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HILAL AHMAD
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CONTENTS
UNIT
No. TITLE
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1 STATISTICS
2 ECONOMICS
3 BUSINESS ENVIRONMENT
4 BANKING
5 BUSINESS MANAGEMANT
6 HUMAN RESOURCE MANAGEMENT
7 MARKETING
8 INTERNATIONAL BUSINESS
9 FINANCIAL MANAGEMENT
10 FINANCE
11 ACCOUNTANCY
12 INCOME TAX
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UNIT-1
STATISTICS
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STATISTICS SOME IMPORTANT POINTS:

 F distribution is coined by George W Snedewr in Honour of Sir Ronald A Fisher.
 Chi square (non- parametric test) concept given by Karl Pearson.
 Concept of normal distribution is given by De Mouire and person involved in this are
Laplace, Gauss and W J Yoden.
 Concept of Regression is given by Sir Francis Galton in 1877.
 Concept of T- distribution is given by WS Gooset.
 Data which are collected for the first time are primary data.
 Data is only quantitative.
 Secondary data are second hand data which are in the form of published & unpublished.
 Category of secondary data are also called paper source.
 Median and mode are positional average.
 Athematic mean, geometric, harmonic & weighted average mean are mathematical
average.
 ∑ known as capital SIGMA.
 Property of arithmetic mean-:
1) Sum of all observations of the given set of observations from their arithmetic mean is zero.
2) Combined mean= n1x1 + n2x2/n1+n2
3) The sum of square of the deviations of the given set of observations is minimum when taken from the
arithmetic mean.
4) Mean is affected by both change of scale and change of origin.
5) AM> GM> HM ( AM- arithmetic mean, GM- geometric mean, HM- harmonic mean)
6) Mode = 3median – 2mean
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7) One dimensional 1d diagram are those which have only length. Examples are line diagram, multiple
bar diagram, compound or cluster bar diagram, sub divided bar diagram are also called Component

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Bar Diagram, Percentage Bar Diagram, Deviational Bar Diagram.

 Two dimensional diagram are those in which both length and breadth are present 2D. Examples
are histogram, area diagrams, rectangles, square, circles and pie diagram.
 OGIVE CURVE and frequency polygon are also 2d diagrams.
 OGIVE represent cumulative frequency and histogram frequency distribution and frequency polygon
means many angled diagrams.
 3D, three dimensional diagrams are those cubes, sphere, cylinders and cuboid.
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 Numerical characteristics of population are parameters and sample are sample statistics/
estimators.
 Random sampling method is also called probability sampling method.
 Non random sampling method is also called non-probability sampling method.

 Random sampling methods are-

1) Simple random sampling method

2) Stratified random sampling method

3) Systematic sampling method

4) Cluster sampling method

5) Multistage sampling

 Non random sampling methods are-

1) Convenience sampling or chunk or incidental sampling

2) Judgment sampling

3) Purposive sampling

4) Quota sampling

5) Snow ball sampling

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 The larger the sample the more accurate will be the research.
 Increasing the sample size decreases the sample error.

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 Sample size N = 100

 Principles of sampling-
1) Law of statistical regularity

2) Principle of inertia of large number

3) Principles of persistence of small numbers

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4) Principle of validity

5) Principle of optimization
 Type 1 error by rejecting a true null hypothesis and it is also known as producer error, alpha
or level of significance.
 Type 2 error by accepting the false null hypothesis also called consumer error (1- β) beta, power
function of test or power curve, power of test.
 Standard error (SE) is standard deviation of the distribution of the sample mean. S.E = σ/√Ŷ
 In a normal distribution curve, since the curve is a bell shaped & symmetrical i.e.
mean=median=mode
 Total area under normal probability curve is 1 (.5 + .5)
 Since curve is symmetrical co efficient of kurtosis is 3 mesocratic.
 Range of distribution is ∞to ∞ but practically it is 60σ.
 Point of inflexion is x= +- µσ
 Leptokurtic <3, Platokurtic>, Mesocratic =3.
 Area µ+-1σ= 68.27%, µ+-2σ= 95.45%, µ+- 3σ= 99.73%
 Z (STANDARD NORMAL DISTRIBUTION) = X-µ/Σ
 Concept of BINOMIAL DISTRIBUTION is given by JAMES BERNOULLI.
 Concept of POISSON DISTRIBUTION is given by SIMEON POISSON. In this the value of mean
and variance is (0,0)
 Standard deviation is also known as root Mean Square Deviation.
 Standard deviation is affected by change of scale & independent of change of origin.
 Positively skewed= mean>median>mode.
 Negatively skewed= mode>median>mean.
 Balance pattern= mean=median=mode.
 Skewness means lack of symmetry or asymmetrical distribution.
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 Concept of co efficient of Skewness given by Karl Pearson.

 Confidence interval 95%= 1.96, 99%= 2.56/2.58

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 Z test is also called standard normal variable test, standard normal deviate test,
approximation test, large scale test.
 Conditions to be applied in z test is-

1) N> 30

2) N≤30 (Standard deviation of population mean is given)

 One tailed test is also known as direction test or right tailed test. F test and chi square test is
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one tailed test.

 Two tailed test is called left tailed test as direction is not mention.
 Conditions to apply t test-
1) N≤30 standard deviation of sample mean is given.

2) To check the difference in mean.

 T test is also called t distribution & student t test, exact test, small test.
 Conditions to accept & reject hypothesis-:
1) Table value> calculated value= accept

2) Table value< calculated value= reject

 Chi square is a non- parametric test

 Chi square lies from 0 to ∞
 Conditions to apply chi square test:-
1) Population mean & sample mean is not given in the question.

2) Degree of freedom (df-1) as df starts from t test.

 Chi square test is also known as:-
1) Goodness of fit accumulation.

2) Contingency table.

3) Quantitative variables.
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4) Co efficient of association.
 Degree of freedom = (row-1) (column -1)
 F test in which value of numerator is always greater than denominator.

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 Conditions to apply f test:-

1) Population mean, sample mean & standard deviation is not given in the question.
2) It will talk about two mean.
3) Its value lies between 0 to ∞
 Concept of correlation is given by Karl Pearson.
 Correlation denotes from R and its values lies between -1 to 1
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 Spearman Correlation Given By Edward Spearman.

 Edward Spearman Denotes Correlation From P (Rho)
 P= 1- 6∑d2/n (n2-1)
 If tied rank the formula will be p= 1-6∑d2/n (n2-1) + m (m2-1)/12
 Karl Pearson correlation formula is cov (xy)/σx.σy.
 Correlation is independent of both change of scale & origin.
 Regression is affected by change of scale & independent of change of origin.
 R2 is coefficient of determination.
 Coefficient values lies between 0 to 1.
 R2= bxy* byx
 Regression shows a causual effect i.e. cause & effect relationships.
 Parametric test: - Z Test, T Test, F Test.
 Non Parametric Test Or Distribution Free Test: - Sign Test, Median Test, Mann Whitney U
Test, run test, K.S Test, Chi Square Test.
 PAIRED T TEST is used in management training, special coaching’s, product
 Vity of Crop Before & After.
 Paired T Test Is Also Known As Bivariate Normal Distribution.
 Nominal scale=mode used, ordinal scale= mode & median, interval & ratio scale = mean,
median, mode.
 Kendall coefficient – In 1955 rank correlation co-efficient evaluate the degree of similarity
between two sets of ranks given to a same set of objects, non-parametric test.
 Friedman test= 0 to 1.

