proprietor can make quick decisions for the development and welfare of his

business and in this way can save his time.


The disadvantages of sole proprietorship can be narrated as under:

1. Continuity:

The continuity of sole proprietorship depends upon the health and life of the

owner. In case of death of the owner the business no longer continues.

2. Chances of Fraud:

In sole proprietorship, proper records are not maintained. This increases the

chances of errors and frauds for dishonest workers.

3. Expansion Difficulty:

In sole proprietorship, it is very difficult to expand the business because of the

limited life of proprietor and limited capital.

4. Lack of Capital:

Generally, one-man resources are limited, so due to financial problems he cannot

expand his business.

5. Lack of Innovation:

Due to fear of suffering from loss, a sole proprietor does not use new methods of

production. So, there is no invention or innovation.

6. Lack of Public Confidence:

The public shows less confidence in this type of business organization because

there is no legal registration to control and wind up the business.

7. Lack of Skilled Persons:

One person cannot hire the services of qualified and skilled persons because he

has limited resources. It is also a great disadvantage.

8. Management Difficulty:

One person cannot perform all types of duties effectively. If he is a good

accountant, he may not be a good administrator. Due to this, business suffers a loss.

9. Risk of Loss:

In case of sole proprietorship a single person bears all the losses, whereas in the

case of partnership or Joint Stock Company all the partners or members bear the loss.

10. Unlimited Liability:

In sole proprietorship there is unlimited liability. It means, in case of loss personal

property of the owner can be sold to satisfy the claimants. It is a great disadvantage.


Partnership is the second stage in the evolution of forms of business organization. It

means the association of two or more persons to carry on as co-owners, i.e. a business

for profit. The persons who constitute this organization are individually termed as

partners and collectively known as firm; and the name under which their business is

conducted is called "The Firm Name".

In ordinary business the number of partners should not exceed 20, but in case of

banking business it must not exceed 10. This type of business organization is very popular

in Pakistan.


The main characteristics of partnership may be narrated as under:

1. Agreement:

Agreement is necessary for partnership. Partnership agreement may be written or

oral. It is better that the agreement is in written form to settle the disputes.

2. Business:

Partnership is a business unit and a business is always for profit. It must not include

club or charitable trusts, set up for welfare.

3. Cooperation:

In partnership mutual cooperation and mutual confidence is an important factor.

Partnership cannot take place with cooperation.

4. Dissolution:

Partnership is a temporary form of business. It is dissolved if a partner leaves, dies

or declared bankrupt.

5. Legal Entity:

If partnership is not registered, it has no legal entity. Moreover, partnership has

no separate legal entity from its members and vice versa.

6. Management:

In partnership all the partners can take part or participate in the activities of

business management. Sometimes, only a few persons are allowed to manage the

business affairs.

7. Payment of Tax:

In partnership, every partner pays the tax on his share of profit, personally or


8. Profit and Loss Distribution:

The distribution of profit and loss among the partners is done according to their


9. Share in Capital:

According to the agreement, every partner contributes his share of capital. Some

partners provide only skills and ability to become a partner of business and earn profit.

10. Transfer of Rights:

In partnership no partner can transfer his shares or rights to another person,

without the consent of all partners.



Following are the advantages of partnership:

1. Simplicity in Formation:

This type of business of organization can be formed easily without any complex

legal formalities. Two or more persons can start the business at any time. Its registration

is also very easy.

2. Simplicity in Dissolution:

Partnership Business can be dissolved at any time because of no legal restrictions.

Its dissolution is easy as compared to Joint Stock Company.

3. Sufficient Capital:

Partnership can collect more capital in the business by the joint efforts of the

partners as compared to sole proprietorship.

4. Skilled Workers:

As there is sufficient capital so a firm is in a better position to hire the services of

qualified and skilled workers.

5. Sense of Responsibility:

As there is unlimited liability in case of partnership, so every partner performs his

duty honestly.

6. Satisfaction of Partners:

In this type of business organization each partner is satisfied with the business

because he can take part in the management of the business.

7. Secrecy:

In partnership it is not compulsory to publish the accounts. So, the business

secrecy remains within partners. This factor is very helpful for successful operation of the


8. Social Benefit:

Two or more partners with their resources can build a strong business. This factor

is very helpful in solving social problems like unemployment.

