Chapter 1
ESSENTIALS OF
MANAGEMENT
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Learning Objectives
 To understand the role of organizations in
modern societies
 To appreciate the importance of
management for organizations
 To understand difference between
efficiency and effectiveness
 To comprehend generic functions of
management
 To learn about different managerial roles
 To appreciate different types of managerial
skills and their importance at different
levels of organization
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Role of Organizations in Modern
Societies
 In Modern times it is appropriate that
Term“Market Economy” be replaced by term
“Organizational Economy”- Herbert Simon
 Positive association between prosperity of an
Economy and Role of Companies- Sumantra
Ghoshal
 Companies engender Value-Creation through
Resource Combination and Exchange that
markets alone can not do
 Companies have Distinct capability to Share,
Transfer, Synthesize and Create Knowledge over
Markets
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Efficiency and Effectiveness
 Efficiency refers to “ Doing Things Right”
 Effectiveness refers to “Doing the Right
Thing”- Peter Drucker
 Efficiency is concerned with getting most
output out of scarce resources (Capital,
Human Resource, Raw Material etc.)
 Effectiveness is achieved by setting right
organizational goals. No amount of
efficiency can make up for lack of
effectiveness.
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“MANAGEMENT" Variously
Understood………
 Specific Organ Of an Organization that
has the responsibility to deliver results
consistently
 Process that drives an Organization
towards its Performance
 People who have authority to Plan,
Organize, Lead and Control different
Organizational activities
 Applied Discipline
 Profession or a career
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Generic Functions of Management
 Managerial Jobs are characterized by
Variety, Fragmentation, Brevity and
Oral communication with several
people.
 First written about by Henri Fayol and
later elaborated by Lyndall Urwick,
Classical Management functions are:



PLANNING
ORGANIZING
LEADING
CONTROLLING
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Management Functions
 Henri Mintzberg called these functions as
“folklore”. He forwarded Role theory of
Managerial work.
 Harold Koontz defends Fayol’s approach
 As managerial work is largely cerebral and
not directly observable.
 Further it allows us to look at universal
aspects of management across different
contexts.
 Managerial functions approach also helps in
classification of management knowledge
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PLANNING





Setting Objectives
Formulating Strategies
Policies
Procedures
Methods
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Steps Involved in Planning
Situational Analysis
Desired Goals, Objectives and Result from System
Goal and Plan Evaluation
Establish Goals and Plans
Chalk out Strategies to Reach Goals and
Implementation
Acknowledge Completion and Celebrate Success
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ORGANIZING
 An Intentional Structure of Roles
 Organizational Structure
 Responsibility & Authority for
achieving objectives
 Departmentation
 Span of Control
 Line & Staff Relationships
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LEADING
 Leadership Skills
 Motivation
 Team Work
 Communication
 Negotiation
 Conflict Resolution
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CONTROLLING
 Anticipate, Monitor & Respond to changing
Environment.



Measurement of Actual Performance
Comparison against the Standard
Managerial Action to correct Deviation





LIQUIDITY
ACTIVITY
PROFITABILITY
LEVERAGE
BALANCE SCORECARD
 Traditional Financial Controls are based on
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Managerial Roles
 INTERPERSONAL
 Figurehead
 Leader
 Liaison
 INFORMATIONAL
 Monitor
 Disseminator
 Spokesperson
 DECISION
 Entrepreneur
 Disturbance Handler
 Resource Allocator
 Negotiator
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Management Skills




TECHNICAL SKILLS
CONCEPTUAL SKILLS
HUMAN SKILLS
Managers at Top Level need
Conceptual Skills the most and FirstLine Managers Technical Skills the
most
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Chapter 2
EVOLUTION OF
MANAGEMENT
THEORY
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Learning Objectives
 To understand the historical evolution of
management discipline.
 To comprehend different schools of management
thought.
 To critically appreciate the modern day relevance of
difference schools of management thought.
 To know contributions of pioneers of management
thought.
 To become aware of contemporary approaches to
management.
 To get acquainted with ‘Eastern Management’
thought.
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Major Schools Of Management
Theory
 CLASSICAL SCHOOL
 BEHAVIORAL SCHOOL
 QUANTITATIVE SCHOOL
 SYSTEMS SCHOOL
 CONTINGENCY SCHOOL
 CONTEMPORARY /EASTERN APPROACHES
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CLASSICAL SCHOOL
 Scientific Management:- Application of Scientific
Method to optimize productivity
 FREDERICK W.TAYLOR [1856-1915]
 HENRY GANTT [1861-1919]
 FRANK [1868-1924]& LILLIAN GILBRETH [18781972]
 HUGO MUNSTERBERG [1863-1916]
 Administrative Management:- Emphasizes Role of the
manager and the functions of Management.
 HENRI FAYOL [1841-1925]
 HENRI MINZBERG
 Bureaucratic Management:- Focuses on Ideal Form of
Organization.
 MAX WEBER [1864-1920]
 PETER DRUCKER
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BEHAVIOURAL SCHOOL
 Human Relations:- Dealt with human aspects of
Organizations
ELTON MAYO [1880-1949] & OTHERS
MARY PARKER FOLLETT
CHESTER BERNARD [1886-1961]
Human Resources:-Motivation and Leadership techniques




focus etc.

ABRAHM MASLOW,KURT LEWIN & OTHERS




DOUGLAS McGREGOR
FREDERICK HERZBERG
CHRIS ARGYRIS
RENAIS LIKERT
 Behavioural Science:-Personality, Attitude, Groups, Values
focus etc.
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QUANTITATIVE SCHOOL
 Management Science &MIS:- Uses Mathematical
and Statistical approaches to
 solve management problems
 GEORGE DANTZIG Etc.
 DSS &ERP SYSTEMS
 Production and Operations Management:-Focuses
upon operation and control of production process that
transforms resources into finished goods and services.
 JURAN
 W.EDWARDS DEMING
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SYSTEMS SCHOOL
 Views Organizations as an
interrelated and interdependent set of
subsystems functioning as a whole
open system interacting with the
Environment
 LUDWIG VON BERTALANFFY
 JAMES ROSENZWEIG
 KENNETH BOULDING
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CONTINGENCY SCHOOL
 Emphasizes the fit between
organizational processes and the
characteristics of the situation




PAUL LAWRENCE
JAY LORSCH
FRED FIEDLER
JOAN WOODWARD
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CONTEMPORARY APPROACHES




Total Quality Management :-Managing the entire
organization to deliver quality goods/services to the customer

JOSEPH JURAN/W. EDWARDS DEMING/PHIL CROSBY

PETER SENGE

PETERS & WATERMANS
Learning Organization:-All employees involved in the growth
& learning of organization as it deals with the changing
environment
Excellence Approach:- Attributes of Excellence empirically
derived.
Chaos Theory:- Views Organizations as complex adaptive
systems
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OTHER APPROACHES
 Indian Management Approach:Emphasizes value-based and management of mind as
well as an attitude of detachment to the outcome but
focused concentration on the work in hand.
 Japanese Management Approach:Emphasizes Participative style of Management and
continuous improvement.
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CHAPTER 3
MANAGEMENT –
BUSINESS
ENVIRONMENT
AND SOCIETY
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Learning Objectives
 To learn and appreciate the significance of
business environment and society in
management.
 To understand difference between old and
emerging economies.
 To learn application of Michael Porter
model in diagnosing the competitive
business environment.
 To learn the significance of corporate
social responsibility in today’s business
environment
 To understand importance of social audit
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 To learn the difference between business
ethics and ethics in business.
 To learn about steps involved in ethical
decision making.
 To learn about what is meant by
corporate governance and its relevance
ethical standards
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Introduction
 Managerial actions as reflected in the
organizational performance is the outcome of
synchronization of internal systems to respond
effectively to the external environment.
 Organizations for their success in today’s fast
changing environment have to keep adjusting,
adopting, and adapting by developing inbuilt
response mechanisms
 Need to understand importance and relevance of
organizational environment for strategic
management as also for social concern and
value-based management.
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Macro Environment Affecting
Organization
SOCIAL
CULTURAL
LEGAL
TECHNOLOGICAL
ORGANIZATIO
N
COMPETITIVE
POLITICAL
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DEMOGRAPHIC
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ECONOMIC
Trends Affecting Emerging
Economies
Old Economies
Emerging Economies
Dominance of agriculture and
Manufacturing
Dominance of service
sector
Local and national markets
Global markets
Customer behaviour – loyalty
highly
Customer behaviour –
Competitive forces – tolerable
intense
Competitive forces –
Regulated economic regime
Deregulated regime
Emphasis on physical assets
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fluid
Emphasis on human assets
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Michael Porter’s Model—
Competitive Diagnosis
Threat of
new entrants
Power of
suppliers
Rival firms and
rivalry amongst
them
Power of
customers
Above factors need to be appropriately diagnosed by the managers to
identify their competitive advantages and disadvantages, so as to chalk out
strategies that can enable them to achieve their corporate goals and objectives
by responding effectively to various environmental forces.
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Corporate Social Responsibility
(CSR)




CSR focuses on need for seriously considering the impact of
the company’s actions on society
CSR basically refers to the obligation toward the society
voluntarily assumed by business.
The philosophy of business as highlighted by Keith Davis
and Robert Blomstrom (1975) states ‘Social responsibility
is the obligation of decision makers to take actions which
protect and improve the welfare of society as a whole along
with their own interests’ This implies that business has to
be viewed more than a money-making proposition and it
provides a great opportunity to serve society. Business
entity has also to focus their efforts on protecting welfare of
the society by creating positive benefits for society.
Corporate Social Responsiveness means the extent to which
company’s policies and programmes are geared to the
social environment. The responsiveness focuses on actions
that results in ways and means of firm’s responses to social
concerns as against responsibility that focuses more on
‘need’ and ‘should’ for corporate sustained growth.
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Corporate Social Responsibility (CSR) at
Different Levels
Voluantry Responsibilities
CSR
Obligation
toward
Society
Voluntarily
Assumed
by
Business
Ethical Responsibilities
Legal Responsibilities
Economic Responsibilities
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Advantages of CSR
 The organizations that integrate CSR as part and
parcel of their philosophy of growth, derive various
advantages such as –
improved financial performance,
cost reduction,
enhanced brand image and reputation,
increased customer satisfaction,
enhanced productivity, quality,
increased market share,
more engaged investors,
environmental sustainability,
and above all competitive edge in the market.
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Social Audit
Mandatory as
Required by
Government
Pollution Check
Employment
Standards
Labour Amenities
to be provided as
per factory Act,
Minimum Wages to
be Provided
Voluntary
Social
Programs
undertaken
by companies
Rural
Development
Education
Health
Social
Audit
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Ethics – Different View Points
Various Views on Ethics
Ethics
Utilitarain View
Rights View
Justice View
Utilitarian View: The utilitarian view focuses on welfare of the greatest
number of people, implying thereby the greatest good for the greatest
number as a criterion for weighing and evaluating decisions.
Rights View: The protection of individual's rights is the main concern as per
rights view.
Justice View: The justice view is grounded in the idea that rules of
organizational or societal existence must be imposed equitably to all. The
focus is making a decision that is objective – without prejudice to emotions and fair to everyone involved.
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Ethical Decision Making
 Define the problem and issue clearly
and explicitly
 Jot down the values relevant to the
situation for the issue under
consideration from the short and long
term perspective
 Analyze the issue vis-à-vis conflicting
values and choose an alternative that
takes care of most crucial values
 Implement the decision
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Chapter 4
PLANNING – A
TOOL FOR
EFFECTIVE
MANAGEMENT
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Learning Objectives
To understand the importance of planning
To know what plan and planning mean
To learn about steps involved in planning
To learn about different types and levels of
planning
 To understand SWOT analysis as a tool for
business strategies development
 To understand the use of BCG matrix in
categorization of businesses
 To understand concept of MBO and its relevance
to planning




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Planning and its Various Facets