TOPIC WISE POINTS

 Statistics is a body of methods of obtaining and analyzing data in order to base decisions on
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them.
 Statistics refers either to quantitative information or to a method of dealing with
quantitative information.

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 All statistics are numerical statements of facts but all numerical statements of facts are not
statistics.
 Statistics is both arts & science.
MEASURES OF CENTRAL TENDENCY
 Average is defined as an attempt to find one single figure to describe whole figure.
 Average is frequently referred to as a Measure Of Central Tendency.
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 Measures of central value are also popularly known as measures of central tendency because its
value lies between two extreme values.
 Types of average-:
1) Arithmetic mean – simple mean & weighted mean

2) Median

3) Mode

4) Geometric mean

5) Harmonic mean
 Arithmetic mean- Its value is obtained by adding together all the items and by dividing
this total by the number of items.
 AM= X1+X2+X3…..XN/N or ∑x/n
 For correcting incorrect value of ARITHMETIC MEAN is – from incorrect ∑x deduct wrong items and
add correct items and then divide the correct with nth observation.
 The use of median and mode would be better in open end distributions because of the difficulty of
ascertaining lower limit & upper limit in open end distributions it is suggested that in such
distributions arithmetic mean should not be used.
 Mathematical properties of Arithmetic mean-
1) The sum of the deviations of the items from the arithmetic means is always zero.

2) Mean is characterized as a point of balance i.e. the sum of the positive deviations from it is equal to
the sum of the negative deviations from it.
3) The sum of the squared deviations of the items from arithmetic mean is minimum that is less than the
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sum of the squared deviations of the items from any other value.
4) Combined mean= x1+x2+x3….xn/n1+n2

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5) Mean is affected by both change of scale and change of origin. As if a constant value k is multiply in a
series then effect on mean is (mk) and if the constant value is subtracted in a series (m-k)
 Median & Mode is positional average
 Arithmetic mean, harmonic mean, geometric mean and weighted average mean is a
mathematical average.
 Uses of mean in index number and in standardized birth & death rate.
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MEDIAN
 The middle value in the distributions.
 It is just the 50th percentile value below which 50% of the values in the sample fall.
 Median Is Called The Positional Average
 If N is odd then median is an actual value with the remainders of the series in two equal parts on
either side of it. If N is even the median is a derived figure, half the sum of the two middle values
 Odd= middle value
 Even = n+1/2th
 Mathematical property of median is-
1) The sum of the deviations of the items from median, ignoring signs is the least.
 Uses of median- in open end distributions, it is more satisfactory measure of the central
tendency than the mean.
 Most appropriate average dealing with qualitative data.
 Quartiles= 4 equal parts, deciles= 10 equal parts, percentiles= 100 equal parts.
 Median can be determined by graphic method also by OGIVES.

MODE
 The MODE or the modal value is that value in a series of observation which occurs with the
greatest frequency.
 The mode is often said to be the value which occurs most often that is with the highest
frequency.
 Mode is the value which has the greatest frequency density in its immediate neighborhood. For this
reason mode is also called the most typical or fashionable value of distributions.
 For determining mode count the number of times the various values repeat themselves & the value
occurring the maximum number of times is the modal value.
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 When there are two or more values having the same maximum frequency one cannot say which is
the modal value & hence mode is said to be ill defined. Such a series is also known as bimodal or
multimodal.

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 Where mode is ill defined its value may be ascertained by the formula based upon relationship
between mean, median, mode, Mode= 3median-2mean. This measure is called the empirical
mode.
 We can locate mode graphically using histogram and frequency polygon.
 Mode is used in open end distributions/ qualitative phenomenon.
 Mode is the most meaning measure of central tendency in case of highly skewed or non- normal
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distribution, as it provides the best indication of the maximum concern.

 Relationship among mean, median and mode is, Mode= 3median- 2mean.
GEOMETRIC MEAN

 It is defined as the nth root of the product of n items or values.

 Properties of geometric mean are –
1) The product of the values of series will remain unchanged when the value of geometric mean is
substituted for each individual value.
2) The sum of the deviations of the logarithms of the original observations above or below the
logarithm of the geometric mean is equal. This also means that the value of the geometric mean is such
as to balance the ratio deviations of the observations from it. Because of this property this measures of
central value is especially adopted to average ratios, rates of change& logarithmically distributed
series.
 Uses- to find average percentage increase in sales, production, population, in construction of
index number.
 Geometric mean is not computed when there are both negative & positive values in a
series or one more of the values is zero.

HARMONIC MEAN
 The Harmonic Mean is based on the reciprocals of the numbers averaged, it is defined as the
reciprocal of the arithmetic mean of the reciprocal of the individual observation.
 HM = N/(1/x1+1/x2+1/x3….1/xn)
 Uses – It is useful for computing the average rate of increase in profits of a concern or average
speed at which a journey has been performed or the average price at which an article has been sold. The
rate usually indicates the relation between two different types of measuring units that can be
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expressed reciprocally.
 Weighted harmonic mean= ∑w/∑(w/x)

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 Relationship among the averages- AM> GM>HM

HYPOTHESIS TESTING
 A statistical hypothesis is some assumption or statement which may or may not be true, about a
population or equivalently about the probability distribution characterizing the given population which
we want to test on the basis of the evidence from a random sample.
 NULL HYPOTHESIS is the hypothesis which is tested for possible rejection under the
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assumption that it is true. It is denoted by Ho.

 ALTERNATIVE HYPOTHESIS is any hypothesis which is complementary to the null hypothesis. It is
very important to explicitly state the alternative hypothesis is respect of any Null Hypothesis Ho,
because the acceptance or rejection of Ho is meaningful only if it is being tested against a rival
hypothesis.
 We make type 1 error by rejecting a true null hypothesis. It is also called producer error,
level of significance, Alpha.
 We make type 2 error by accepting a false null hypothesis. It is also called consumer error, beta,
and power function of test (1-β)

Z- Test

 It is any statistical test for which the distribution of the test for which the distribution of the test
statistics under the Null Hypothesis Can be approximated by a normal distribution. Because of the
central limit theorem, many tests statistics are approximately normally distributed for large sample.
 Z- test is also known as Standard Normal Variable Test Or Standard Normal Deviate Test.
 Conditions for applying z test-

1) N>30
2) N≤30, standard deviation of population mean is given.
 Z= mean - µ/σ/√n. or µ/σ/ S.E (Standard Error).
 Conditions for acceptance and rejection of Null Hypothesis:
1) If table value > calculated value, we accept the hypothesis.

2) If table value< calculated value, we reject the hypothesis

 1.96 – 5% confidence interval.
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 Location tests are the most familiar Z- Test.

 Z- Test is also known as Standard Normal Test, Approximate Test, And Large Sample Test.