9. Expansion of Business:

In this type of business organization, it is very easy to expand business volume by

admitting new partners and can borrow money easily.

10. Flexibility:

It is flexible business and partners can change their business policies with the

mutual consultation at any time.


The disadvantages of partnership are enumerated one by one as under:

1. Unlimited Liability:

It is the main disadvantage of partnership. It means in case of loss, personal

property of the partners can be sold to pay off the firm's debts.

2. Limited Life of Firm:

The life of this type of business organization is very limited. It may come to an end

if any partner dies or new partner enters into business.

3. Limited Capital:

No doubt, in partnership, capital, is greater as compared to sole proprietorship,

but it is small as compared to Joint Stock Company. So, a business cannot be expanded

on a large scale.

4. Limited Abilities:

As financial resources of partnership are limited as compared to Joint Stock

Company, so it is not possible to engage the services of higher technical and qualified

persons. This causes the failure of business, sooner or later.

5. Limited number of Partners:

In partnership, the number of partners is limited, so the resources are also limited.

That is why business cannot expand on large scale.

6. Lack of Secrecy:

In case of misunderstandings and disputes among the partners, business secrets

can be revealed.

7. Chances of Dispute among Partners:

In partnership there are much chances of dispute among the partners because all

the partners are not of equal mind.

8. Expansion Problem:

Partnership business may not be expanded due to limited number of partners,

limited capital and unlimited liability.

9. Risk of Loss:

There is a risk of loss due to less qualified and less experienced people.

10. Transfer of Rights:

In partnership no partner can transfer his share without the consent of all other



Joint Stock Company is the third major form of business organization. It has entirely

different organizational structure from sole proprietorship and partnership. There are

two advantages of Joint Stock Company. First of all, it enjoys the advantage of increased

capital. Secondly, the company offers the protection of limited liability to the investors.


Following are the main features of a Joint Stock Company.

1. Creation of Law:

A joint stock company is the creation of law or special ̀ Act' of the state. It is formed

and governed by the Companies Ordinance or by a special Act of the legislature.

2. Capital Borrowing:

The company can borrow capital in its own name to expand the business.

3. Separate Legal Entity:

A Joint Stock Company has separate legal entity, apart from its members. It can

sue in a court of law in its own name.

4. Legal Person:

A Joint Stock Company, as a legal person, has the usual rights of any person to

carry on the business in its own name, to own property, to borrow or lend money and to

enter into contract.

5. Long Life:

A joint stock company has long life as compared to other forms of business


6. Limited Liability:

The liability of the shareholder is limited to the extent of the face value of the

shares they hold.

7. Large Scale Business:

Because of more members, a company has larger capital as compared to sole

trade ship and partnership, which helps in doing business on large scale.

8. Management of Company:

The shareholders elect the Board of Directors in the Annual General Meeting and

all the management is selected by the Board of Directors.

9. Number of members:

In case of private limited company, minimum number of shareholders is `2' and

maximum is `50'; but in case of public limited company, minimum number is `7' and there

is no limit for maximum number.

10. Transferability of Shares:

A shareholder of a company can easily transfer his shares to other persons. There

is no restriction on the purchase and sale of shares.



Following are the advantages of Joint Stock Company:

1. Expansion of Business:

A joint stock company sells the shares, debentures and bond s on large scale. So,

a joint stock company can collect a large amount of capital and can expand its


2. Easy Access to Credit:

A joint stock company can get a huge amount of capital from banks and other


3. Easy to Exit:

It is easy to separate oneself from a joint stock company by selling his shares.

4. Experts' Services:

Because a joint stock company has a strong financial position, so it may hire the

service of qualified and technical experts.

5. Employment:

Joint stock companies are also playing very important role to provide employment

to unemployed persons of the country.

6. Flexibility:

There is flexibility in such business organizations.

7. Limited Liability:

The liability of the owner is limited. In case of loss, the shareholders are not

required to pay anything more than the face value of the shares.

8. Large Scale Production:

Availability of huge amounts of capital makes possible for a joint stock company

to produce goods on very large scale, at a lower cost.