Planning refers to a systematic approach towards
making decisions about goals and objectives and the
associated activities that need to be carried out along
with various resource requirements
What is Planning?
Planning
Systematic approach of making
decision about goals and objectives
and associated activities
A
C
T
I
V
I
T
I
E
S
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Goals & Objectives
Plans
Policies
Procedures
Rules
Strategy
Task
Resources
Program
Budget
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Goals and Objectives
 Goals refer to specific objectives that an
organization aspires to accomplish in
total, or in some combination, in order to
achieve some larger purpose, i.e., the
mission of an organization
 Objectives are clear and verifiable
yardsticks against which performance can
be measured. The accomplishment of
various functional and departmental
objectives lead to the achievement of
goals.
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Plans and Policies
 Plans are the actions or means that a manager
proposes to use for achieving pre- determined
goals. A plan indicates what the management
wants to achieve. It specifies the steps that are
to be taken towards the achievement of goals.
 Policies refer to a broad statement and/or a set
of guidelines that direct decision-making. It is a
plan of action adopted by an individual or an
organization. They define the framework within
which managers are expected to make decisions
leading to the achievement of objectives.
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Procedures, Rules and Strategies
 Procedures are plans that set out the
required methods and processes to handle
future activities.
 Rules refer to principles or conditions that
govern behavior. They define specific
required actions and inactions in given
circumstances .
 Strategies are an elaborate and
systematic plan of action. These are the
methods or processes required in total, or
in some combination, to achieve the
goals.
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Objectives and Tasks
 Objectives are specific targets that
must be accomplished in total, or in
some combination so as to achieve
the predetermined goals in the plan
 A piece of work that is undertaken
to contribute towards the
achievement of objectives is called
‘task’
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Resources, Programmes , and
Budget
 Resources include the people, materials,
machines, technologies, money, etc. required to
implement the strategies or processes
 A program is a combination of goals, policies,
procedures, rules, and set of activities to be
undertaken, resources to be deployed and other
interrelated actions required to be undertaken
for accomplishment of a purpose.
 Budget is a statement of expected provisions or
results expressed in numerical terms. It can be
for inputs as well as outputs
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Steps Involved in Planning
Situational Analysis
Desired Goals, Objectives and Result from System
Goal and Plan Evaluation
Establish Goals and Plans
Chalk out Strategies to Reach Goals and
Implementation
Acknowledge Completion and Celebrate Success
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Types of Planning
Types of Planning
Short-term
Planning
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Medium-term
Planning
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Long-term
Planning
Levels of Planning
Levels of Planning
Strategic
Tactical
Operational
Strategic planning is undertaken at the top-level of the management. It deals with
decision making about the organization’s long-term goals and strategies .
Tactical planning deals primarily with the specific goals and plans pertaining
to functional areas – production, marketing, human resources management, etc.
It deals with major actions pertaining to implementation phase of the planning
process.
Operational planning deals with specific systems, procedures, and processes
required to implement the tactical plan at the level of the operational or frontline
manager.
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What is SWOT Analysis?
SWOT Analysis
Internal
External
Opportunities
Threats
Strengths
Weaknesses
Develop Business Strategies
Opportunities and threats are diagnosed by undertaking an external
environmental analysis.
Strengths and weaknesses are essentially internal to the organization and
pertain to its resources. These relate to resources – human and nonhuman, physical, processes, programs, and organization in key areas.
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Developing Business Strategy
SWOT analysis helps in identification of possible
strategies based on the following criteria:
 Build and develop on strengths
 Resolve and overcome weaknesses
 Exploit and avail opportunities
 Avoid or minimize the effect of threats
BCG (Boston Consulting Group) has developed a tool
that enables the mapping of all the organization’s
businesses based on the criteria of market growth
and relative competitive position vis-à-vis
competitors.
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BCG Matrix—A Tool for Mapping
Businesses of Organization
Market Growth
STARS
CASH COWS
QUESTION
MARKS
DOGS
Relative Competitive Position
Stars are the businesses having high growth as well as a strong competitive position.
Dogs have low growth and weak-competitive position businesses.
Cash Cow businesses have low growth but are having strong competitive position .
Question Marks are the businesses that have high growth but weak competitive position
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Management By Objectives (MBO)
MBO is a
management system that is goal driven and success-oriented
MBO is defined as an integrated managerial system that
is systematically and consciously directed towards
achievement of organizational and individual objectives
Employees Get Adequate and Strong Input
to be Clear about their Objectives, Time
Lines for Completion
Synchronizing Goals and Subordinate
objectives throughout the Organization
Tracks Performance to Provide a Feedback
for Taking Timely Corrective Measures
Enhances Organizational Performance
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Salient Features of MBO
Cascading of Organizational Goals
and Objectives
Specific Objectives Driven
Salient Features of
MBO
Participative Decision Making
Process
Explicit Time Period Deadlines
Performance Evaluation and
Feedback
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Benefits of MBO
 Ensuring personal commitment to organizational goals
 Provides goal and role clarity in the organization and
in turn helps in devising organizational structure
conducive for improving efficiency and effectiveness
 Ensures result oriented planning
 Development of effective control mechanism leading
to timely corrective actions
 Less supervision of subordinates and increased
motivational level as a result of each employees clear
definition of responsibilities
 Employees accountability increases
 Improved managerial effectiveness and efficiency
results in greater satisfaction level to the employees
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Disadvantages of MBO








Failure to teach the philosophy of MBO across the
organization
Lack of guidelines to goal setters
Difficulty in setting verifiable objectives
Over emphasis on short term achievements at the
cost of long term growth and development
Lack of flexibility to attune changes with changing
environmental forces
Over emphasis on quantitative goals, even where it
may not be applicable
It turns out to be paper passing buck, especially in
organizations where in well set mechanism to
monitor and evaluate the performance does get laid
down
It is a time consuming process to imbibe the
philosophy of MBO in the organization
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Chapter 5
ORGANIZATIONAL
STRUCTURE
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Learning Objectives
 To understand what is meant by organizational
structure.
 To comprehend different dimensions of organizational
structure.
 To understand difference between job specialization
and differentiation
 To understand what is meant by formalization
 To understand difference between centralization and
decentralization.
 To understand the use of different bases for
departmentation.
 To understand the effect of size, environment and
technology on organizational structure.
 To learn about Mintzberg’s typology of organizational
configurations.
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DIMENSIONS OF ORGANIZATIONAL
STRUCTURE
 Job Specialization
 Behaviour Formalization
 Centralization
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JOB SPECIALIZATION
 Division Of Labour
 Job Specialization in horizontal and
vertical dimensions
 Job Enlargement
 Job Enrichment
 When to go for job Enlargement?
 When to go for Job Enrichment?
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BEHAVIOUR FORMALIZATION
 By Positions [Job Description].
 By Work-Flow [Process Descriptions].
 By Specifying Rules [Regulations,
Policy Manuals, Code and Conduct
Rules etc.]
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CENTRALIZATION
 Vertical Decentralization.
 Horizontal Decentralization
 Selective Decentralization.
 Parallel Decentralization.
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DEPARTMENTALIZATION Based
on…..









Number
Function
Product-line
Territory
Customers
Processes
Matrix
Cross-functional team
Virtual Network
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SPAN OF MANAGEMENT
 Tall Structure Vs. Flat
Structure.
 Chain of Command.
 Line and Staff Relationships.
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SITUATIONAL FACTORS AFFECTING
STRUCTURE
 SIZE
 ENVIRONMENT
 STATIC VS. DYNAMIC
 SIMPLE VS. COMPLEX
 TECHNOLOGY
 BATCH PRODUCTION
 MASS PRODUCTION
 PROCESS PRODUCTION
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MINTZBERG’S TYPOLOGY
Key Parts Of an Organization: Operating Core
 Strategic Apex
 Middle Line
 Techno-structure
 Support Staff
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MINTZBERG’S TYPOLOGY….
Coordinating Mechanisms: Direct Supervision
 Mutual Adjustment
 Work-Process Standardization
 Outputs Standardization
 Skills or Knowledge
Standardization
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MINTZBERG’S TYPOLOGY….





Simple Structure
Machine Bureaucracy
Professional Bureaucracy
Divisionalized Form
Adhocracy
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Chapter 6
ORGANISATIONAL
EFFECTIVENESS
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Learning Objectives
 What is meant by organizational
effectiveness
 Organizational culture and its implications
to organizational effectiveness
 Factors that build and nurture favourable
organizational culture
 Different organization life cycle stages
 Measuring organizational effectiveness.
What does it take to become a high
performance organization?
 Characteristics of effective organizations
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Organizational Effectiveness
 Organizational effectiveness is defined as the
ability of an organization to maximize its
performance within a competitive external
environment .
 An organization is a consciously coordinated
entity with an identifiable boundary that
functions on a relatively continuous basis to
achieve a common goal or set of goals.
 An organizational structure defines how roles
are defined, tasks are allocated, relationships
are reported, and the formal coordination and
interaction pattern that the organization would
follow
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Organizational Effectiveness
and Culture
 Culture is a set of norms, values, and
assumptions that are available to the staff, and
it is thus inseparable from action and process .
 Schein states that organizational culture develops in
response to two major challenges that every
organization confronts; external adaptation and
survival and internal integration.
 organizational culture is defined as the overall
attitude of the people within an organization. It
contributes a great deal to the achievement of
its objectives and in improving its effectiveness.
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Organization Life Cycle Stages
Organization Life Cycle Stages
Entrepren
eurial
Stage
Collectivity Stage
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Formalization and
Control
Stage
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Elaboration of
Structure
Stage
Decline
Stage





Entrepreneurial Stage The organization is in its nascent
stage. Although its goals are ambiguous, they have a high
level of creativity.
Collectivity Stage Innovations continue in this stage and the
organization’s mission is clarified. Communication is informal
and its employees are highly committed to the organization’s
objectives and goals.
Formalization and Control Stage In this stage the
organizational structure stabilizes and formal rules and
procedures put in place. However, innovation is given a back
seat while efficiency and stability is emphasized upon.
Elaboration of Structure Stage: Products and services are
diversified at this level. The structure becomes more
complex. Decision-making gets decentralized.
Decline Stage: This is the stage when management looks
for ways to hold the markets and look for new opportunities.
Organizational effectiveness demands to come out with new
ideas to exploit existing or emerging opportunities.
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Model for organizational effectiveness measurement criteria
Organisational Organizational
Effectiveness
Where the
Organiszati
on is?
Where the
Organization
Would like to be
Corporate Goals:
 Quantitative
 Qualitative
Individuals’ and the
Groups Performance
Viewed and Evaluated
vis-à-vis a
Predetermined Criteria
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Individuals and Groups
at Different Tiers have to
Plan and Execute a
Sequence of Actions
and Activities.
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Parameters for Hugh Performance
Organizations
Parameters
Values and goals
Leadership behaviour
Decision-making
Management processes
Talent
Measure and incentives
Customer focus
Frontline support
Performance culture
Capacity to change
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Yardsticks
Clear vision
Cohesive leadership
Crisp decision
Value adding
processes
Deep talent
Meritocracy
Consistent high quality
Fit
High performance
Continuous evaluation
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Characteristics of Effective
Organizations





Providing sustained leadership
Driving effective decisions
Focusing people on performance
Aligning the front line
Driving a high-performance
culture
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CHAPTER 7
BUSINESS –
ECONOMIC
FUNDAMENTALS
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Learning Objectives
The meaning of economics
The purpose of studying economics
Types of economic theories
Demand and supply concepts and their
relevance to the understanding
economic behaviour
 How market mechanism operates
 Concepts of elasticity, factors affecting
elasticity, and their implications to
economic decision-making