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T- TEST
 T-TEST is any statistical hypothesis test in which the test statistics follows a student T Distribution
if the Null Hypothesis is supported. It can be used to determine if two sets of data are significantly
different from each other & is most commonly applied when the statistics would follow a normal
distribution if the value of a sampling term in the test statistics were known.
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 Welch’s T –Test.
 T- test is given by W S Gooset 1908.
 Impaired independent sample t test.
 Conditions for applying t-test are -:
1) N≤30 Standard deviation of mean is given.

2) To check the difference in mean.

 T- Test is also known as Student T Distribution, Exact Test Or Small Sample Test.
 Degree of freedom start from this test df= n-1

CHI SQUARE TEST

 A Chi Square Test also referred as to x2 test is any statistical hypothesis test in which the sampling
distribution of the test Statistic is a Chi Squared distribution when the Null Hypothesis is true.
 It is introduced by Karl Pearson.
 Value of x2 can never be negative.
 Pearson’s Chi Square Test Also Known As The Chi Square Goodness Of Fit Test & Chi Squared
Test For Independence.
 Yates Correction For Continuity – To Reduce The Error In Approximation Frank Yates Suggested
A Correction For Continuity That Adjusts The Formula For Pearson Chi Squared Test By Subtracting 0.5
From The Difference Between Each Observed Value & Its Expected Value In A 2*2 Contingency
Table.
 Mean of Chi Square= v
 Variance of Chi Square = v2
 It is interested in dealing with more than two populations
 It enable us to test whether more than two population proportions are equal.
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 The chi square test distribution is known by its only parameter numbers of degrees of
freedom.
 Df = ( row-1) ( column -1)

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 It should be noted that the chi square test only tells us whether two principles of classification are
significantly related or not but not measure of the degree or form of relationship.
 The arrangement of data according to attributes in cells are called a contingency table.
 Chi square is also known as:-
1) Goodness of fit accumulation
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2) Contingency table

3) Quantitative variables

4) Co efficient of association.
 Conditions for applying chi square test:-
1) Population & sample mean is not given in the question.

2) It talks about degree of freedom.

 Chi square= n.s2/σ2
 Chi square lies between 0 to ∞
 It is a non- parametric test.
 One Tailed Test- In this test direction is mentioned (< >), it is also known as right tailed test ( f test
and chi square test is one tailed test).
 Two Tailed Test- In this direction is not mentioned (= ≠)it is also known as left tailed test.

F TEST

 F- Test Is Mainly Arise When The Models Have Been Shifted To The Data Using To Least
Square.
 Coined By George W Snedewr In Honour Of Sir Ronald A Fisher.
 (ANOVA) Analysis Of Variance.
 F test never be in negative because of square and numerator is always greater than
denominator.
 F test= s1 square/s2 square
 Df (n1-1) (n2-1)
 Conditions For Applying F- Test Is:-
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1) Population mean, sample mean & standard deviation not given in the question.

2) Will talk about two sample mean

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3) Lies 0 to ∞

4) It is one tailed test

Paired-T test
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 Paired-T- Test may be applied to verify the necessity of a costly management training for its sales
personnel by recording the sales of the selected trainees before and after the management training or
the validity of special coaching for a group of educationally backward students by verifying their
progress before & after the coaching programme or the increase in productivity due to the
application of a particular kind of fertilizer by recording the productivity of a crop before & after
applying this particular fertilizers & so on.
 Paired -T Test is also known as Bivariate Normal Distribution.
PARAMETRIC TEST

 T- Test, F-Test, Z- Test Are Called Parametric Test.

 Conditions of parametric tests are as follows: -
1) The population from which the samples have been withdrawn should be normally distributed this
is known by the term assumptions of normality
2) The variables involved must have been measured in interval or ratio’s scale.

3) The observations must be independent the inclusions or exclusions of any case in the sample
should not unduly affect the results of the study.
4) These populations must have the same variance or in special cases must have a known ratio of
variance. This is called Homoscedasticity i.e. equal variance.
However in many cases where these above conditions are not met, it is always advisable to make use of
non -parametric test for comparing samples and to make inferences or to test the significance or trust
worthiness of the computer statistics. In other words the use of non- parametric test is
recommended in the following situations-
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1) Where n is quit small

2) When assumptions like normality of the distributions of scores in the population are doubtful. It is

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the characteristics of non- parametric test which enables them to be called distribution free test.
3) When the measurement of data is available either in the form of ordinal or nominal scale.

 Non – Parametric Test are typically simpler & easier to be carried out, there use should be
restricted to those situations in which the required conditions for using parametric test ate met.
 Non- parametric test are less powerful (less able to detect a true difference when it exists) than
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parametric test in the same situations.

 Non parametric tests are as follows:-
1) Sign test. 2) Median test. 3) Mann Whitney u test. 4) Run test. 5) Ks test. 6) Chi square
test.

MEASURES OF DISPERSION

 Dispersion is the measure of the variation of the items.

 A measure of dispersion or variation is one that measures the extent to which these are differences
between individual observations & some central or average value. In measuring variation we shall be
interested in the amount of the variation or its degree but not in the direction.
 It is important to measures the reliability.
 Methods of studying dispersion are as follows-:
1) The range

2) The interquartile range or the quartile deviation

3) The mean deviation or the average deviation 9

4) The standard deviation or the root square mean deviation

5) The Lorenz curve

 Range- It is the difference between the largest item and the smallest item. Range= highest-
lowest
 Co efficient of range = highest- lowest/highest+ lowest
 Inter Quartile Range Or Quartile Deviation- It represents the difference between the third quartile
and the first quartile. Inter quartile range = Q3-Q1. Quartile deviation = Q3-Q1/2. Co efficient of
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quartile deviation= Q3-Q1/Q3+Q1.

 Percentile range is also used as measure of dispersion. Percentile range= p90-p10. Semi
percentile range = p90-p10/2

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 Range and quartile deviation they do not show the Scatterness around as average.
 Mean deviation- The mean deviation is also known as the Average Deviation. It is the average
difference between the items in a distribution from the median or mean of that series. It is advantage in
taking the deviations from median because the sum of the deviations of items from median is minimum
when signs are ignored. The arithmetic mean is more frequently used in calculating the value of average
deviations & this is the reason it is also called mean deviation. Mean deviation (MD) = ∑;(d)/n, d= (x-a), a=
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assumed, co efficient of mean deviation = MD/Median if taken from median and if taken from mean the
MD/Mean. The greatest drawback of this method is that algebraic signs are ignored while taking the
deviations of the items as it makes the method non-algebraic. It is especially effective in reports
presented to the general public or to groups not familiar with statistical methods.
 Standard deviations- This concept was introduced by Karl Pearson in 1893. It is also known as Root
Mean Square Deviations for the reason that it is the square root of the means of the squared deviations
from the arithmetic mean. It is denoted by small Greek letter σ sigma.
 The standard deviations measures the absolute dispersion or variability of a distribution, the
greater the amount of dispersion or variability the greater the standard deviation, for the greater will be
the magnitude of the deviations of the values from their mean. A small SD means a high degree of
uniformity of the observations as well as homogeneity of a series, a large standard deviation means
just the opposite.
 Difference between Mean deviation and standard deviation-
1) Algebraic signs are ignored while calculating mean deviation whereas in the calculation of standard
deviation signs are taken in to a/c.
2) Mean deviation can be computed either from median or mean but standard deviation is always
computed from arithmetic mean because the sum of the squares of the deviations of items from
arithmetic mean is least.
 Population standard deviation is denoted by σ whereas sample standard deviation is
denoted by s.
 Standard deviation is affected by change of scale & independent of change of origin.
 Mathematical properties of standard deviations are as follows-
1) It is possible to compute combined mean of two or more than two groups, similarly we can also
compute combined standard deviation of two or more group.
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2) The standard deviation of the first n natural numbers obtained from σ= √1/12 (n2-1)

3) The sum of the squares of deviations of items in the series from their arithmetic mean is minimum.