9. Larger Capital:

There is no problem of capital in a joint stock company because there is not limit

for maximum number of members. So, a joint stock company collects capital from many


10. Long Life:

A joint stock company has a permanent life. If one or more than one shareholder

die, or sell their shares, it makes no difference to the company. New shareholders take

their place.


Some of the disadvantages of the joint stock company are given below:

1. Initial Difficulties:

It is more difficult to establish a joint stock company as compared to other

business organizations.

2. Lack of Interest:

Most shareholders become relaxed and leave all the functions to be carried out

by the directors. This usually encourages the directors to promote their own interest at

the cost of the company.

3. Labor Disputes:

In such organization there is no close contact of the workers with the owners or

the shareholders. This leads to formation of labor unions to fight against the company's


4. Lack of Responsibility:

There is lack of personal interest and responsibility in the business of a joint stock

company. If any mistake occurs, everybody tries to shift or transfer his responsibilities to

other persons and he remains safe.

5. Lack of Secrecy:

A joint stock company cannot maintain its secrecy due to the reason that a

company has to submit various reports to the registrar.

6. Lack of Freedom:

A joint stock company cannot perform its functions freely because it has to submit

various reports to the registrar form time to time.

7. Monopoly:

Due to larger size and resources, a joint stock company is in a position to create

monopoly. Sometimes a few customers make agreement and exploit the consumers.

8. Corruption:

The directors of the company do not show the picture of the company to the

public and encourage corruption by changing the policies for their personal interest.

9. Complicated Process:

The formation of a joint stock company is a complicated process due to many legal


10. Centralization of Power:

In Joint Stock Company, all the powers have in a few hands and due to this, an

ordinary shareholder cannot participate in the affairs of a company.

2. Management

2.1 Concept of Management

Management is the process of reaching organizational goals by working with and

through people and other organizational resources.

Management has the following 3 characteristics:

a. It is a process or series of continuing and related activities.

b. It involves and concentrates on reaching organizational goals.

c. It reaches these goals by working with and through people and other

organizational resources.

2.2 Functions of Management

The 4 basic management functions that make up the management process are described

in the following sections:






Planning involves choosing tasks that must be performed to attain

organizational goals, outlining how the tasks must be performed, and indicating

when they should be performed.

Planning activity focuses on attaining goals. Managers outline exactly what

organizations should do to be successful. Planning is concerned with the success

of the organization in the short term as well as in the long term.

Types of Plan

I. Operational Plan:

The specific results expected from departments, work groups, and

individuals are the operational goals. These goals are precise and

measurable. “Process 150 sales applications each week” or “Publish 20

books this quarter” are examples of operational goals.

An operational plan is one that a manager uses to accomplish his

or her job responsibilities. Supervisors, team leaders, and facilitators

develop operational plans to support tactical plans. Operational plans can

be a single‐use plan or an ongoing plan.

II. Tactical Plan:

A tactical plan is concerned with what the lower level units within

each division must do, how they must do it, and who is in charge at each

level. Tactics are the means needed to activate a strategy and make it


Tactical plans are concerned with shorter time frames and

narrower scopes than are strategic plans. These plans usually span one

year or less because they are considered short‐term goals. Long‐term

goals, on the other hand, can take several years or more to accomplish.

Normally, it is the middle manager's responsibility to take the broad

strategic plan and identify specific tactical actions.

III. Strategic Plan:

A strategic plan is an outline of steps designed with the goals of the

entire organization as a whole in mind, rather than with the goals of

specific divisions or departments. Strategic planning begins with an

organization's mission.

Strategic plans look ahead over the next two, three, five, or even

more years to move the organization from where it currently is to where

it wants to be. Requiring multilevel involvement, these plans demand

harmony among all levels of management within the organization. Top‐

level management develops the directional objectives for the entire

organization, while lower levels of management develop compatible

objectives and plans to achieve them. Top management's strategic plan for

the entire organization becomes the framework and sets dimensions for

the lower level planning.

Steps in Planning

1. Setting Goals and Objectives:

Give some thought to your financial goals. Some may be short-term in

nature, others long-term. Assign each one a time frame and put them in order of

importance to you. These goals are the building blocks to any sound financial plan.