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What is Economics?
 Economics (derived from the Greek words οίκω
(okos), ‘house’, and νέμω (nemo), ‘rules’ hence,
household management) is the social science
that studies the allocation of scarce resources.
This involves analysing the production,
distribution, trade, and consumption of goods
and services.
 Economics studies choice, decision-making, and
optimum allocation of limited resources to fulfil
unlimited human needs and wants.
 Economics involves analysing the production,
distribution, trade, and consumption of goods
and services with a view to suggest optimum
allocation of resources.
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Why study Economics?
 Economics needs to be studied as
it provides a logical way of
diagnosis, analysis, and solution
to a variety of problems that arise
within an organization
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Classification of Economic Theories
Economics - is the study of choice and decision-making in
a world with limited resources to fulfill unlimited wants
Positive and Normative Economics
Micro-economics and Macro-economics
Descriptive Economics, Economic Theory, and
Applied Economics
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 Positive economics deals with causal
relationships and attempts to find out the
causes that lead to a given effect or the
vice versa.
 Normative economics is prescriptive in
nature and has more to do with values.
 Microeconomics deals with individual
behaviour of a householder, consumer,
businessperson, producer, etc
 Macroeconomics considers the economy as
a whole and deals with aggregate variables
such as aggregate demand and supply for
money, capital, and commodities.
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 Descriptive economics refers to the collection
of all the relevant facts related to an event and
aligning them coherently with emerging
implications .
 Economic theory or analysis helps simplifying
explanation of features of an economic systems
 Applied economics operates within the
framework of analysis provided by economic
theory. It attempts to test the economic
theories to ensure whether or not these
theories appear to be supported by statistical
evidence about the real world.
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Demand
 Demand for a product is defined as the
various quantities of it per unit of a
time; daily, weekly, or monthly that
consumers are willing and able to
purchase at alternative prices, keeping
all other things affecting demand as
constant.
 The law of demand states that the
relationship between a good’s price
and its quantity demanded is negative
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Demand can be expressed as:
XD =
f ( Px, N, T, Y, Pn, R, E, )
Where:
X = Quantity of goods or services
Px = Price of X:
N = Number of consumers under consideration.
T = Taste and preferences of consumers:
Y = Consumers’ income and distribution:
Pn = Price of related goods:
R = Range of products available to consumers
E = Expectations of consumers:
Demand refers to a demand schedule that lists the different
quantities of the commodity that consumers are willing and able
to take at alternative prices, keeping all other factors affecting the
demand as constant , i.e., ceteris paribus
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Change in Demand
 A change in the demand or a shift of the
entire demand curve is caused by a
change in any of the other factors other
than the price of the product under
consideration affecting the demand.
 When demand increases, the quantity
demanded by consumers increases at
every price.
 When demand decreases, the quantity
demanded by consumers falls at every
price.
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Supply
The concept of supply is defined
as various quantities of a product
that the seller places in the
market per unit of time at
alternative prices, keeping all
other factors affecting supply as
constant.
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Supply can be expressed
XS
=
f ( Px,
Pn, T, E, Pi)
Where:
X = quantity of good or service
Px = price of X
N = Number of sellers under
consideration
T = Technology to produce the product
E = Future expectations of the sellers
Pi = is the price of inputs
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Market Price
 Conventional microeconomic analysis states that
the price of a product or service and its output is
determined at the intersection of supply and
demand curves which is called the equilibrium
price.
 Any price above the equilibrium will result in a
situation where the quantity supplied exceeds the
quantity demanded. Due to their inability to clear
the market, producers may reduce prices.
 Any price below the equilibrium will see the
quantity demanded exceed the quantity supplied,
bidding the price upwards.
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Price Elasticity of Demand
 Price elasticity of demand measures the
responsiveness of the quantity demanded as the
price of the product or service undergoes
changes, given the demand curve for the
product or service .
 If the quantity demanded is not too responsive
to the change in price, it would result in an
increase in the total expenditure on the product
for increase in price of the product and vice
versa.
 If a product or service is highly responsive to
change in price, it would result in a decrease in
the total expenditure on the product for increase
in its price and vice versa.
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How to Measure Price Elasticity
Well-known British economist Alfred Marshall (1891), defined price
elasticity of demand as the percentage of change in quantity taken
divided by percentage change in price, when the price change is
small.
Percentage change in quantity
demanded
Price elasticity of Demand e = -----------------------------------------------Percentage change in the price of the
product
Numerically, the price elasticity is expressed as :
p
=
(% Q)/(%
P)
The elasticity of demand at a given point on the demand curve is
referred to as point elasticity of demand. Arc elasticity of demand is
computed between two points on the demand curve
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Factors that Influence price
elasticity of demand
 Availability of close substitutes
within the market
 Degree of Necessity or Luxury
 Proportion of income spent on a
good
 Habit forming goods
 Permanent or temporary price
change
 Time period under consideration
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Cross Elasticity of Demand
Cross elasticity of demand measures the
responsiveness of the quantity demanded of one
good to changes in the price of another.
Cross elasticity of demand for good X is expressed as:
% Change in quantity demanded of good X
= --------------------------------------% Change in price of another good Y
Two goods which are substitutes will have a positive
cross elasticity
Two goods which are complementary to each other
will have a negative cross elasticity
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CHAPTER 8
PRINCIPLES
OF
PRODUCTION
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Learning Objectives
 The need for knowing principles of
production
 To learn about production function
 To understand the concepts of
production function
 To understand optimal resource
allocation in production
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Production Function
The production function is the physical relationship
between a firm’s inputs of resources and the output of
goods and services per unit of time, leaving prices aside.
It gives maximum output that can be achieved by
combining inputs into various combinations, for a given
technology and prices of inputs. Production function is
described as under:
Q = f ( x,y,z)
Where Q represents a firm’s output and x, y, z
represent the inputs required to produce the given
product.
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Fixed and variable inputs
An input comprises goods or services that go into
the process of production. Firms add value to
imputs, through production or other processes, to
obtain an output.
A fixed input is one whose quantity remains fixed
irrespective of level of production in the short run
such as plant, building, and machinery.
A variable input is one whose quantity varies with
the level of production and, therefore, the
quantities of variable input can be changed, such as
labour and raw materials, is elastic in the short run.
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Short run and long run
 Short run refers to a period of time
(time horizon) in which the supply
of certain inputs is fixed or inelastic.
 The long run refers to a planning
horizon in which all inputs can be
readily varied for a desirable change
in the output
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Law of Variable Proportion vs
Law of Fixed Proportion
 The law of variable proportion is defined
as the possibility under which varied
levels of outputs can be achieved by
combining various amounts of variable
inputs together with a fixed input in the
short run.
 The law of fixed proportion relates to the
production system in which resources can
be combined in only one unique way to
get an output.
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Returns to Scale
Constant returns to scale production functions are those in
which changes in the quantity of all inputs used in the same
proportion results in changes in the quantity of output by the
same proportion.
If all inputs are raised by a proportion k and output increases
by a proportion greater than k, then it is referred to as
increasing returns to scale production function.
If all inputs are raised by a proportion k and output increases
by less than k proportion, then it is referred to as decreasing
returns to scale production function.
For a production function Q = f (x, y) then it is said to be a
homogenous function of degree k
if λk Q = f (λ x, λ y).
k = 1, it is a constant returns to scale production function
k > 1, it is an increasing returns to scale production function
k < 1, it is a decreasing returns to scale production function
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Isoquants
Isoquants are locus of points
with various combination of
inputs that can produce a
certain quantity of output per
unit of time.
The movement to the right
gives rise to higher level of
production.
On a given isoquant map the marginal rate of technical
substitution of B (labour) for A (capital) is given by the ratio
of the marginal product of B to the marginal product of A.
This measures the reduction in one input per unit increase in
the other such that the level of output remains constant
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Law of Diminishing Returns
As per law of diminishing returns,
increase in the levels of one input
while keeping other inputs fixed
would eventually result in smaller
and smaller increases in additional
output
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Total Product, Average Product, and
Marginal Product under Short Run
In the short run, the production function gives the
maximum amount of the total product (output) that
can be obtained by combining different amounts of
variable inputs with fixed amount of fixed inputs.
Marginal product (MP) of a variable input is defined
as the change in the total product for a unit change
in the variable input in the production system.
Average product (AP), with respect to the variable
input, is defined as the output per unit of a variable
input used, keeping a particular level of fixed input.
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Optimal Resource Allocation in
Production
Objective of Producer
Producer would either like to minimize the
cost of production for a given level of output
or maximize the production for a given cost
outlay.
Mathematically, producer aim to maximize
Q = f(x, y) for a given cost constraint as
E = xpx + ypy
where x and y are units of inputs and px and
py are the prices of inputs respectively.
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Z =
f(x, y) -
λ ( xpx
+ ypy )
To maximize, we need to take partial derivative with respect to
variables and put them equal to 0.
dz/dx
dz/dy
dz/dλ
=
=
=
fx − λpx
= 0
fy
−
λpy = 0
E − xpx − ypy = 0
Dividing equation 1 by 2 we get:
fx/fy
=
px/py
or
fx/px
or MPx/px
=
=
………….. 1
……………2
……………..3
fy/py
MPy/py
Marginal Rate of Technical Substitution (MRTSxy) = px/py
This means to optimize the production, the producer should
operate at a point of input combination at which MRTSxy is equal
to the input price ratio or MP per rupee worth of an input must
be same for each input used in the production system.
The second order condition for maximization of output is that
d2y/dx2 > 0
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CHAPTER 9
MARKETS
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Learning Objectives
 Markets and their relevance to business
decisions.
 Different market structures and their
implications to business decisions.
 The difference between normal and
economic profits.
 The mechanism of pricing and output
decisions in different markets – pure
monopoly, pure competition, oligopoly, and
monopolistic competition
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Classification of Markets
A market refers to a suitable arrangement in which the buyers and
sellers could closely interact (physically or otherwise) to arrive at
exchange decisions
Classification of Markets
Pure
Monopoly
Oligopoly
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Monopolistic
competition
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Pure
Competition
Pure Competition
Characteristics of Pure Competition
 very large numbers of buyers and sellers;
 standardized product similar in all respects
being produced by each firm;
 ‘price takers’—firms accept the price as
given;
 free entry and exit for sellers; and
 perfect knowledge about the market.
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Demand Curve and Influence of the
Firm on Demand, Output, and Prices

Demand curve faced by the sellers is horizontal at the
prevailing equilibrium price. It is said to be perfectly
elastic, i.e., at the given price, sellers can sell all that
they have to offer. However, at any price above the
market equilibrium price, firms would not be in a
position to sell any quantity.

A perfectly competitive industry would be in equilibrium
when each and every individual firm in the industry is in
equilibrium, i.e., each firm is maximizing its profit by
equating marginal revenue with marginal cost and the
industry, as a whole, is in equilibrium, i.e., no firms are
entering or leaving the market.

Every entrepreneur in the industry earns normal profit—
profits that are sufficient to sustain the seller in the
industry.
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d
d1
d
d1
P1
Price Per Unit
Price Per Unit
Pure Competition – Firm and
Market Demand Curves
D
P
0
0
Q Per Unit of time, FIRM
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S
S1
Q
Q1
Q Per Unit of Time, INDUSTRY
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Pure Monopoly
 Pure monopoly operates in a
market when a single firm is the
sole producer of a product for
which there are no close
substitutes.
 cross elasticity of demand for the
monopolist’s product is either
zero or negligible.
 Barriers to Entry
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Demand Curve
The market demand curve itself would be a demand curve for the
monopolist
Price Per Unit
Rs/unit
D
P
A monopolist can increase sales
by lowering the price.
He can change its demand curve
by using promotional tactics.
A monopolist can effectively
operate on price discrimination
strategies
D
Q
Quantity Per Unit of Time
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Oligopoly
 Few sellers and the decision of one affects the
other because of the sellers’ small size .
 In a pure oligopoly market, firms produce
homogeneous products while in a differentiated
oligopoly market, firms produce and sell
differentiated products.
 Sellers in an oligopoly market usually turn to
advertising to improve their sales. Some
examples of oligopolies are banking industry,
automotive manufacturers, gas companies,
insurance companies, telecommunications
companies, etc.
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Demand Curve and Influence of the Firm on
Demand, Output, and Prices
 The demand for a firm’s products cannot be
determined, if the firm is unable to predict the
reactions of its competitors to the changes in its
price and output decisions.
 An oligopolistic firm is in a position to influence
its demand curve to some extent and,
consequentially, its price and output.
 An oligopolist can shift its demand curve
upwards with the help of advertising and other
promotional efforts.
 Generally, the elasticity of demand would be
elastic but it would depend on the rival’s
reactions to the price and output changes of the
single seller.
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Monopolistic Competition
 Many sellers of a particular product
that are differentiated in some way or
the other.
 Each seller is too small to influence the
decision of the other.
 Cross elasticities of demand are high
as though differentiatedproducts are
good substitutes to each other.
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Demand Curve and Influence of the
Firm on Demand, Output, and Prices
 Relatively less elastic demand as
compared to Pure Competition because
of differentiated products. Each tries to
create a niche for its products in the
market.
 Firms may enjoy economic gains, i.e.,
profits over and above normal profits.
 Individual firms may be in a position to
influence the demand and price of its
product to some degree through
advertising.
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CHAPTER 10
NATIONAL INCOME
ACCOUNTING
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Learning Objectives
 The relevance of macroeconomics to business
 Production of output and payments to factors of
production
 Gross Domestic Product (GDP) and its relevance
to business entities
 Techniques used to measure GDP
 Problems associated with measurement of
National Product
 The relationship between GNP, NNP and NI and
DPI
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Macroeconomics
 Macroeconomics deals with the behaviour
of economy as a whole such as booms and
recessions, aggregate output of goods and
services, growth in employment and
output, inflation and deflation, balance of
payment, balance of trade, exchange rates,
etc.
 Macroeconomics essentially deals with
interactions among goods and services,
labour and capital markets of the economy
and similar interactions amongst national
economies that interact, with each other.
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Concept of GDP
 Gross Domestic Product (GDP), is the total market
value of all final goods and services produced within
a given period, by factors of production located within
a country.
 Final goods and services refer to goods and services
produced for final use. Intermediate goods are goods
produced by one firm to be used as raw materials by
another.
 Value added is the difference between the values of
goods as they leave the stage of production and their
cost when they entered that stage.
 For calculating the GDP, we can either sum up the
value added at each stage of production, or we can
consider final value of sales.
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Measurement of GDP
Aggregate demand or output for the
domestic goods and services is made
up of four components namely
consumption spending by households
(C), investment spending by business
and households (I), government
consumption of goods and services and
gross investment (G) and foreign
demand for our net exports.
Y = C + I + G + (E − I)
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Gross Investment Net
Investment