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The sum of the squares of the deviations of items of any series from a value other than the arithmetic
mean would always be greater this is the reason why standard deviation is always computed from
the arithmetic mean.
4) For symmetrical distributions

Mean +- 1σ= 68.27%, mean +- 2σ= 95.45%, mean +- 3σ= 99.73%

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5) In normal distribution there is a fixed relationships between the three most commonly used
measures of dispersion. The Q.D is smallest, the MD next & SD is greatest. QD= 2/3σ, MD= 4/5σ so,
QD> MD> SD
 Co efficient of variation- Relative measures of SD is known as Co-Efficient Of Variation. This
measures developed by Karl Pearson. Co efficient of variation is greater is said to be more variable or less
consistent, less uniform, less stable or less homogenous. On the other hand the series for which co
efficient of variation is less is said to be less variable or more consistent more uniform, more stable
or more homogenous. It is denoted by C.V = σ/x*100.
 Variance= square of standard deviation σ2. Smaller the value of σ2 the lesser the variability or
greater the uniformity in the population.

 Standard deviation is the best measure of variation.

 Correcting of incorrect value of SD= SD – wrong value+ right value then divide by number of
observation.
 LORENZ CURVE- It is devised by MAX O LORENZ. It is a graphic method of studying dispersion. This
curve was used by him for the first time to measure the distribution of wealth & income. The most
common use of this curve is the study of the degree of inequality in the distribution of income &
wealth between countries or between different periods of time. It is a cumulative percentage curve
in which the percentage of items is combined with the percentage of other things as a wealth, profits &
turnover.
 As it is a graphical method, in this there is a line OP which is known as line of equal distribution.
The line OP will make an angle of 45%. For any given distribution the curve will never cross the line of
equal distribution. It will always lie below OP unless the distribution is uniform in which case it will
coincide with OP. The greater the variability the greater is the distance of the curve from OP. Thus a
measure of variability of the distribution is provided by the distance of the curve of the cumulated
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percentages of the given distribution from the line of equal distribution.

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SKEWNESS, MOMENTS & KURTOSIS

 When a series is not symmetrical it is said to be Asymmetrical Or Skewed.

 Skewness refers to the lack of symmetry.
 In a symmetrical distribution the value of mean, median & mode coincide. The spread of the
frequencies is the same on the both sides of the center point of the curve. Mean= median= mode.
 A distribution which is not symmetrical is called a skewed distribution & such a distribution could
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either be positively skewed or negatively skewed.

 Symmetrical distribution= mean= median= mode
 Positive skewed distribution= mean> median> mode. (Skewed right)
 Negatively skewed distribution- mode> median>mean (skewed left)
 In a moderately symmetrical distributions the interval between the mean & the median is
approximately 1/3rd of the interval between the mean & the mode. It is this relationship which
provides means of measuring the degree of skewness.
 Dispersion is concerned with the amount of variation rather than with its direction. Skewness tell
us about the direction of the variation or the departure from symmetry.
 Measures of Skewness are dependent upon the amount of dispersion.
 Skewness is present if-
1) Mean, median, Mode do not coincide.

2) When data are plotted on a graph they do not give the normal bell shaped.

3) The sum of positive deviations from median is not equal to the sum of the negative
deviations.

4) Quartiles are not equidistant from the median.

5) Frequencies are not equally distributed at points of equal deviations from mode. Skewness is
absent if above conclusions are present.
 Measures of Skewness- It tell us the direction & extent of asymmetry in a series. Absolute measure
of skewness and relative measure of skewness.
 Skewness can be measured in absolute terms by taking the difference between mean & mode in
same unit. Absolute Skewness= x-mode, x>mode= positive skewed , x< mode= negative skewed
 If the absolute differences were expressed in relation to some measure of the spread of values in
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their respective distributions the measures would be relative.

 Four important measures of relative skewness are as follows-

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1) Karl Pearson co efficient of skewness

2) The bowley’s coefficient of skewness

3) The Kelley’s coefficient of skewness.

4) Measure of skewness based on moments

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1) Karl Pearson co efficient of skewness- also known as PEARSONIAN COEFFICIENT. Developed by

Karl Pearson. It is based upon the difference between mean & mode & is divided by standard
deviation to give a relative measure. Skp= mean- mode/sd
 Mean= median= mode- coefficient of Skewness is 0
 Mean> median> mode- positive coefficient of skewness
 Mean<median<mode – negative coefficient of skewness
 Moderately skewed distribution- mode= 3median-2mean
2) Bowley’s coefficient of skewness- Prepared By Bowley’s, it is based on quartiles, quartiles
measures of skewness. Skb= q3+q1- 2median/q3-q1. Its value lies between -1 to 1. It is useful in open end
distributions and extreme values. Bowley’s measure values is limited between -1 and 1 while Pearson
measures as no such limit.
3) Kelley’s coefficient of skewness-It is based on the formula for measuring skewness that is based
upon the 10th deciles & 90th percentiles. Percentiles SKk= p10+p90- 2median/p90-p10. Deciles
skk= d1+d9-2median/d9-d1
MOMENTS

 Moment is refers to the measure of force with respect to its tendency to provide rotation. The
strength of tendency depends on the amount of force and the distance from the origin of the point
at which the force is exerted.
 Moment= ∑fx/n , f= force, x= distance.
KURTOSIS

 It is a Greek word means bulginess.

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 It refers to the degree of flatness or Peakedness in the region about the mode of a frequency
curve.
 If a curve is more peaked than a normal curve- leptokurtic

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 If a curve is more flat topped than the normal curve- Platykurtic

 The normal curve- Mesokurtic
 The condition of Peakedness or flat Toppedness itself is known as kurtosis or excess.
THEORETICAL DISTRIBUTIONS:-
BINOMIAL DISTRIBUTIONS
 It is also known as Bernoulli distribution.
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 Developed by Jacob Bernoulli.

 Binomial distribution is probably distribution expressing the probability of one
set of dichotomous alternatives i.e. success or failure
 The mean of Binomial distribution is np & standard deviation √npq (p= success, q= failure)
 Mean of binomial distribution = np
 Standard deviation of binomial distribution= √npq
 Variance of binomial distribution= npq
POSSION DISTRIBUTION

 It is a discrete probability distribution & is very widely used in statistical work.