Our financial advisors can assist you in identifying goals and establishing time


2. Data Gathering

One should always have their finger on the pulse of where they stand

financially. However, it’s understandable that some matters get pushed to the

back burner. Now is the time to gather all of your financial documents and ensure

all information is current.

3. Analysis and Solutions

Depending on the goals that you established in Step 1, you will need to

perform some further analysis to define a roadmap to help you achieve your goals.

This may include analyzing your retirement, education, debt or insurance needs.

4. Recommendations

Now that you have established goals and objectives, you will want to begin

by implementing the recommendations that will ensure that you reach these


5. Implementation

Once the preparatory work of analyzing, determining and calculating is

finished, the most important step is implementing the recommendations to

ensure your goals are reached. Deverall, Calma & Associates Financial Services Inc.

is designed to assist you in establishing a well-diversified portfolio that will help

you meet your goals by spreading risk, reducing volatility and enhancing the

potential for solid long-term returns. No matter what the goal, a well-balanced

portfolio, based on your individual investor profile is a requirement of any

financial plan.

6. Follow-up and Periodic Reviews

Finally, follow-up's and annual reviews by both yourself and your financial

planner are critical to ensuring your success. Your financial situation should be

reassessed at least once a year to account for any changes in your life cycle or

economic conditions. Achieving your goals and objectives are the ultimate

measure of success in the 6-steps to a personal financial plan.


Organizing can be thought of as assigning the tasks developed in the

planning stages, to various individuals or groups within the organization.

Organizing is to create a mechanism to put plans into action.

People within the organization are given work assignments that contribute

to the company’s goals. Tasks are organized so that the output of each individual

contributes to the success of departments, which, in turn, contributes to the

success of divisions, which ultimately contributes to the success of the


Organizing Process:

1. Identification and Division of work:

The organizing function begins with the division of total work into smaller units.

Each unit of total work is called a job.

And an individual in the organization is assigned one job only. The division of work

into smaller jobs leads to specialization because jobs are assigned to individuals

according to their qualifications and capabilities. The division of work leads to

systematic working. For example, in a bank every individual is assigned a job. One

cashier accepts cash, one cashier makes payments, one person issues cheque

books, one person receives cheques, etc. With division of work into jobs the banks

work very smoothly and systematically.

2. Grouping the Jobs and Departmentalization:

After dividing the work in smaller jobs, related and similar jobs are grouped

together and put under one department. The departmentation or grouping of jobs

can be done by the organization in different ways. But the most common two ways


(a) Functional departmentation:

Under this method jobs related to common function are grouped under one

department. For example, all the jobs related to production are grouped under

production department; jobs related to sales are grouped under sales department

and so on.

(b) Divisional departmentation:

When an organization is producing more than one type of products then they

prefer divisional departmentation. Under this jobs related to one product are

grouped under one department. For example, if an organization is producing

cosmetics, textile and medicines then jobs related to production, sale and

marketing of cosmetics are grouped under one department, jobs related to textile

under one and so on.

3. Assignment of Duties:

After dividing the organization into specialized departments each individual

working in different departments is assigned a duty matching to his skill and

qualifications. The work is assigned according to the ability of individuals.

Employees are assigned duties by giving them a document called job description.

This document clearly defines the contents and responsibilities related to the job.

4. Establishing Reporting Relationship:

After grouping the activities in different departments the employees have to

perform the job and to perform the job every individual needs some authority. So,

in the fourth step of organizing process all the individuals are assigned some

authority matching to the job they have to perform.

The assignment of the authority results in creation of superior-subordinate

relationship and the question of who reports to whom is clarified. The individual

of higher authority becomes the superior and with less authority becomes the


With the establishment of authority, managerial hierarchy gets created (chain of

command) and principle of scalar chain follows this hierarchy. The establishment

of authority also helps in creation of managerial level.

The managers with maximum authority are considered as top level managers,

managers with little less authority become part of middle level management and

managers with minimum authority are grouped in lower level management. So

with establishment of the authority the individuals can perform their jobs and

everyone knows who will report to whom.

Organizational Structure

I. Bureaucratic Structures

Bureaucratic structures maintain strict hierarchies when it comes to people management.