Gross investment is defined as the total value of all
newly produced capital goods such as plants,
machinery, equipment, housing, building, and
inventory in a given time period.
Investments determine the long-term plan of growth
that the economy will adopt.
It is the demand for capital formation that gets
affected by aggregate demand for goods and
services, prevailing interest rates, taxation system
and structure, and other monetary and fiscal
considerations.
Capital is subject to wear and tear with usage and
time. It may also become completely obsolete on
account of various factors. The rate of depreciation
depends upon the type of capital and its useful life.
The net investment is the difference between gross
investment and depreciation.
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National Product – Problems of
Measurement
 Double counting - avoid adding the value of all
intermediate goods.
 Second-hand goods already sold once should
not be accounted in the national product
accounts.
 Some outputs are not traded in the market and
thus are not rightly reflected in the GDP. These
include services of a housewife, vegetables,
and fruits produced a kitchen garden, etc.
 Government services are not directly priced by
the market and, therefore, it is not necessary
that a rupee spent by the government is worth
its value.
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 Certain expenses that are added to GDP
represent use of resources to contain or
overcome social evils such as crime or risk to
national economy.
 Quality of Life getting affected on account of
environmental pollution and degradation and
the improvement in the quality of products
such as computers, whose quality and
efficiency are improving while the prices are
falling, resulting in lesser contribution in GDP
for each additional unit produced.
Economists have been trying to overcome these
limitations to arrive at an adjusted GNP.
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CHAPTER 11
GOALS AND
FUNCTIONS OF
FINANCE
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Learning Objectives
 The goals of a business entity
 The meaning and implications of profit
maximization
 The role and function of finance and
financial managers
 Value creation for shareholders
 Economic value added (EVA)
 Corporate social responsibility and
business
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Goal of the Company – Value
Creation for Shareholders
Goal of the company
Value creation for shareholders:
By maximizing shareholders’ wealth by availing
profitable business opportunities.
Requires effective and
efficient:
Investment decisions
Financing decisions
Dividend decisions
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Market value of stock of
the company
Enhanced dividends
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The fundamental
purpose for the
existence of a
business entity is
to create value for
the shareholders Although there are
many stakeholders
in a business
entity, its key
stakeholders are
the owners of the
company
Profit Maximization & EPS
Profit maximization as well as maximization of EPS
are not reasonable measures of a company’s
success as these fail to consider the following:
 Timings of returns.
 Availability of cash flows to stakeholders (stockholders’
inflows not only depend upon dividends arising from
accounting profits but also on a large share of inflows
dependent upon the market price of the stock)
 Uncertainty and risk (profits or EPS does not take care
of future risk associated with investment as also
expected future flows)
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Maximizationof Shareholders
Wealth
Financial mangers should focus on Key factors that
influence the share price of the company.
 Maximization of profits and EPS are important, it
is necessary to maximize the shareholders’
wealth by the maximization of market price per
share.
 Measurement of the stockholders’ wealth by the
share price of the stock is dependent upon the
timing of returns, magnitude of returns, and
other associated risks.
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Economic Value Added (EVA)
Economic Value Added (EVA) is concept used to
find out whether an existing or a proposed
investment opportunity would positively
contribute to the shareholders’ wealth.
EVA = Net operating profit after taxes (NOPAT) −
(Capital × Cost of capital)
Investment opportunities having positive EVAs
increase shareholders’ wealth, while those with
negative EVAs reduce it
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Social Responsibility
 A good company not only has the maximization
of the shareholders’ wealth as its corporate goal,
but also adheres to its social responsibility of by
taking care of interest of it all stakeholder.
 Responsible governing is part of a good corporate
culture and is part and parcel of its ultimate goal
of maximizing the shareholders’ wealth.
 A good business believes that corporate
existence depends upon social responsibility.
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Role of Finance and Financial
Managers
 Till the 1950s, the main role of financial managers
continued to be fund-raising and management of the
company’s cost across various activities.
 It was in the 1950s that the concept of present value
led to a change in the role and responsibilities of
financial managers. Which included capital investment
projects as also implications of time value of money to
the financial decisions.
 1990s, transformed the role of financial managers
which included making financial decisions regarding
acquisition, financing, and effective management of
acquired assets to achieve overall goals pertaining to
stockholders and stakeholders. Vital decisions pertain
to—investment decisions, financing decisions, and
dividend/share repurchase decisions.
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Financial Decisions
 optimization of financing mix or capital structure.
 to generate profit changing the mix of money
raised from time to time, retirement of high-cost
debt by substituting it with low-cost debt, changing
the short-term and long-term mix of funds
deployed in the business, etc.
 to decide as to what proportion of the surplus
should be used for repurchasing dividends/shares
and what proportion should be redeployed within
the business.
 To build good investor relations, so that company
has their support whenever needed.
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CHAPTER 12
FINANCIAL
STATEMENTS
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Learning Objectives
Financial statements and their utility
The need and purpose of financial statements
Different types of financial statements
What constitutes a balance, profit and loss account,
cash flow and fund flow statements
 The difference between cash flow and fund flow and
their implications on business decisions
 The relevance and implication of ‘note forming part of
accounts’ and the ‘auditor’s report to the
shareholders.’




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What are Financial Statements?
 A written record of the financial status of an
individual, association, or business
organization. A financial statement includes
a balance sheet, income statement (or
operating statement or profit and loss
statement), and a statement of cash flows.
 Reports that summarize a firm’s accounting
data and indicate its financial condition. The
four basic financial statements are: the
balance sheet, income statement,
statement of retained earnings, and
statement of changes in financial position.
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Different types of Financial Statements
Financial Statements - – Reports that summarize a
firm's accounting data and indicate its financial
condition
Balance
Sheet
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Income
Statement or
Profit and
Loss Account
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Statement of
Cash Flows
Why do we need Financial
Statements?
Financial Statements are needed to fulfil the objectives
and interests of different stakeholders such as –
employees, managers, owners, shareholders, creditors,
financial institutions and banks, venture capitalists,
customers, government, and public.
Some common questions posed by various stakeholders
are:
What is the financial position of the company at
present? How does it compare with its past financial
position and competitors?
How has the business performed for the given time
period in absolute and relative terms?
Where do the funds come from into the system and
where do they go?
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Balance Sheet
 Balance Sheet provides details
about a company’s assets,
liabilities, and shareholders’
equity at a given point of time.
 Assets are those resources of a
company, that have a value and
are expected to provide additional
benefits, in the form of higher
cash inflows.
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Assets can be classified into four
categories:
 Fixed Assets: Land, building, plant, machinery, etc.
These assets are expected to produce benefits over a
period of time.
 Investments: Financial securities and bonds owned by
the firm
 Current assets, loans and advances: This includes
inventories, debtors, cash and bank balance, loans
and advances, and other current assets. These can be
converted into cash within an operating cycle of the
company or in the short run, i.e., within a period of
one year.
 Miscellaneous Expenditure and Losses: Consists of
preliminary expenses incurred during construction,
development expenditure, and the debit balance of
profit and loss account.
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Liabilities
 Liabilities are those amounts of
money that a company owes to
others
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Liabilities may be classified into the
following categories:





Share Capital: includes equity and preference capital,
i.e., the stake of the owners in the company
Reserves and surplus: includes retained earnings out
of the profit earned by the business as well as
shared premium money and capital subsidy, if any in
the system.
Secured Loans: Loans taken from banks and
institutions or other sources having charge on the
assets of the company.
Unsecured Loans: Loans taken by the company
without extending any charge on the assets of the
company.
Current liabilities and provisions: obligations like
payments to be made to creditors, interest accrued
and not due, bills payable, and provision for taxes,
dividend, etc., that are expected to materialize within
a year.
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Balance Sheet Form - Abridged
Liabilities
-------------------
Assets
------------------------
Share Capital
Fixed Assets
Reserves and surplus
Secured loans
loans and advances
Unsecured loans
Investments
Current Assets,
Current liabilities and provisions
Current liabilities
Provisions
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Current assets
Loans and advances
Miscellaneous expenses
and losses
Profit and loss account or
income statements
 It provides broad details of income
and expenses of the company in a
particular time period.
 It gives the net earnings or losses
incurred in undertaking the
business activity in a given time
period, say a month, a quarter, half
a year, or a year.
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Profit & Loss Account – Important
Concepts
Net Sales
Gross sales–sales rejected by customer–excise
Cost of Goods Sold
It computes all the cost associated with the
goods sold during the accounting period
Gross Profit
Net sales – Cost of goods sold
Operating Expenses
Expenses incurred in running the business during
the accounting period consisting of administrative
expenses, selling and distribution expenses,
depreciation, etc.
Depreciation takes into account the wear and tear
on fixed assets, such as machinery, tools, and
furniture, which are used over the long term?
Companies spread the cost of these assets over
the periods they are used.
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Operating Profit
Non-operating
gains/losses
Profit before
Interest or taxes
Gross profit–operating expenses.
It represents the profit earned/loss incurred
on account of normal business activities of the
company and does not consider non-operating
gains.
Gains and losses on account of transactions
that are not related to normal business of the
company such as interest and dividend income,
profit/loss on account of sale of fixed assets,
investments, etc.
Profit Before Interest and Taxes (PBIT)
measures profit without considering interest
and taxes and is arrived at by adding nonoperating profit or subtracting non-operating
loss from the operating profit.
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Interest
Profit before tax
Interest relates to the cost of borrowed funds
(secured or unsecured) from banks, financial
institutions, fixed deposits, from promoters,
commercial papers, etc.
PBIT – interest expenses
Provision for taxes
Profit after tax/
Net profit
Current tax on taxable income as computed under
Income Tax Act
Profit before tax–Income tax provision
Prior period adjustments From net profit certain adjustments such as adding
the profit brought forward, adding reserves written
back and subtracting extra burden on account of
earlier years taxes/expenses, etc., are done. These
are called prior period adjustments.
Amount available for
appropriation
Profit after tax plus prior period adjustments. From
this provision is made for payments of dividends and
the balance amount in the profit and loss account is
carried forward to the balance sheet. -
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Fund Flow and Cash Flow
Statements
 Cash flow statements show a
company’s inflows and outflows of cash
 cash flow statements are divided into
three main parts. Each reviews the
cash flow from specific types of
activities:
(1) operating activities,
(2) investing activities, and
(3) financing activities
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Read the Notes to Accounts
 Auditors remarks on the fiancial
statements are covered in ‘Note
Forming part of Accounts’ and in
the ‘auditor’s report to the
shareholders.’
 Implications of Auditors remarks
should be clearly analysed for the
future operations and financial
decisions
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Auditors Remarks - Certain vital
areas of concern to various
Stakeholders
 Prospects about realization of bad debts
 Status on certain international contracts
and their implications, etc.
 Payment of income taxes and statutory
dues
 Pension plans and other retirement
programs
 Stock options
 Significant accounting policies and practices
 Details on contingent liabilities
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Types of assets to be managed
for creation of value
Business Organizations Create
Value Through Assets
Tangible
Assets
Fixed
Assets
Intangible
Assets
Human
Resources
Brands
Current
Assets
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Goodwill
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Investments
Human Resource Accounting –
importance and methods
Knowledge Economy
Human Resource
Accounting Gaining
Importance
Cost Based Methods
Need for measurement
of Human
resources
value and worth
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Economic Value
Based Methods
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CHAPTER 13
FINANCIAL
RATIO ANALYSIS
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Learning Objectives
 The application of ratio analysis to analyse
financial statements
 Financial ratios and their utility
 Different types of ratios
 Using ratio analysis
 Different types of ratios and their implications
on analysis of financial position of the company
 Evaluating the relative strengths and
weaknesses of the company by using ratio
analysis so that the various stakeholders of a
company may make their financial decisions
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Financial Ratios and their
utilities
 Financial ratio analysis computation
and comparison of ratios based on the
information about the company’s
performance in its financial
statements.
 Utility of ratios varies from stakeholder
to stakeholder.
 Each stakeholder views the ratio
according to the issues that concerns
him.
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Types of Ratio Comparison
 Ratio comparisons can be made in
two ways—cross-sectional and
time series.
Types of ratio
comparison
Cross-Sectional Analysis:
It compares the financial
ratios of different
comparable
firms at a given
point of time
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Time Series Analysis:
It compares ratios
for a given company
over a period of time
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Using Ratio Analysis
Some points to be kept in mind while using ratios are:
 Over dependence on a single ratio is not desirable as far
as conclusive interpretation of the performance of a
company is concerned.
 Effect of seasonality needs to be segregated while
making comparisons.
 To get the true financial analysis, ratios should be
computed based on audited accounts data
 Definition used for arriving at the value of variables in
the ratio should be identical in all respects.
 Implication of inflating on the business performance as
also on the computed ratios should be duly taken care of
while interpreting the ratios
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Broad categories of Ratios
 Liquidity Ratio: gives short-term financial position or
solvency of the company
 Operational Ratio: deals with efficiency of resource
and asset utilization in the operations of the company
 Profitability Ratio: indicates the margins realized by
the company, i.e., various returns on sales and capital
employed
 Leverage Ratio relates to the debt component used
in the company’s capital structure.
 Solvency Ratio: indicates the company’s ability to
generate cash flow for meeting its overall financial
obligations
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Liquidity Ratios
Liquidity ratios provide information about the company’s ability to
meet its short-term commitments with its total cash reserves.
Current Ratio = Total Current Assets / Total Current Liabilities
Quick Ratio = Cash + government securities + receivables /
total current liabilities
Current ratio is the ratio between current assets; those that the
company owns and can be converted into cash within a short
period, i.e., within a year and current liabilities that the
company owes to others and are payable within a short time,
say within a year.
= (Current assets – inventory) / Current
liabilities
Quick ratio differs from current ratio, as it excludes inventories
and only considers mostly those liquid assets that can be
easily converted into cash.
Working capital = Total current assets - Total current liabilities
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Operational Ratios
Operational ratios focus on the management’s
efficiency in running the business
Inventory Turnover Ratio = Net sales / Average
inventory at cost
Or
= Cost of goods sold / inventory
Inventory turnover is normally reported in terms of
number of days worth of inventory carried by
company. Inventory period is worked out as –
= 365/ Inventory turnover
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Average Collection Period
average age of account receivables helps in evaluating a company’s
policies towards its debtors.
= Accounts receivables/ Average sales per day
= Accounts receivables/ (Annual sales / 365)
Average Payment Period
company’s strength to get more favourable terms of payment from its
creditors.
= Accounts payable/ Average purchases per day
= Accounts payable/ (Annual purchases/365)
Total Asset Turnover
Total asset turnover = Sales /total assets
Higher the ratio, the greater the efficiency of asset utilization and better it
is for the company.
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Profitability Ratio
Ratios give the margins to sales, on assets, and on owner’s
investment. Comparison of the margin ratios with the average
of the industry or the best performers indicates the performance
of the company and the scope the management has to improve
efficiency of resource generation, allocation, and value addition
to the same.
Gross margin ratio
Gross profit
= Gross profit / Net sales
= Net sales - Cost of goods sold
Net Profit Margin Ratio = Net Profit (earnings available for common
stockholders)/ Net Sales
Return on total assets= Net profit (earnings available for
common stockholders) / Total assets
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Total Asset Turnover
It indicates the efficiency with which company’s assets are being used.
Total asset turnover = Sales /total assets
Profitability Ratio
Profitability ratios give the margins to sales, on assets, and on owner’s investment.
Comparison of the margin ratios with the average of the industry or the best
performers indicates the performance of the company and the scope the
management has to improve efficiency of resource generation, allocation, and
value addition.
Gross margin ratio = Gross profit / Net sales
Gross profit
= Net sales - Cost of goods sold
Net Profit Margin Ratio = Net Profit (earnings available for common
stockholders)/ Net Sales
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Return on Total Assets/Net Worth/Equity
Return on total assets, also known as Return on Investment (ROI) measures
the overall effectiveness of the management in generating profits.
Return on total assets= Net profit (earnings available for common
stockholders) / Total assets
Net profit/ Sales (I)
Divide I by II
Net
profit/Total
assets
Return on
Assets
Sales/Total
Assets (II)
Return on equity
= Net profit (earnings available for common stockholders) /
Common stock equity
Return on net worth = Net profit (earnings available for common stockholders)/
net worth
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Leverage Ratio
Leverage ratio, calculated by total liabilities divided by the net worth of
the company indicates the extent to which the business is dependent on
debt financing in relation to owner’s equity.
Solvency Ratio
The solvency ratios indicate the company’s ability to generate cash flow
for meeting its overall financial obligations.
Debt–Equity Ratio
This ratio indicates the proportion of debt with respect to the equity,
i.e., owners’ stake in the business.
Debt–Equity ratio = Debt/Common stock equity
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Interest Cover Ratio
This ratio measures a company’s capacity to meet its interest
commitments. The higher the value of the ratio, the better it is.
Interest coverage ratio = Earnings before interest and taxes/Interest
Debt Service Coverage ratio (DSCR)
A company’s capability to service its debt obligations is found through the
computation of debt service coverage ratio (DSCR).
Earnings before interest and taxes + Lease
payments
Fixed payment = --------------------------------------------------coverage ratio
Interest + Lease payments + [(Principal
payments + Preferred stock dividends) ×
{1/ (1−T)}]
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Ratio Analysis enable the management to take corrective
steps or realize its objectives and goals.
What matters the most is interpretation of financial ratios,
as certain information given in the financial statements is
incomplete without really understanding the implications
of ‘notes to accounts’ and their effect on the financial
ratio at a given time or in the future.
Therefore, coupled with financial ratio analysis, practising
financial analysts with their experience often develop
their own measures for particular industries and even
individual companies to evaluate their financial
performance.
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CHAPTER 14
OVERVIEW OF
HUMAN
RESOURCE
MANAGEMENT
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Learning Objectives
 Human Resource Management (HRM)
 HRM in the current complex business
environment
 The objectives of HRM functions
 More about HRM
 Steps in HR planning process
 Various facets with which HRM deals
with
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Human Resource
Management
 Deals with the staffing functions of the
organization such as human resources
planning, recruitment, training, career
planning, compensation package,
performance appraisal, etc.
 Deals with all aspects of human
resources that enable effective use of
the same to improve organizational
effectiveness.
 Supporting activities such as training,
recruitment, orientation, motivation of
employees, and compensation related
issues.
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Functions of Human Resource Management
Human Resource Management (HRM)
Enables the Most Effective and Efficient
Contribution from Human Resources so as to
Achieve Organizational and Individual Goals
Recruitment and Selection
Human
Resources
Planning,
Organizing,
Directing and
Controlling
Training, Orientation and
Induction
Career Planning
Performance Appraisal
Placement
Compensation Package
Creating conducive Work
Environment and Motivation of
Employees
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Objectives of the HRM
Functions


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
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Facilitating achievement of organizational goals
Effective and efficient deployment of human skills,
abilities, and knowledge
Providing inspired, motivated, and trained employees
Communicating HRM practices and policies to
employees
Providing scope for creativity and innovation to
employees
Enhancing job satisfaction to the employees
Improving the quality of professional life in the
organization
Creating healthy work relations in the organization
Operating on ethical policies
Complying with statutory requirements
To work towards corporate social responsibility (CSR)
Managing change
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HR Planning Process



HR managers have to synchronize their activities with the
business plan of the organization to ensure that the right
type and number of people are made available to different
departments of an organization, in line with their
contribution to the organizational goals.
organization is expected to take steps for synchronizing
human resources activities such as recruitment, selection,
placement, training, recognition and reward system,
performance appraisal, and labour relations with the
organizational business plan.
HRM has to review and evaluate its actions to ensure that
the steps taken are producing the expected results as per
business plan and the corrective measures that need to
be taken, in case they are not. The evaluation of human
resource activities focus on productivity, quality,
quantity, innovation, and employee satisfaction levels.
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Different Facets of HRM




Recruitment and retention of employees
Planning for staff requirement
Defining jobs, roles, and responsibilities
Recruitment process






applications and resumes
examinations, group discussions and interviews
reference checks
personality tests
integrity tests
ensure reliability and validity of various tests
used
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Contd..
 Induction of new employees
 Outsourcing certain stages of production,
functions, and services
 Creating and providing an environment
conducive to growth
 Determining employees benefits and
compensation package
 Training and development
 Career planning for different groups of
employees
 Arranging training in-house or outside
 Leadership development
 Self-development
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Contd..
Team training
Diversity training
Training need assessment
Training evaluation
Regulatory compliance to be ensured
Personnel database management
Framing and devising personnel policies
Statutory compliances
Employees rules and regulations and other
related issues
 Ethical practices to be followed
 To ensure non-discriminatory treatment to
employees

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

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Arranging Conducive and Safe
Working Environment
Developing employees’ assistance programmes
Handling drug abuse situations in the workplace
Ensuring safe working facilities
Promoting welfare schemes for employees
Retaining High Performance Employees
Performance measurement and management
Group performance management
Enhancing personal productivity
Rewarding employees and groups for their special
achievements
 Timely promotions and career advancement
prospects.

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

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Who performs HRM activities?
HRM Activities
Planning and
Policy Making
Implementation and
Operationalization
HR Specialists
Operating Managers
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HRM – Importance & Significance
 Of all the resources, the only one that is unpredictable
is human resource.
 In the present information and knowledge age,
companies need to devise effective HRM policies and
practices to gain a distinctive advantage over their
competitors.
 HRM planning, programming, review, and evaluation
ensure that the right number and kind of people are
made available at the right time to effectively
implement the company’s business plan.
 Challenge before HRM is to manage change by
eliminating systems and practices that come in the
way of effective implementation, have ethical leaders
at different tiers of the organization, outsourcing
functions, services, and production processes.
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CHAPTER 15
JOB DESIGN
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Learning Objectives
 Job design
 Its significance to HRM professionals
 Job design related factors that affect work
performance
 Changes that the job design perspective has
undergone change over years
 Issues that job design addresses
 Different approaches to job design
 Implications of viewing an organization from
socio-technical systems model point of view
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What is ‘job design’?
It requires a stepwise diagnosis of a job to deal
with the following issues
 Task to be performed; content
 How they are to be performed; method and
mechanism
 How many actions are to be performed within the
task; steps involved,
 In what order the actions have to be done ;
sequencing,
 The knowledge skills and attitudes required to
perform the task efficiently and effectively; optimum
performance.
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Job design also deals with the
administrative issues such as:









Job rotation
Job enlargement
Job enrichment
Job engineering
Task/machine pacing
Work breaks
Working hours
Working environment
Working relationships
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The growing importance of job
design over the years