 Originated by Simeon Denis Poisson.
 It deals with counting the number of occurrence of a particular event in a specific time interval
or region or space.
 Mean of poisson distribution = m
 Standard deviation of poisson distribution=√m or µ2= m
 Mean and variance is (o,o)
NORMAL DISTRIBUTION

 The normal distribution also called the Normal Probability Distribution happens to be most useful
theoretical distribution for continuous variables.
 It was first discovered by De Moivre. It was also known to be Laplace, it has been credited to
Karl Gauss.
 The normal distribution is also known as Gaussian distribution (Gaussian law of error).
 Topography of Normal distribution is given by W J YODEN .
 The type of random variable which can take an infinite number of values is called a continuous
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random variable & the probability distribution of such a variable is called continuous probability
distribution.
 Normal distribution is one of the versatile continuous probability distribution.

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 Properties of Normal distribution are as follows-

1) The normal curve is symmetrical about the mean (Skewness=0). If the curve were folded along its
vertical axis the two halves would coincide. The number of cases below the mean in a normal
distribution is equal to the number of cases above the mean, which makes the mean and median
coincide.
2) The height of normal curve is at its maximum at the mean. Hence the mean & mode of the normal
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distribution coincide. Thus mean, median & mode all are equal.
3) There is one maximum point of the normal curve which occurs at the mean. The height of the
curve declines as we go in either direction from the mean. The curve approaches nearer and nearer to
the base but it never touches it i.e. the curve is asymptotic to the base on either side. Hence its
range is unlimited or infinite in both directions.
4) There is only one maximum point, the normal curve is unimodal i.e. it has only one mode.

5) The points of inflexion i.e. the point where the change in curvature occurs are x+-σ

6) The first and third quartiles are equidistant from the median.

7) The mean deviation is 4/5th or more precisely 0.7979 of the standard deviation.

8) Area under normal curve

 Mean +-1σ= 68.27%, Mean +-2σ= 95.45%, Mean +-3σ= 99.73%, 1.96σ= 95%, 2.5758σ= 99%
 Coefficient of skewness is 0
 Coefficient of kurtosis is 3 mesocratic.
 Since the mean= median= mode= µ the ordinate at x=µ divides the whole into two equal parts.
Further since total area under normal probability curve is 1. The area to the right ordinate as well as
to the left of ordinate at x=µ is 1 (0.5+0.5)
 No question of the curve lies below the x-axis since the probability can never be negative.
 The range of probability distribution is from -∞ to ∞ but practically 6σ.
 All odds moments of normal distribution is zero µ2n+1=0.
 Point of inflexion of the normal curve are at x=+-µσ, they are equidistant from mean at a
distant of standard deviation.
 Standard normal distribution or standard normal variance z= x-µ/σ, x= sample mean, µ= population
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mean, σ= standard deviation.

 Properties of probability for a normal distribution are

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1) Px= 1/√2πσ.e (-z)2/2

2) Mean and variance is (0, 1) a normal curve with 0 mean & unit standard deviation is known as
the standard normal curve.
CORRELATION AND REGRESSION CORRELATION

 If two quantities vary in such a way that movement in one are accompanied by movements in the
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other, these quantities are correlated.

 The correlation analysis refers to the techniques used in measuring the closeness of the
relationship between the variables.
 Correlation analysis deals with the association between two or more variables.
 Correlation analysis attempts to determine the degree of relationship between variables.
 Correlation is an analysis of the covariation between two or more variables.
 Coefficient of correlation is one of the most widely used and also one of the most widely abused in
the sense that the correlation measures nothing but the strength of linear relationship and that it does
not necessarily imply a cause & effect relationships.
 Karl Pearson has given the concept of correlation.
 Correlation denotes from “r”
 Correlation lies between -1 to 1
 Correlation analysis help in determining the degree of relationships between two or more variables
it does not tell us anything about cause and effect relationships.
 Correlation does not necessarily imply causation or functional relationship though the existence of
causation always implies correlation. It establishes only covariation.
 Correlation observed between variables that cannot conceivably be casually related is called
spurious or nonsense correlation.
 Types of correlation are as follows-
1) Positive or negative correlation

2) Simple, partial, multiple correlation

3) Linear and non-linear correlation

 Positive or negative correlation- If both the variables are varying in the same direction i.e. if as one
variable is increasing the other on an average is also increasing it is known as positive correlation. On the
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other hand if the variables are varying in opposite directions i.e. as one variable is increasing the other
is decreasing or vice versa, correlation is said to be negative.

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 Simple, partial or multiple correlation- when one, two variables are studied it is a problem of
simple correlation, when three or more variables are studied it is a problem of either multiple or partial
correlation. In multiple correlation three or more variables are studied simultaneously.
 Linear or non-linear correlation- if the amount of change in one variable tends to be a constant
ratio to the amount of change in the other variable then correlation is said to be linear. Correlation
would be called non-linear or curvilinear if the amount of change in one variable does not bear a
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constant ratio to the amount of change in the other variable.

METHODS OF STUDYING CORRELATION

 Followings are the methods of correlation

1) Scatter diagram method
2) Graphic method
3) Karl Pearson coefficient of correlation.
4) Rank correlation
5) Concurrent deviation method
6) Method of least squares

1) Scatter diagram method- The simplest device for ascertaining whether two variables are related is to
prepare dot chart called scatter diagram. The greater the scatter of the plotted points on the chart the
lesser is the relationship between the two variables. The more closely the points come to a straight
line, the higher the degree of relationships.
 If all the points lie on the straight line falling from the lower left hand corner to the upper right
hand, correlation is said to be perfect correlation r= +1
 If all the points are lying on a straight line rising from upper left hand to the corner right hand
correlation is said to be perfect negative r= -1
 If the plotted points lie on a straight line parallel to the x-axis or in haphazard manner it shows
absence of any relationship between the variables and it is called no correlation r=0
 Perfect positive r= +1, perfect negative= -1, positive r>0, negative r<0, no correlation= 0.
 As much as relationships come closer to zero it is called weak correlation or low degree
correlation.
 As much as relationships come closer to 1 it is called strong correlation or high degree
correlation.
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2) Graphic method- when values are plotted on a graph paper we obtain two curves, one for x variable
and another for y variables. If both the curves drawn on the graph are moving in the same direction
(either up or down) correlation is said to be positive. On the other hands if the curves are moving in

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the opposite direction, correlation is said to be negative.

3) Karl Pearson coefficient of correlation or product moment coefficient of correlation Karl Pearson
method popularly known as Pearsonian co-efficient of correlation.
 The Pearsonian co-efficient of correlation is denoted by the symbol r, r=∑xy/nσx.σy.
 This method is to be applied only where the deviations of items are taken from actual means
and not from assumed means.
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 Value of co-efficient of correlation lies between -1 to 1.

 The co-efficient of correlation describes not only the magnitude of correlation but also its
decision. r= ∑xy /√∑x2.∑y2.
 The coefficient of correlation is said to be a measure of covariance between two series. The
covariance of two series x & y, covariance = ∑xy/n
 In order to find out the value of correlation coefficient, first we calculate covariance & then in order
to convert it to a relative measure we divide the covariance by the standard deviation of the two series.
The ratio so obtained is called Karl Pearson’s coefficient.
 Correlation is independent of change of scale & origin.
 R= ∑xy /√σx.σy.
 R= cov (xy)/σx.σy.
 Probable error= P.Er= 0.6745, 1-r2Ϯ/√n
 Standard error= S.E R = 1- r2/√n
Co-efficient of Determination

 Square of co-efficient of correlation is called co-efficient of determination.