There are three types of bureaucratic structures:

1. Pre-bureaucratic structures

This type of organizations lacks the standards. Usually this type of structure can

be observed in small scale, start-up companies. Usually the structure is centralized

and there is only one key decision maker.

The communication is done in one-on-one conversations. This type of structures

is quite helpful for small organizations due to the fact that the founder has the full

control over all the decisions and operations.

2. Bureaucratic structures

These structures have a certain degree of standardization. When the organizations

grow complex and large, bureaucratic structures are required for management.

These structures are quite suitable for tall organizations.

3.Post-bureaucratic Structures

The organizations that follow post-bureaucratic structures still inherit the strict

hierarchies, but open to more modern ideas and methodologies. They follow

techniques such as total quality management (TQM), culture management, etc.

II. Matrix Organizational Structure

When it comes to matrix structure, the organization places the employees based on the

function and the product.

The matrix structure gives the best of the both worlds of functional and divisional


In this type of an organization, the company uses teams to complete tasks. The teams are

formed based on the functions they belong to (ex: software engineers) and product they

are involved in (ex: Project A).

This way, there are many teams in this organization such as software engineers of project

A, software engineers of project B, QA engineers of project A, etc.

III. Virtual Organizational Structure

A virtual organization or company is one whose members are geographically apart,

usually working by computer e-mail and groupware while appearing to others to be a

single, unified organization with a real physical location.


Directing can be defined as guiding the activities of organization members

in the direction that helps the organization move towards the fulfillment of the


The purpose of directing is to increase productivity. Human-oriented work

situations usually generate higher levels of production over the long term than do

task oriented work situations because people find the latter type distasteful.

Principles of direction

1. Principle of harmony of objectives:

Every organization set the objectives and these objectives are to be

fulfilled with the help of people working in the organization. Therefore managers

must try to bring harmony between individual and organizational goals.

2. Unity of command:

The individual who works in the organization get direction from his/her

superior. The subordinates must get direction from only one superior to reduce

conflict and confusion which is called unity of command.

3. Direct supervision:

When superior direct the subordinates with face to face communication it

is known as direct supervision. It helps to increase the morale of employees and it

helps to develop quick feedback and necessary information

4. Appropriate leadership style:

Proper leadership means the skill of leading that depends upon the

characteristics of leader, features of subordinates and the situation. It is the

process of influencing human behavior in achieving organizational goals without

dissatisfaction of any employees

5. Maximum individual contribution:

The employees’ capacity should be used fully with effective direction by

encouragement not irritation with proper design direction style.

6. Effective communication:

Without effective communication, direction is not possible. Mainly,

communication may be downward or upward in an organization. Downward

communication carries the order, ideas, instruction to the subordinates and

upward communication carries the order, ideas, and instruction from the


7. Effective control:

Without effective control organization can’t be operated. Effective control

helps to coordinate and supervise the activities and other mechanism.

8. Effective motivation:

Motivation is the act of inspiring and encouraging the people to do work.

Employees must be motivated to achieve the goals. Without motivation, direction

cannot be complete

9. Flow of information:

Information is most important asset in any organization. When

information is blocked, then there can be failure. On the other hand, information

is useful to issue the order, ideas, and instruction.

10. Follow- up:

Direction is a continuous managerial process. It involves constant and

continuous supervision, counseling, advice, instructions etc in the employees’

activities. Merely issuing orders is not sufficient but management should find out

whether the subordinate is working or not.


Controlling is the following roles played by the manager:

i. Gather information that measures performance.

ii. Compare present performance to pre-established performance


iii. Determine the next action plan and modifications for meeting the

desired performance parameters.

Controlling is an ongoing process.

Importance of controlling

The importance of controlling becomes clear from the following facts:

(1) Accomplishing Organizational Goals:

The controlling process is implemented to take care of the plans. With the

help of controlling, deviations are immediately detected and corrective action is

taken. Therefore, the difference between the expected results and the actual

results is reduced to the minimum. In this way, controlling is helpful in achieving

the goals of the organization.

(2) Judging Accuracy of Standards:

While performing the function of controlling, a manager compares the

actual work performance with the standards. He tries to find out whether the laid

down standards are not more or less than the general standards. In case of need,

they are redefined.