During the 70s, the challenge before HRM professionals
dealing with job designs was to find out how
organizations achieve results in the wake of loss of
productive effort resulting from industrial actions and
absenteeism, increased demand for employee
participation, and imposition of various employee
legislations.
During the 80s a major change occurred in the working
environment in the form of introduction of new
technologies and a shift in the cost of production in
favour of machines as against workforce leading to the
change in job design perspective.
During the 90s that a real challenge in terms of
optimum job design and work organization arose to
respond to the fast changing environmental conditions
leading to a greater importance and adopting a new
approach towards job design.
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Issues addressed by job design
 Work overload
 Work under load
 Repetitiveness leading to drudgery and
adverse effect on productivity
 Work and people isolation
 Multiple shifts
 Managing pending filling-up of vacancies
 excessive working hours
 lack of understanding of the whole job
process
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Common approaches to job
design
Improving
Performance
Job Design
Approaches
Work Design
(jJob
Engineering)
Job
Enlargement
Focus on
Job Rotation
Satisfaction of
Employees
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Job
Enrichment
Job Enlargement
 Job enlargement for a particular task
attempts to enhance the scope of the jobs
to include a variety of tasks that need to
be performed by the individual
Job Rotation
 Job rotation moves employees from one
task to another to add variety and reduce
boredom by allowing them to perform a
variety of tasks
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Job Enrichment
 Job enrichment, as per Orsburn and Moran
(2000), empower employees to assume greater
responsibility and accountability for planning,
organizing, performing, controlling, and
evaluating their own work
Work Design (job engineering)
 Work design allows employees to understand
and appreciate the linkage between work
methods, layout, and handling procedures as
also the interaction between people and
machines.
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Socio-technical systems
 The socio-technical systems model views organizations
as organic wholes made up of people with various
competencies and capabilities, i.e., the social system,
that uses machines, tools, and techniques, i.e., the
technical system, to produce goods and services that
are valued by customers.
 This necessitates developing of social and technical
systems in such a way that they become interdependent
in a unified whole to fulfil the demands made on them
by customers, suppliers, and other stakeholders in the
external environment.
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CHAPTER 16
RECRUITMENT
AND SELECTION
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Learning Objectives
 Recruitment and selection as an HRM
function
 The significance of recruitment and
functional aspects for developing an
effective recruitment process
 The different steps required for effective
recruitment
 The importance of proper induction of
employees and professional approach to
induct new employees
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Recruitment
 Recruitment is a specialized task and effective
recruitment is becoming more and more
challenging in present environment.
 Major challenges to recruitment lies in recruiting
a right person who would have a long-term
relationship with the organization.
 Recruitment decisions should be made in the
context of an overall staffing plan, which takes
into account long-term operational needs,
known retirements, and resignations vis-à-vis
the growth plans of the company
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Approaches to Recruitment
Internal
Recruitment
External
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Promotions and
Transfers from Within
the Organization
Infusion of New
talent Blood from
Outside into the
Organization
HRM Planning – Inputs and Tasks
Retirements and
resignations
vis-à-vis the
growth plans
HRM Planning
Identify need
for fresh
induction of
human resources
Long-term
operational
needs
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Recruitment
Selection
Placement
Developing an Effective
Recruitment Process
 Identification and analysis of requirements; at
organisational and job levels
 Inviting applications, processing applications, and
taking steps for selection; internal and external
markets
 Standardization of selection process within the broad
framework of policies to reduce risk while filling
vacancies
 Deploying reliable, valid, and cost effective methods
of selection
 Taking care of legal constraints and contracts of
employment
 Recruitment system should maintain and deliver
quality service
 Recruitment process should be strategic and proactive
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Steps Required for Effective
Recruitment
 Identifying the existence of a vacancy
 Identifying a pool of appropriate
candidates
 The selection process
 Selection tests and interview
techniques
 The criteria for recruiting candidates
 The job offer letter
 Induction of selected employees
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Job Description
 Job title
 Location of the job, i.e.,
department/group/division
 Grade of the post
 Whom an employee would be
responsible
 Who all would be reporting to the
person occupying a particular position
 Main purpose of the job
 Duties and responsibilities involved
 Special working conditions
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Identifying a pool of
appropriate candidates
 People already known, including
ex-employees and past applicants
 Direct advertising
 Employment agencies
 Consulting and hiring firms, along
with advertisement
 Search consultants
 Using personal network for head
hunting
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The selection
 Quality and quantity of results of the efforts
made through alternative sources to attract
more and better candidates depends mainly
upon the good marketing practices followed to
market the organization.
 Transparency in terms of providing more
information, as sought by the prospective
candidates, generate greater trust and interest
in the organization.
 Simplicity and straightforwardness of the
process lead people to think well of the
organization.
 Flexible in approach towards interview timings
and transparent as also quick in decisionmaking, attracts greater response from the
candidates.
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Selection Tests and Interview
Techniques
 Methods used should be reliable, valid,
cost effective, and acceptable.
 Commonly used methods are –
application form, bio-data, structured/
unstructured interviews; one-to-one
panel, references screening, conducting
ability tests; paper based, practical,
social, aptitude, intelligence, and
personality tests; in groups or in
assessment centres.
 An interviewer should necessarily have
due qualities, competence, and
knowledge to perform this task.
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Difference between professional and
non-professional approach to selection
Professionally
Managed
Organizations
Nonprofessional
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Communicate the
decision on-the- spot
or immediately
after the interview,
giving a rationale and
reasoning for
selection
Take a long time to
decide. Candidates
Remain in dark
for long or forever
The Job Offer Letter
 Clearly indicate terms and conditions
of the job.
 Collect acceptance of stipulated terms
and conditions, that makes an offer
letter a contract between the two
parties.
 Candidate, before accepting an offer
letter should feel free to seek any
information or clarification that may
help him/her in making a decision to
join or otherwise.
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Induction of new employees
Refers to the smooth entry of new employees into their
jobs and organizational culture
Professionally managed organizations have a detailed
checklist to scientifically and systematically induct people
into the organization
In the absence of proper induction, people may make
assumptions or ask the wrong person that may lead to
getting incomplete or wrong information resulting in their
getting dissatisfied and, in turn, quickly quitting the
organization.
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Retention of Employees – A
great challenge
Organizational culture and the
relationship with bosses emanating
from quality of supervision is a
critical factor in reducing attrition
rate
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CHAPTER 17
TRAINING AND
DEVELOPMENT
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Learning Objectives
 The relevance of training in a fast changing business
environment
 Training, training and development, and learning and
development
 The scope of training
 The steps involved in designing a good training
programme
 The significance of systems approach to training
 The sources of data for training that need assessment
 Various methods of training and their relevance to
training objectives
 The relevance of training evaluation, techniques, and
approaches used to evaluate training
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Training: A Definition
 Training is ‘A planned process to modify
attitude, knowledge, or skill behaviour through
learning experience to achieve effective
performance in an activity or range of activities.
Its purpose, in the work situation, is to develop
the abilities of the individual and to satisfy the
current and future needs of the organization.’
 Training may be distinguished from
development. Training usually refers to teaching
lower-level employees how to perform their
present jobs, while development involves
teaching managers and professional employees
broader skills needed for their present and
future jobs. ( Bateman and Snell 2002)
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Contd..
 David Kolb (1984) has focused on
experiential learning, i.e., experience
as the source of learning and
development. He emphasizes on how a
learner can transform learning into an
experience, and later, use it to perform
his assigned duties. Each learner has
his preferred method of learning which
gets developed like any other facet of
his personality
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Kolb’s Experiential Learning Model I
REFLECTOR
ACTIVIST
Experience based
action
Plan
hypotheses testing
Observe
reflection
Think
abstraction
PRAGMATIST
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THEORIST
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Training & Development vs
Training & Learning
The field of Training and Development (T
and D) deals with the design and delivery
of workplace learning by imparting
required changes in the knowledge, skills,
and attitudes to improve job performance.
Therefore, in some organizations the term
Learning and Development is used instead
of Training and Development, in order, to
emphasize the importance of continuous
learning for the individual and the
organization.
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HRM – Linkages between training,
learning, individual, and
organizational development
Human Resource Management
(HRM)
Learning and
development
Training and
development
Career and
development
Individual and organizational
development
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Need for Training
 In the advanced technology and information
boom, human resources, knowledge, and skills
are fast becoming obsolete .
 Competitive global environment .
 Greater importance of abilities to create,
analyse, and transform information and to
interact effectively with others.
 Learning has to be a life-long activity,
considering the fast changes in economic, social,
cultural, technological, legal, and political
environment
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Need and importance for continuous
training and development
Fast Changes
in
Environment
Economic
Social
Cultural
Technological
Legal
Political
Fast
Obsolecense
of
Knowledge,
Skill and
Attitude
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Continuous
Training
and
Development
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Updated
Knowledge,
Skills and
Attitude
Required for
Improved
Efficient
and Effective
Performance
of Job role
Scope of Training
 Improve the method and system of
working
 Increase the work output of the
trained employee
 Increase employee versatility
 Improve communication and cooperation among employees and with
clients
 Lower absenteeism
 Motivate employees to give their best
to the organization
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 Equip employees to deal and handle
new technology
 Help in overcoming resistance to
change
 Increase employee satisfaction and
lower grievances
 Reduce overtime
 Help superiors to delegate their
responsibilities
 Let the trainee learn new skills at a
very fast rate
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Training cannot do the following:
 Change the organizational structure or
solve its concomitant problems
 Improve the selection process or
become a substitute for it
 Solve problems, which are caused by
organizational shortcomings like
shortage of manpower, lack of
delegation, conducive work
environment, and shortage of tools and
technology.
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Steps to design a Good Training
Programme
Organizational Analysis
Assess Corporate and
Individual Goals
Convert into Specific
Behavioural,
Knowledge and
Attitudinal Criteria
Employee Analysis
Depute Employees and Impart
Training
Training Needs
Assessment
Training Evaluation
Gaps in Performance
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Systems Approach to Training
To realize the optimum benefits from
investment made on training, the systems
approach to training is imperative that
emphasizes on three major steps namely:
 Assessment emanating from Key
Performance Areas (KPAs) of jobs
 Development of Training Programmes
 Training Evaluation
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Development of effective
training programmes
Key Performance Areas (KPAs)
Training needs assessment
Design and development
of training programmes
Content development and
pedagogy for training
Nominate employees and
impart training
Training evaluation
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Sources of data for training
needs assessment
 Organizational analysis
 Organizational Goals and
Objectives through strategic
plans, business plans,
departmental/divisional Plans.
 Personnel inventories giving
detailed profiles of people
 Skills inventories
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Contd..
 Efficiency indices
 Changes in machinery,
equipment, and technology
 Changes in systems and
procedures
 Changes in policies
 Mandate from top management
and executives for training
 Exit interviews
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Job/ Analysis
Contd..
Job description
Job specification
Performance standards
Steps involved in performing the job
Diagnosing jobs in consultation with
departmental/divisional employees
 Operating problems involved in
effectively performing the job
 Person Analysis





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Contd..
 Performance appraisal data
 Interviews with job performers
and their supervisors
 Questionnaires
 Attitude surveys
 Assessment centers
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Steps in Training





Prepare
Tell
Show
Do
Review
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Training Methods
 Informational Techniques
Lecture
Talk
Discussion
Audiovisuals
Independent study
Programmed Instructions
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CHAPTER 18
MOTIVATION –
THE KEY TO
PERFORMANCE
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Learning Objectives




What is motivation
Theories of motivation
Motivating and demotivating factors
How to motivate the self and
employees
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What is Motivation?
 Motivation is a drive, an energizing
force that directs and sustains a
person’s effort to achieve a given
objective and goal .
 Motivation is need based and,
therefore, can be defined as ‘what one
does not have that one wants, one
works to achieve that which one needs
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Maslow Hierarchy of Needs
Self-fulfillment
Needs
Esteem Needs
Affection Needs
Safety Needs
Physiological Needs
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Theory X and theory Y Motivation

Douglas McGregor (1960) proposed two distinct views of
human beings: Theory X that was labeled negative, and
theory Y, that was labeled positive.

Under theory X managers assume that the employee does
not like work, and given a chance would avoid it; employees
need to be coerced and controlled, or punished to achieve
goals; they will avoid responsibilities and basically seek
formal direction.