 Co-efficient of determination= r2
 R2= explained variance/ total variance.
 Co-efficient of determination (r2) means the percentage of variation in the (y) dependent variable
which is explained by the independent variable (x).
 Y = ∞+βx where y is dependent variable, ∞ is intercept, β is slope, x is independent variable.
 Co-efficient of determination lies between 0 and 1.
 R2= bxy.byx
 The ratio of unexplained variance to total variance is frequently called the co-efficient of non-
determination (k2)
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 Square root of non-determination is called co-efficient of alienation or k.

 Properties of coefficient of correlation are as follows-
1) The coefficient of correlation lies between -1 to 1.

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2) The coefficient of correlation is independent of change of scale & origin.

3) The coefficient of correlation is the geometric mean of two regression coefficient r=

√bxy.byx

4) The degree of relationship between two variable is symmetric rxy= ryx.

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RANK CORRELATION COEFFICINT

 EDWARD SPEARMAN has developed this.

 Sometimes we are required to examine the extent of association between two ordinary scaled
variables such as two rank orderings.
 A measure to ascertain the degree of association between the ranks of the two variables x and
y is called rank correlation.
 Spearman denotes it by p(rho)
 P= 1-ϲ∑d2/n3-n
 Features are as follows-
1) The sum of the differences or ranks between two variables shall be zero, ∑d=0

2) It is distribution free or non-parametric

3) If ranks are equal then p=1- 6∑d2/n(n2-1)+m(m2-1)/12.

CONCURRENT DEVIATION METHOD

 It is the simplest method

 To find out the direction of change of x variables & y variables.
 Rc=+-√(2c-n)/n
 C= concurrent deviations
 When we observe numerical data in relation to time the set of observations so obtained is
known as time series.
 The limits of the population correlation are given by r+- P.E
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REGRESSION ANALYSIS

 It reveals the average relationship between two variables and this make possible estimation

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or prediction.
 The meaning of the term regression is the act of returning or going back.
 The term Regression was first used by Sir Francis Galt on in 1877.
 The line describing the tendency to regress or going back was called by Galton a Regression
line.
 It is the measure of the average relationship between two or more variables in terms of
the original units of the data.
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 To study the functional relationships between the variables and thereby provide a mechanism for
predictions and forecasting.
 It is a statistical device with the help of which we are in a position to estimate (or predict) the
unknown values of one variable from known values of another variables.
 Y = a+bx, Y dependent variable we are trying to predict, x= independent variable which is used
to predict.
 Geometric mean of two regression co-efficient gives co-efficient of correlation. R= √bxy.byx
 Regression is affected by change of scale & independent of change in origin.
 R2= √bxy.byx
 R2= bxy.byx
 = cov(xy/σx2. Cov(xy)/σy
 = cov2(xy)/σx2.σy2

Difference between Correlation & Regression

CORRELATION REGRESSION
1) Correlation simply tells the relationship 1) Regression mean stepping back or returning to
between the two or more variables which the average value i.e. it’s simply tells average
vary together relationship between two variables.
2) Correlation coefficient tells the degree 2) Regression analysis aims at establishing the
of relationships between two variable, r= xy= functional relationships between two variables
ryx bxy.byx (not symmetric).
3) Correlation need not imply cause & 3) Regression analysis clearly indicate the
effect relationship between two cause & effect relationships.
variables.
4) Correlation coefficient is a relative 4) Regression coefficient bxy & byx are
measure of the linear relationship between absolute measures representing the change in
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x and y & is independent of units of the value of variable y for a unit change in the
measurement. It value lies between -1 to 1. value of variable x,
its value lies between 0 & 1.

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5) There may be nonsense correlation 5) There is no such things as non-sense

between two variables e/g intelligent & regression.
weight called spurious correlations.
6) Correlation analysis is confined to the 6) Regression analysis includes linear as well
study of linear relationships between as non-linear relationships between
variables variables.
7) Correlation coefficient is independent 7) Regression is independent of change of
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of both change of scale & change of change of origin but not of scale.
origin

 Both regression co-efficient wills have the same sign i.e. either they will be positive or negative. It is
never possible that one of the regression co-efficient is negative & other positive.
 Since the value of the co-efficient of correlation cannot exceed one, one of the regression co-
efficient must be less than one or, in other words, both the regression co-efficient cannot be
greater than 1.
 The coefficient of correlation will have the same sign as that of regression co-efficient i.e. if
regression co-efficient have a negative sign, r will also be negative and if regression coefficient have
a positive sign, r would be positive.
 Since bxy=rσx/σy we can find out any of the four values given the other three.
 Regression coefficient are independent of change of origin but not of scale.
 When the data represent a sample from a larger population, the least square line is a best estimate
of the population regression line. Regression equation of x on y, Xc= a+By
 The standard error of estimates measures the dispersion about an average line called the regression
line syn= √∑(y-y)2/n or syn= σy√1-r2.

PRINCIPLES OF SAMPLING
1) Law of statistical regularity- According to this law a group of objects chosen at random from larger
group tens to possess the characteristics of that large group.
2) Principle of inertia of large number- It states that as the sample size increases the result tends to be
more reliable & accurate keeping other things constant.
3) Principle of persistence of small numbers- According to this principle if some of the items in a
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population possess markedly distinct characteristic from the remaining items then this tendency would
be revealed in the sample value also rather this tendency of persistence will be there even if the
population size is increased or even in the case of large sample.

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4) Principle of validity- A sample design is termed as valid if it enables us to obtain valid tests &
estimates about the population parameters
5) Principle of optimization- this principle stresses the need of obtaining optimum results in terms of
efficiency cost of the sample design with the source available at our disposal.

 Type 1 error- when we reject the true null hypothesis it is also known as producer error, level
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of significance and alpha.

 Type 2 error- when we accept the wrong null hypothesis it is also known as consumer error, ;β-1),
power function test or power curve beta.
 Standard error- standard deviation of the distribution of the sample mean is known as
standard error. S.E=σ/√N.
TYPES OF SAMPLING PROBABILITY SAMPLING/ RANDOM SAMPLING
1) Random sampling- In random sampling we select the sample randomly i.e. there is equal chance of
selecting every item but it is a case of without replacement. If we select ball from 10 balls then 1/10, if
we select 1 ball keeping 1 ball outside then 1/9.
2) Simple random sampling- In simple random sampling we select the sample randomly and there is
equal chance of selecting every item and replacement occurs so size remain the same. Eg if we
select 1 ball from ten balls after replacement then 1/10 (tibbet tables/lottery)
3) Stratified sampling- In this type of sampling we convert heterogeneous data in homogenous form
and then select the sample randomly (strata means layers e.g. if we separate boys & girls and then
select)
4) Systematic sampling–In this type of sampling we follow a system for collecting a sample on our own
and rest of the sample are automatically selected at equal gal from each other.

5) Cluster sampling- It is also known as area sampling, In this type of sampling we make groups out of
heterogeneous data and then select the groups randomly.
6) Multi stage sampling- In this type of sampling we use same or different method of sampling to
study the cases.