(3) Making Efficient Use of Resources:

Controlling makes it possible to use human and physical resources

efficiently. Under controlling, it is ensured that no employee deliberately delays

his work performance. In the same way, wastage in all the physical resources is


(4) Improving Employee Motivation:

Through the medium of controlling, an effort is made to motivate the

employees. The implementation of controlling makes all the employees to work

with complete dedication because they know that their work performance will be

evaluated and if the progress report is satisfactory, they will have their identity

established in the organization.

(5) Ensuring Order and Discipline:

Controlling ensures order and discipline. With its implementation, all the

undesirable activities like theft, corruption, delay in work and uncooperative

attitude are checked.

(6) Facilitating Coordination in Action:

Coordination among all the departments of the organization is necessary

in order to achieve the organizational objectives successfully. All the departments

of the organization are interdependent. For example, the supply of orders by the

sales department depends on the production of goods by the production


Through the medium of controlling an effort is made to find out whether

the production is being carried out in accordance with the orders received. If not,

the causes of deviation are found out and corrective action is initiated and hence,

coordination between both the departments is established.

Process of Controlling

Controlling as a management function involves following steps:

1. Establishment of standards:

Standards are the plans or the targets which have to be achieved in the

course of business function. They can also be called as the criterions for judging

the performance. Standards generally are classified into two:

i. Measurable or tangible: Those standards which can be measured and

expressed are called as measurable standards. They can be in form of cost,

output, expenditure, time, profit, etc.

ii. Non-measurable or intangible: There are standards which cannot be

measured monetarily. For example- performance of a manager, deviation

of workers, their attitudes towards a concern. These are called as

intangible standards.

Controlling becomes easy through establishment of these standards because

controlling is exercised on the basis of these standards.

2.Measurement of performance:

The second major step in controlling is to measure the performance. Finding

out deviations becomes easy through measuring the actual performance.

Performance levels are sometimes easy to measure and sometimes difficult.

Measurement of tangible standards is easy as it can be expressed in units, cost,

money terms, etc. Quantitative measurement becomes difficult when

performance of manager has to be measured. Performance of a manager cannot

be measured in quantities. It can be measured only by-

i. Attitude of the workers,

ii. Their morale to work,

iii. The development in the attitudes regarding the physical environment, and

iv. Their communication with the superiors.

It is also sometimes done through various reports like weekly, monthly, quarterly,

yearly reports.

3.Comparison of actual and standard performance:

Comparison of actual performance with the planned targets is very

important. Deviation can be defined as the gap between actual performance and

the planned targets. The manager has to find out two things here- extent of

deviation and cause of deviation. Extent of deviation means that the manager has

to find out whether the deviation is positive or negative or whether the actual

performance is in conformity with the planned performance. The managers have

to exercise control by exception. He has to find out those deviations which are

critical and important for business. Minor deviations have to be ignored. Major

deviations like replacement of machinery, appointment of workers, quality of raw

material, rate of profits, etc. should be looked upon consciously. Therefore it is

said, “If a manager controls everything, he ends up controlling nothing.” For

example, if stationery charges increase by a minor 5 to 10%, it can be called as a

minor deviation. On the other hand, if monthly production decreases

continuously, it is called as major deviation.

Once the deviation is identified, a manager has to think about various cause which

has led to deviation. The causes can be-

i. Erroneous planning,

ii. Co-ordination loosens,

iii. Implementation of plans is defective, and

iv. Supervision and communication is ineffective, etc.

4. Taking remedial actions:

Once the causes and extent of deviations are known, the manager has to

detect those errors and take remedial measures for it. There are two alternatives


i. Taking corrective measures for deviations which have occurred; and

ii. After taking the corrective measures, if the actual performance is not in

conformity with plans, the manager can revise the targets. It is here the

controlling process comes to an end. Follow up is an important step

because it is only through taking corrective measures, a manager can

exercise controlling.

Management Principles developed by Henry Fayol:

DIVISION OF WORK: Work should be divided among individuals and groups to ensure that

effort and attention are focused on special portions of the task. Fayol presented work

specialization as the best way to use the human resources of the organization.

AUTHORITY: The concepts of Authority and responsibility are closely related. Authority

was defined by Fayol as the right to give orders and the power to exact obedience.

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