Under theory Y managers believe that employees view work
as something natural like play, rest, or relaxation; people
are basically self-directed and self-controlled; an average
person accepts and seeks responsibility; and above all the
ability to innovate is widely distributed throughout the
population and is not necessarily among those who hold
managerial positions.
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Job Satisfaction (Frederick
Herzberg, et al, 1959)
Motivator
Job Satisfaction
Improved Productivity
and
Performance
Job Enlargement
Job Enrichment
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David McClelland (1961)
Three important Needs affect both how we are
motivated and how we attempt to motivate others.
 Need for achievement
 Need for affiliation
 Need for power
Motivator to
Need for Achievement
Need for Affiliation
Need for Power
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Fulfillment
Acts As
Self
Others
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Managerial
Success
Factors that De-motivate People
Negative Criticism
Humiliation in Public
Rewarding Non-performance
Lack of Clarity about
Objectives and Goals
Negative Attitude
Discriminatory Treatment
Frequent Transfers and
Change in Job Roles
Responsibility not Backed
by Authority
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Negatively
Contributes to
Affects
Behaviour
Individual
Group
Organizational
Performance
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Contd..
 Experiential Techniques
On-the-job training
Role-play
Case study or analysis
Games and simulations
Project
Computer assisted Instruction
Group dynamics
Sensitivity Training
Mentoring
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Training Evaluation
 Participants’ opinions and reactions
 Extent and degree of learning by the
participants
 Change in the behaviour of participants
 To what extent have the proposed
training goals and objectives been
achieved
 Return on investment and cost-benefit
analysis
 Benchmarking, that is comparing the
data with data from companies that
excel in those areas
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CHAPTER 19
TEAM
EFFECTIVENESS
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Learning Objectives
 The importance of team building in
organizational effectiveness
 Inputs that design effective teams
 Rules of team development
 The principles of team building
 Ways of building co-operation
 Ways to improve team effectiveness
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Team
A team is defined as a group of
interdependent individuals who
work together to accomplish a
common goal or purpose.
The critical prerequisites for
building an effective team are
interaction, mutual influence,
interdependence, and a welldefined common goal.
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Inputs to Design Effective
Teams
 Size of the team
 Team goals
 Composition of members – skills,
talents, and knowledge
 Roles – task oriented, relationship
oriented, self oriented
 Characteristics – personalities, skills,
abilities
 Diversity – heterogeneous,
homogeneous
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Critical factor for designing and
developing a team - Roles
A role may be defined as a set of behaviours and
attitudes that characterizes an individual in a given
situation.
 Task-oriented Roles: The team member plays the role
of an initiator, informer, clarifier, summarizer, energizer,
reality tester, consensus taker.
 Relationship-oriented: The team member takes on
the responsibilities of a harmonizer, gatekeeper,
encourager, compromiser, observer, commentator
 Self-oriented roles: The team member plays the
negative role of an avoider, help seeker, aggressor,
blocker, dominator
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What makes a Good Team ?
 Clear sense of itself as a group
 Interacts positively with outsiders
 Cultivates positive assumptions and
beliefs
 Communicates clearly
 Clear approach to the team’s work
 Members have a sense of mutual
accountability
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Rules for Team Development
 Start modestly
 Be very clear about your goals and objectives
 Remember that the unknown is usually more
threatening than the known
 Remember that development is basically selfregulated
 Be prepared to grab other opportunities that
may arise as a result of your actions
 Ensure everyone’s agreement
 If required, be prepared to accept outside help
 Consult widely and genuinely
 Encourage open and frank discussions
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Different types of teams
Types of Teams
Functional
Cross- functional
Problem- solving
Virtual
Advisory
Self-managed
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Principles of Team Building
 Each team member contributes both a function and a
team role
 A team needs an optimal balance between functional
and team roles
 Team effectiveness depends on how the team
members balance themselves within the team
 Some team members fit into certain team roles better
than others, depending on their personalities and
mental abilities
 A team can only deploy its technical resources to the
best advantages when it has a suitable range and
balance of team roles
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Nine Steps for Building Good
Team
Clearly defines the problem
Looks for commonalities
Respects all contributions
Recognizes multiple interests
Respects all individuals
Looks towards solutions
Move from WIIFM (What’s In It For
Me) to WIIFU (What’s In It For Us)
 Focus on benefits
 Allow time to evaluate and make
decisions







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Barriers to Effective Team
Functioning
 Time trade-offs in decision-making
 problems of ‘groupthink’ and pressure
to conform
 potential for increased conflict over
decision-making
 Lack of leadership
 Individual resistance to working in a
team.
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Team Building Skills
 Building interpersonal
relationship
 Interaction process analysis
 Roles
 Clarifying purpose
 Goal
 Measures
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Contd..







Communication
Participation
Decision-making
Problem-solving
Team spirit factor
Feedback rules
Team effectiveness review
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Ways to Improve Team
Effectiveness
 Provide team with a vision
 Establish clear and well-defined goals
 Define roles and their
complementarities
 Attempt to build consensus
 Decide to perform key tasks via
democratic process
 Encourage the voluntary sharing of
work experience, professional
expertise, and essential information
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Contd..
 Inculcate in team members the need to
show respect for and courtesy towards
each other
 Promote free discussion cross
fertilization at planning stage
 Use brainstorming techniques to
trigger creativity
 Provide organizational support
 Have a performance linked objective
reward system
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CHAPTER 20
COMMUNICATION
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Learning Objectives
 The importance of communication in
improving personal and organizational
effectiveness
 How communication enhances
personal effectiveness
 Understanding communication process
 Barriers to effective communication
 The basic rules for ensuring effective
communication
 Improving organizational effectiveness
through communication
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Effective Communication
 Effective communication is important, not only for
the success of an organization but also the
individuals within it. Individuals who are able to
communicate their ideas and thoughts effectively
influence others and leave their mark.
 Communication refers to a series of interrelated
activities such as reading, listening, managing,
interpreting information, serving clients, writing,
speech making , and the use of symbolic gestures
(Conger, 1991).
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Communication and Personal
Effectiveness
 Effective communication refers to the meaningful
transfer of ideas and thoughts from one party
(sender) to another (receiver) through medium of
exchange via monologue or a dialogue.
 Communication is not only an essential aspect of
organizational changes, but effective
communication is the foundation of modern
organizations.
 Communication helps in projecting a positive
image; it builds synergies that lead us to achieve
goals, it helps others to estimate their true
potential; and above all, it helps us in display our
knowledge and facilitates feelings, so that we are
prepared to absorb new and fresh ideas.
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Communication Process
Distortions and
Noise
Sender
Message
Encoding
Decoding
Medium of
Exchange
Receiver
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Contd..
 Communication is said to be complete
when it serves the intended purpose.
 It should have a balance between
emotion and intelligence, speaking and
listening, and above all should ensure
that the audience grasps its content
and purpose.
 Effective communication is creative
and caters to its audience’s needs.
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Barriers to Effective
Communication

A bad choice of words, unclear sentences, or phrases.

Defensiveness, distorted perceptions, guilt,
transference, distortions from the past.

Body language, tone, and other non-verbal forms of
communication.

Receiver distortion comes in the way due to selective
hearing, ignoring non-verbal cues.

Assumptions that others see situations as you do and
have similar knowledge level and feelings
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Contd..
 Perceptual differences
 Professional relationship between two
individuals. Information may be misunderstood
due to lack of understanding
 Use of an inappropriate medium
 Not caring for time relevance of information arrival
and need for timely response accordingly
Effective communication requires deciphering the
basic values, motives, aspirations, and assumptions
that operate across geographical areas. Thus, cultural
differences if not resolved and understood may result
in miscommunication
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Rules of Effective
Communication
 Choose right words to convey your
thoughts
 Speak from your knowledge and
experience
 Don’t make sure shot statements,
unless confident
 Always intermittently confirm the
meaning of the words from the
receiver
 Don’t begin sentences with ‘everyone
knows …’
 Avoid jargons and complex sentences
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Contd..
 Don’t try to impress others with your
vocabulary, you may miscommunicate
 Be an attentive listener
 Be calm and poised
 Make positive first impression
 Synchronize body language with verbal
communication
 Modulate your content appropriately
 Use motivating statements and
positive strokes wherever required
 Always give a concise summary
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Organizational Communication
Organizational communication refers to the way
organizations respond, adjust, and adapt themselves
to changing environments, externally and internally.
Communication channels to all stakeholders





Organizational structure
Official channels
Unofficial channels
Communication devices / technology
Communication cultures
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Information loss in downward
communication in an organization
Top level Management’s (CMD & and ED) Understanding and Clarity
(100 %)
General Manager’s Understanding & and Clarity ( 63%)
Assistant General Manager’s Understanding &
and Clarity (56%)
Regional Manager’s
Understanding & and Clarity (40%)
Information Loss BM’s Under- standing
Information Loss
& and Clarity (30%)
Employee
Clarity (20%)
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 Downward Communication - flow of
information from higher to lower levels
in the organization’s hierarchy
 Upward Communication - flow of
information from lower to higher levels
in the organization’s hierarchy.
 Horizontal Communication: The flow of
information amongst people on the same
hierarchical level
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 Formal and informal Communication:
formal communications are official and
can move upward, downward, or
horizontally for performing a specific task.
However, informal communication is
unofficial.
 Diagonal Communication: refers to
communication between managers and
workers located in different functional
departments/divisions
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Flow of information in
borderless organizations
Interpersonal
Intrapersonal
Upward
Formal
Informal
Horizontal
Diagonal
Inter-group
Inter-department
Downward
EXTERNAL – Inter-organizational, organization, & environment
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CHAPTER 21
CONFLICT
MANAGEMENT
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Learning Objectives






Conflict and its causes
Types of conflict and their sources
Identifying the root cause of conflict
Managing conflict
Managing conflict in organizations
Creativity and managing conflict
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What is Conflict?
 Conflict refers to a process in which
one party (person or group) perceives
that its interests are being opposed or
negatively affected by another party.
 Conflict implies a mismatch in the
concerns of people involved in a
particular event.
 Conflict is a state of disagreement
resulting from individuals or groups
that differ in attitudes, beliefs, values,
objectives, and goals
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Conflict – mismatch between
feelings and behaviour
CONFLICT ?
YOUR FEELINGS
YOUR BEHAVIOUR
MY FEELINGS
MY BEHAVIOUR
MISMATCH
CONFLICT
CLASH BETWEEN GOALS
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Manifestation of Conflict
Through Human Behaviour
The Interpersonal Gap
PARTY 1
FEELINGS
PUBLIC BEHAVIOR
7% VERBAL
INTENTIONS
PARTY 2
FEELINGS
INTENTIONS
93% NON VERBAL
ATTITUDES
ATTITUDES
THOUGHTS
THOUGHTS
7% VERBAL
93% NON VERBAL
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Stages of Conflict
 Latent Conflict manifests itself non-verbally mainly
through actions and reactions to the situations.
 Perceived conflict normally results from partial
availability of information that is likely to
jeopardize the interest of one of the parties
involved in the situation.
 Manifested Conflict is a phase wherein the conflict
manifests itself verbally or materially.
 Felt conflict is the stage wherein one or the other
involved parties undergo a stage of felt emotions
including fear, mistrust and anger.
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Varieties of Conflict
 Goal conflict arises because of a mismatch between
the expected and the actual outcomes of an
event/action.
 Cognitive conflict arises because of confusion within
an individual resulting from his own ideas and
thoughts on a particular issue.
 Affective conflict arises becase of inconsistency in
feelings and emotions within an individual or between
individuals.
 Procedural Conflict arises when individuals and
groups have differing opinions about the process to be
used for responding to an issue.
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Sources of Conflict
 Diverse goals or objectives
 Different values and beliefs
 Status; incongruence, salary differences,
education level
 Decision making; considerations, pressures
 Role pressure or clarification
 Differences in perception of the situation
 Group associations, status, or identity
 Race, ethnicity, or gender differences
 Personality clashes
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Contd..
 Competition for limited resources or competition to
achieve similar goals
 Inadequate or poor communication
 Resource inadequacy; disagreements about ‘who does
what’
 Leadership problems, including inconsistent
leadership, lack of knowledge for avoiding conflict
 Disagreement on the process of doing things
 Personal, self, or group vested interests
 Power and influence
 Getting into win-lose situation
 Role ambiguity and lack of role clarity
 Communication; limited, lack of, under, or distorted
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Identifying the root cause of
conflict






Needs
Perceptions
Socio-cultural Backgrounds
Power
Values
Feelings and emotions
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Managing Conflict
 Define conflict and get concerned
about it when it is at latent or felt
stage
 Identify the root causes behind
conflict by diagnosis and analysis
 Work out an implementable and
acceptable management strategy
through negotiation
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Conflict Management Strategies
ACCOMMODATIVE
OBLIGING
LOW
CONCERN FOR
OTHERS
HIGH
Conflict Management Strategies
COLLABORATING
COMPROMISE
AVOIDING
LOW
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ASSERTIVE
DOMINATING
CONCERN FOR SELF
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HIGH
Negotiation
Negotiation is a systematic process in
which two or more individuals or groups
having common and/or conflicting goals,
discuss alternate possible solutions
involving specific terms for a possible
agreement It involves three stages
namely:
Pre-negotiation
Negotiation
Post-negotiation
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Managerial Actions to Manage
Conflict
 Review job descriptions and seek employees’
inputs
 Build relationships with all subordinates
 Receive regular written reports from various
departments covering current issues, needs and
expectations from management and future plans
 Conduct trainings on how to have effective
interpersonal communication, management of
conflict, etc.
 Standardize the procedures for routine tasks
 Hold regular meetings to communicate
 Use a suggestion scheme
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Creativity to Manage Conflict
Resolving conflict, for those issues that have been
dragging for a very long time, requires imagination
and creativity. This requires –
 Lateral thinking.
 Issues should be discussed openly with
the stakeholders.
 Choose the right time to handle conflict.
 Do not react to unintentional remarks .
 Focus on the problem instead of the group(s) or
individual(s) involved.
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CHAPTER 22
DYNAMICS OF
LEADERSHIP
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Learning Objectives
Leadership
Theories of leadership
Leadership traits
The difference between leaders and
non-leaders
 The difference between leaders and
managers
 Different leadership styles