NON RANDOM SAMPLING/ NON PROBABILITY SAMPLING

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1) Purposive sampling- In this type of sampling the conclusion is predetermined and then we
select the sample accordingly.

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2) Convenience sampling- It is also known as Chunk Sampling, Incidental Sampling and in this type of
sampling we get the sample in a convenient way from collections and guidance.
3) Judgmental sampling- In this type of sampling we collect our sample on the basis of experience,
expert knowledge and accordingly to judge.
4) Quota sampling- In this type of sampling quota is fixed for every enumerators and they have to
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collect the sample by using any biased method.

5) Snowball sampling- In this type of sampling we study the rare cases such as aids patients and then
accordingly to their reference we collect the sample.
COLLECTION OF DATA

 The information collected from various sources which can be expressed in quantitative
form for a specific purpose is called data.
 Types of Data –
1) Primary data – It is the original data which are collected for the first time for a specific
purpose e.g. population census data collected by government in a country.
2) Secondary data – It Is those which have already been collected by some other agency and
which have already been processed. It is in the published and unpublished. Sources is
important for collecting data. Documentary source of data is also known as paper source.

MISCELLENEOUS POINTS
1. Maximum value of correlation is-1
2. Spearman's method is the method of calculating coefficient of correlation by--
Charles Spearman.
3. Graph of variables having linear relation will be--Stright Line
4. The files required to maintain general ledger records include--Detail posting file.
5. In which files, the records are organised in sequence and an index table is used to
speed up access to the records without requiring a search of the entire file? Indexed
Sequential file.
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6. Correlation between income and demand is-Postive.

7. F distribution is coined by George W Snedewr in Honour of Sir Ronald a fisher.

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8. Chi square (non parametric test) concept given by karl pearson.

9. Concept of normal distribution is given by De Mouire and person involved in this
are Laplace, Gauss And W J Yoden.
10. Concept of regression is given by Sir Francis Galton In 1877.
11. Concept of T- distribution is given by Ws Gooset.
12. Data which are collected for the first time are primary data.
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13. Data is only quantitative.

14. Secondary data are second hand data which are in the form of published &
unpublished.
15. Category of secondary data are also called paper source.
16. Median and mode are positional average.
17. Arthemetic mean , geometric, harmonic & weighted average mean are
mathematical average.
18. ∑ know as capital sigma.
19. Property of arthemetic mean-:
> Sum of all observations of the given set of observations from their arthemetic
mean is zero.
> Combined mean= n1x1 + n2x2/n1+n2
> The sum of square of the deviations of the given set of observations is minimum
when taken from the arthemetic mean.
> Mean is affected by both change of scale and change of origin.
> AM> GM> HM ( AM- arthemetic mean, GM- geometric mean, HM- harmonic
mean)
> Mode = 3median – 2mean
> One dimensional 1d diagram are those which have only length. Examples are line
diagram, multiple bar diagram, compound or cluster bar diagram, sub divided bar
diagram are also called component bar diagram, percentage bar diagram, deviationa
bar diagram.
20. Two dimensional diagram are those in which both length and breadth are
present 2D. Examples are histogram, area diagrams, rectangles, square, circles and
pie diagram.
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21. Ogive curve and frequency polygon are also 2d diagrams.

22. Ogive represent cumulative frequency and histogram frequency distribution

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and frequency polygon means many angled diagrams.

23. 3D , three dimensional diagrams are those cubes, sphere, cylinders and
cuboid.
24. Numerical characteristics of population are parameters and sample are sample
statistics/ estimators.
25. Random sampling method is also called probability sampling method.
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26. Non random sampling method is also called non probability sampling method.
27. Random sampling methods are-
>Simple random sampling method
>Stratified random sampling method
>Systematic sampling method
>Cluster sampling method
>Multistage sampling
28. Non random sampling methods are-
>Convenience sampling or chunk or incidental sampling
> Judgement sampling
> Purposive sampling
>Quota sampling
>Snow ball sampling
29. The larger the sample the more accurate will be the research.
30. Increasing the sample size decreases the sample error.
31. Sample size N = 100
32. Principles of sampling-
>Law of statistical regularity
>Principle of inertia of large number
>Principles of persistence of small numbers
>Principle of validity
>Principle of optimization
33. Type 1 error by rejecting a true null hypothesis and it is also known as
producer error, alpha or level of significance.
34. Type 2 error by accepting the false null hypothesis also called consumer error (
1- β) beta, power function of test or power curve, power of test.
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35. Standard error ( SE) is standard deviation of the distribution of the sample
mean. S.E = σ/√n

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36. In a normal distribution curve, since the curve is a bell shaped & symmetrical
i.e mean=median=mode
37. Total area under normal probability curve is 1 ( .5 + .5)
38. Since curve is symmetrical co efficient of kurtosis is 3 mesocurtic.
39. Range of distribution is ∞to ∞ but practically it is 6σ.
40. Point of inflexion is x= +- µσ
41. Leptokurtic <3, platokurtic>, mesocurtic =3.
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42. Area µ+-1σ= 68.27%, µ+- 2 σ= 95.45%, µ+- 3σ= 99.73%

43. Z( standard normal distribution) = x-µ/σ
44. Concept of binomial distribution is given by James Bernoulli
45. Concept of poisson distribution is given by Simeon Poisson . In this the value
of mean and variance is (0,0)
46. Standard deviation is also known as root Mean Square Deviation.
47. Standard deviation is affected by change of scale & independent of change of
origin.
48. Positively skewed= mean>median>mode.
49. Negatively skewed= mode>median>mean.
50. Balance pattern= mean=median=mode.
51. Skewness means lack of symmetry or asymmetrical distribution.
52. Concept of co efficient of skewness given by Karl Pearson.
53. Confidence interval 95%= 1.96, 99%= 2.56/2.58
54. Z test is also called standard normal variable test, standard normal deviate
test, approximation test, large scale test.
55. Conditions to be applied in z test is-
N> 30.
N≤30 ( standard deviation of population mean is given).
56. One tailed test is also known as direction test or right tailed test. F test and chi
square test is one tailed test.
57. Two tailed test is called left tailed test as direction is not mention.
58. Conditions to apply t test-
N≤30 standard deviation of sample mean is given.
To check the difference in mean.
59. T test is also called t distribution & student t test, exact test, small test.
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60. Conditions to accept & reject hypothesis-:

1) Table value> calculated value= accept
2) Table value< calculated value= reject

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61. Chi square is a non- parametric test

62. Chi square lies from 0 to ∞
63. Conditions to apply chi square test:-
>Population mean & sample mean is not given in the question.
>Degree of freedom ( df-1) as df starts from t test.
64. Chi square test is also known as :-
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>Goodness of fit accumulation

> Contingency table
>Quantitative variables
>Co efficient of association
65. Degree of freedom = ( row-1) ( column -1)
66. F test in which value of numerator is always greater than denominator.
67. Conditions to apply f test:-
>Population mean, sample mean & standard deviation is not given in the question.
>It will talk about two mean.
>Its value lies between 0 to ∞
68. Concept of correlation is given by karl pearson.
69. Correlation denotes from R and its values lies between -1 to 1.
70. Spearman correlation given by Edward spearman.
71. Edward spearman denotes correlation from p ( rho)
72. P= 1- 6∑d2/n (n2-1)
73. If tied rank the formula will be p= 1-6∑d2/n(n2-1) + m(m2-1)/12
74. Karl pearson correlation formula is cov( xy)/σx.σy
75. Correlation is independent of both change of scale & origin.
76. Regression is affected by change of scale & independent of change of origin.
77. R2 is coefficient of determination.
78. Coefficient values lies between 0 to 1.
79. R2= bxy* byx
80. Regression shows a causual effect i.e cause & effect relationships.
81. Parametric test:- z test, t test, f test.
82. Non parametric test or distribution free test:- sign test, median test, mann
whitney u test, run test, k.s test, chi square test.
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83. Paired t test is used in management training, special coachings, producti

84. vity of crop before & after.
85. Paired t test is also known as bivariate normal distribution.