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Leadership Defined
 Leadership is all about
influencing people to act, behave,
and perform as desired by the
leader.
 Good leaders survive in adverse
conditions while bad leaders can
lose even in favourable
conditions.
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Leadership Theories
 Traits Theory: assumes that certain
characteristics, mostly those of personality,
when combined with an individual, bring
forth a successful leadership.
 Behavioural model of leadership:
focuses on what leaders do and how they
do it.
 Situational Approach: successful leader
adapts behaviour according to the
situation; adaptability is the key.
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Leadership Traits






Integrity
Loyalty
Commitment
Energy
Decisiveness
Selflessness
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Six prominent traits and
qualities of leaders
 Live by integrity, lead by example
 Develop a winning strategy
 Build a great team
 Inspire People around them
 Create a Flexible Organization
 Implement relevant systems
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Difference between Leaders
and Non-leaders
Leaders vs. Non-leaders
Leadership is about influencing people to act, behave
and perform as desired by the leader.
LEADERS
 Coach
 Open Door
 Problem Solver
 Advice Giver
 Cheer Leader
 Fair in Dealings with
Others
 Open to Disagreement
 Decisive, Humble,
 Persistent
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NON-LEADERS
 Invisible
 Gives Orders to Staff
 Expects Orders to be
Carried Out
 Thinks of personal
Rewards, Status
 Fair in Dealings to Top
 Intolerant to Open
Disagreement
 Use Committees and
Consultants for
Decision Making
 Persistent When Own
Stakes are Involved
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Vroom’s Leader Decision Styles
Degree of Freedom for Group
Influence By Leader
0
Decide
3
Consult
Individually
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Consult
Team
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7
Facilitate
10
Delegate
Leadership Styles
 Decide Style: leader makes the decision and
either announces or sells the same to the
subordinates .
 Consult individually Style: leader consults.
However decision may or may not be the
outcome of this consultation.
 Consult Team Style: leader places the problem
before the group, however, the decision may or
may not be the outcome of their suggestions.
 Facilitate Style: leader presenting the problem
to the team acts as a facilitator, get the views of
the team members and a concurrence to a
decision. Delegate Style: leader empowers
subordinates and allows the team to make
decisions within the given limits.
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CHAPTER 23
DECISION
MAKING
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Learning Objectives
 Decision making
 Its relevance to managers
 Systematic and structured
decision making
 Steps involved in decision making
 Tools and techniques for making
decision
 The ‘Six Thinking Hats’
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What is Decision Making?
Decision Making
Decision making is the cognitive process of
selecting a course of action from among
multiple alternatives
Non-programmed
Decisions
are one-shot
occurrences
and are usually
less structured
Programmed Decisions
are Repetitive and
Routined
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Decision Making Uncertainty
and Risk
 If a decision maker has required
information and is in a position to predict
the consequences of the action, then the
decision maker is said to operate under a
condition of certainty.
 In case the decision maker has inadequate
or insufficient information to know the
consequences of his actions then he
operates under uncertainty.
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Systematic and Structured
Decision Making
Systematic and structured decisionmaking requires recognition and
analysis of important components
of decisions:
 Context
 Objectives
 Options
 Criteria
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Steps in Decision Making
 Identify, diagnose, and precisely define
the problem
 Workout alternative solutions
 Evaluate each alternative solution
 Choose the best alternative
 Implement the decision
 Evaluate the decision
 Review and learn the lessons for future
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Tools and Techniques for
Decision Making
Pareto Analysis
Paired Comparison
Analysis
TOOLS AND
TECHNIQUES
FOR
DECISION
MAKING
Choose
Depending
on the
Problem
Situation
Grid Analysis
Decision Tree
Plus/Minus/
Implications
Force Field Analysis
Six Thinking Hats
Cost/Benefit Analysis
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Chapter 24
EMOTIONAL
INTELLIGENCE
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Learning Objectives
 To understand relevance of emotional
intelligence and emotional competence to
work performance
 To understand the meaning of emotional
intelligence
 To understand relationship between
emotional competence and emotional
intelligence
 To understand emotional competence
framework
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EMOTIONS
 “Anyone can become angry –
that is easy. But to be angry with
the right person, to the right
degree, at the right time, for the
right purpose, and in the right
way is not that easy!”
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Emotional Competence
 Goleman (1998) defines emotional
competence as
“A learned capability based on
emotional intelligence that
results in outstanding
performance at work”.
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Emotional Intelligence
 To be adept at an emotional
competence e.g. in customer service
or conflict management necessitates
an underlying ability in emotional
intelligence fundamentals especially,
social awareness and relationship
management.
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EMOTIONAL INTELLIGENCE
[EI]
 EI refers to the capacity for recognizing
our own feelings and those of others, for
motivating ourselves, and for managing
emotions in us and in our relationships.
 EI describes abilities distinct from, but
complementary to, academic intelligence
or the purely cognitive capacities
measured by IQ.
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“EQ” VS “EI”
 However, possession of social
awareness or skill at managing
relationships does not guarantee
skills in handling a customer adeptly
or resolving a conflict.
 Emotional intelligence merely relates
to the potential but emotional
competencies are learned abilities
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EMPIRICAL EVIDENCE
 A study of Harvard graduates in the
fields of law, medicine, teaching, and
business found that scores on
entrance exams - a surrogate for IQ had zero or negative correlation with
their eventual career success.
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DANIEL GOLEMAN
 Being intelligent and gaining
expertise in one's line of work aren't
enough to ensure success, says
author Daniel Goleman.
 In addition, he says, people in
business must be judged on "how
well we handle ourselves and
each other."
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FIVE COMPETENCIES
 "Emotional 'intelligence' determines
our potential for learning the practical
skills that are based on its five
elements [or competencies]:viz.
“self-awareness, motivation, selfregulation, empathy, and
adeptness in relationships,"
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EMOTIONAL COMPETENCE
FRAMEWORK
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CHAPTER 25
STRESS
MANAGEMENT
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Learning Objectives









After studying this chapter, you will be able to
understand:
Stress
Eustress and Distress
The human stress response
Stressors
Stress and the organization
Levels of stress
Stress and individual behaviour
Stress management
Stress management at the individual level
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Understanding stress
 Stress is tension that is an outcome of
anxiety and fear about a current event
or a future one. Thus, the chief cause
of stress is ‘anxiety’ resulting in
feeling of discomfort in mind that
further leads to body ailments.
 In management, stress is defined as
the human body’s response to the
demands made on it.
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Stress can be defined as:
 The non-specific response of the body to any
demand put upon it.
 It is the body’s automatic response to challenge
Stress is not:
 An event or a circumstance but a response to it
 Necessarily bad, damaging, or unhealthy
 Always over stimulating or exciting
 Simply anxiety yet a vital signal that something
is out of balance
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The human body responds to
stress according to:
 Our thoughts
 Biochemical and physiological
changes in the body
 Way our mind responds to
situations
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Eustress and Distress
EusStress
High Motivation Stress
Disappears on
Fulfillment of Need
SUCCESS
Stress
Non-specific
Response of
the Body to
any Demand
put upon it
Sense of Helplessness,
Feeling off Frustration
Disstress
NO SUCCESS
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Manifestation of Stress
Three Stages of Stress
Stage III High Stress Arousal
Pressure – Stage of Strain
Stage II: Continuance of Stress –
Stress Arousal Pressure
Stage I: Beginning of Stress – Mobilization of
Energy
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Stressors
Stressors refer to those events and situations that
trigger stress. Some of common stressors are:
 Non-fulfilment of needs Not being invited as part
of a group you want to belong to
 Not being cared for, recognized, respected, or
valued
 Having a feeling incompetence compared to peers
 Neglected, not cared for, or denied what is due to
you
 Monotony or boredom from assigned job role
 Not having freedom to take initiative
 Being over or closely supervised
 Inequity in rewards and work assignments
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Levels of stress symptoms
Levels of Stress Symptoms
Fourth Level – Ulcer, Stroke,
Alcoholism, Drug Addiction,
Psychosis
Third Level – More Headaches,
Stomachaches, Diarrhea, Sweating,
Insomania, Depression
Second Level – More irritability, Stuttering and&
Staemmering, Difficulty in Concentrating,
Restlessness, Lack of Appetite, Increased
Smoking or Drinking
First level – Normal initial Response –
Palpitation, increased blood pressure, dilation of
pupils, sweaty palms, reduced activity in stomach
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Type A and Type B personalities’
responses to stress
Type A Individual
Type B Individual
Chronic struggle with the
environment
Hard driving – over
achiever
Time urgency – Hyper
responsive
Hostility
Workaholics
Balanced interplay with
the environment
Rational approach to
achievement
Relaxed
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Positive interpersonal
relations
Balance between work
and other events
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Checking Type A Behaviour
 Restrain from being center of attention
 Try to take charge of your time
 Reflect and assess the cause of your
hurry sickness.
 Understand and be clear that majority
of your work and social life do not
really require ‘universal acclaim’
 Broaden yourself– theatre, reading,
music, games, etc
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Contd..
 Try not to make unnecessary
appointments and unachievable
deadlines
 Protect your time by learning to say
NO
 Do something that relaxes you
 Try to make yourself aware of your
behaviour and its impact on others
 Do not be an idealist
 Take time off to develop social
relationships
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Stress management
Individual Level Planning for Stress Management
Stress
Management
The
Through
Change in the
Way we View
Events around
Us
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Maintaining Good Physical
Health
Practice Relaxation
Develop Psychological
Support System
Manage Your Time
Physical/Psychological
Withdrawal
Accept the Fact that ‘I am
Not Always Right’
Develop a Positive
Orientation Towards Life
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Contd..
 Lack of growth opportunity
 Work overload , deadlines, or boredom at work
 Inadequate resources to effectively and
efficiently perform the assigned work
 Conflict between personal and organizational
values
 Excessive and conflicting demands at work
 Responsibilities not well defined. Ambiguity and
confusion about what is expected
 Unpredictable behaviour on the part of the boss
 Unknown and completely unfamiliar work
situations
 Being made scapegoat for group failures
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Chapter 26
Creativity
and
Entrepreneurship
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Learning Objectives
 To understand meaning of Entrepreneurship
 To learn what is meant by creativity and its
relevance to entrepreneurship
 To learn about the relationship between
creativity and innovation and creativity and
invention
 To learn about knowledge economy and
relevance of creativity in knowledge
economy
 To know about basic requirements to
become successful entrepreneur
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NEED FOR CREATIVITY
In today’s competitive environment,
companies
 Who understand how to manage
creativity?
 How to organize for creative
results? and
 Who willingly implement new
ideas, will triumph.
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BUSINESS CREATIVITY
 Business creativity, is the entire process
by which ideas are generated,
developed, and transformed into value.
It encompasses what people commonly
mean by innovation and
entrepreneurship. ---[ John Kao ]
 It includes both the art of giving birth to
new ideas and discipline of shaping and
developing those ideas to the stage of
realized value.
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Importance of Creativity in
Knowledge Economy
In these times of
 Shifting competitive dynamics,
 Technological change
 Demographic shifts
 & Capricious consumer tastes, no
business has a safe harbor unless it
reinvents itself continuously.
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Entrepreneurship and
Creativity
 Entrepreneurial management is defined as
“the pursuit of opportunity without
regard to resources currently
controlled”.
 Essentially creativity is all about —
imagination, inspiration, ingenuity and
initiative — a mindset of unrestrained
pursuit of potentialities - Howard H.
Stevenson.
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The Basic requirements
a Successful Entrepreneur
Embrace Failure
Reject money as a goal
Find a way to win
Be ready to sacrifice your
personal life
 Be passionate about your vision




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