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86. Nominal scale=mode used, ordinal scale= mode & median, interval & ratio
scale = mean, median, mode.
87. Minimum value of correlation is-1
88. Files held on a storage device are identified by a special block of data held as
the first block on the file.
This block is called the---file label.
89. MIS stands for---Mgt information sys.
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90. Graph of variables having non-linear relation will be--curved

91. Horizontal curve represents the value of coefficient of correlation to be--zero.
92. In case there is no relation between two variables, value of coefficient of
correlation will be--0
93. Karl Pearson's coefficient of correlation method of measuring correlation is--
Mathematical
94. Correlation between price and demand is-Negative.
95. The collection of integrated and related master files is known as---Database.
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UNIT- 2
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ECONOMICS
Some important points-
> Cournot Duopoly Model- 1838
> Bernard Duopoly Model- 1880
> Edge Worth Duopoly Model- 1897
> Stackeel Duopoly Model- 1933
> Chamberlin Duopoly Model- 1934
> Sweezy Duopoly Model- 1939
> Neumann Morgenstern Game Theory Model- 1944
> Baumaul Duopoly Model- 1959
> Father Of Economics- Adam Smith
> Originator Of Law Of Demand- Alfred Marshall
> Revealed Preference Theory- Paul Samuelsson
> Cardinal Utility/ Neo Classical Approach- Alfred Marshall
> Ordinal utility/ indifference curve- F Y edge worth, vilfredo Pareto, EE Slustky, J R Hicks and RGD
Allen.
> Indifference curve analysis is also known as iso utility curve or equal utility curve and for producer it
is iso quant curve.
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> Budget Line is also called Price Line, Consumption Possibility Line And Iso Cost Line.
> Consumer equilibrium is said when there is a tangency between the budget line and the indifference
curve.

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> Price discrimination- A C Pigou.

> Free entry & exit/ factor mobility concept- Adam Smith.
> Exception of Law Of Demand- Beham
> Perfect competition is known as Myth.
> Imperfect competition- John Robinson.
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> Kinked Demand Curve- Paul Sweezy In 1939.

> Consumer & Producer Surplus- Alfred Marshall
> Material requisites well-being- A C pigou
> Positive impact of monopoly- Joseph Schumpeter.
> Wealth of nations- Adam Smith.
> Composite demand- the demand of commodities or goods that provides multiple uses.
> Demand- willingness to purchase+ ability to pay
> Substitute goods like tea and coffee
> Complementary goods is also known as jointly demand goods. Such as car petrol.
> Characteristics of demand curve-
1) Downward sloping.
2) From left to right.
3) Negative slope.

> There is an inverse relationship between the price of goods and the quantity demand of the goods in
law of demand.
> A family of Indifference Curve is called an indifference map.
> Slope of Indifference Curve is known as Marginal Rate of Substitution.
> Transactions cost is given by Ronald Coase.
> In Normal goods price effect= income effect + substitution effect
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> In inferior goods substitution effect= price effect + income effect

> In giffen goods income effect= price effect + substitution effect

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> Law of demand is violated in giffen goods.

> Opportunity Cost is also known as next best Foregone Cost, Sacrifice Cost, Transfer Earnings and
Alternative Cost.
> Explicit Cost is also known as out of Pocket Cost, Accounting cost and Direct Cost.
> Implicit Cost is also known as Imputed Cost.
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> Cost of production= explicit cost+ implicit cost.

> Fixed Cost is also known as Supplementary Cost, Overhead Costs, Unavoidable Cost or Indirect Cost.
> Variable Cost is also known as Direct Cost and Prime Cost.
> Fixed cost cannot be zero even when production is stopped.
> Accounting Costs are Explicit Cost.
> Economic costs are both explicit cost and implicit cost.
> AFC (average fixed cost) is also known as rectangular hyperbola
> Effective demand backed by purchasing power and willingness to spend.

CHAPTER WISE EXPLANATION

Demand and Elasticity of Demand

> Demand is the willingness to purchase plus ability to pay for it at a particular price and at a particular
point of time.
> Demand backed by adequate purchasing power.
> Demand is multivariate relationships i.e. it is determined by many factors simultaneously.
> There is an inverse relationship between the price of the goods and the quantity
demand of that goods.
> Partial Equilibrium Analysis- given by Alfred Marshall.
> Ceteris paribus it means other things being equal or constant.
> Factors affecting demand-
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1) Price of the product.

2) Income.
3) Relative price of product.

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4) Consumer expectations.
5) Advertisement effect.
6) Fashions, climate, customs etc.

> Demand schedule- it is tabular statement of price and quantity relationships.

> Demand curve- A graphical presentation of demand schedule
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> Characteristics of demand curve are as follows-

1) Downward sloping.
2) from left to right.
3) Negative slope.
4) Inverse relationship between price and quantity demand.

> Exceptions to the law of demand- in this there is a direct relationships between the price of the
goods and the quantity demanded.
1) Giffen goods- It is given by Robert Giffen. It is such a inferior goods in which consumer reduces its
consumption when price decreases and increases the consumption when its price increases.
It has a very high negative income effect. Demand curve is upward sloping
2) Goods of status- the goods of status are name after Thorstein Veblen as Veblen goods. It is a
prestigious goods like diamonds.
3) Expectation if price rise in future
4) Demonstration effect
5) Emergency
6) Uncertain product quality of goods
7) Snob appeal or ostentations.

> Goods whose demand rises when income rises are called Normal Goods.
> Goods whose demand falls when income rises are called Inferior Goods.
> Substitute goods – It is those goods which are an alternative to one another in consumption example
tea and coffee. When price of tea rises, demand of coffee rises. There is a positive relations
between price & quantity demand. Increase in the price of the substitute goods, the demand
curve shifts rightward.
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> Complementary goods- those goods which are jointly used or consumed together to satisfy
want. It is also known as jointly demanded goods. Example is car and petrol. If the price of one goods
rises then the quantity demand of other goods reduces. There is a negative relationship between price

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& quantity demand. If there is decrease in the price of complementary goods the demand curve shifts
leftward.
> Change in quantity demand- when a movement along a demand curve is caused by change in
price of the goods other things remain constant it is known as change in quantity demand. Movement
along a same demand curve brings about expansion and contraction of demand curve. Expansion occurs
when the price of goods is less and the quantity demand is more. Contraction occurs due to increase in
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price the quantity demand of the goods decreases.

> Change in demand- A shift in the demand curve is caused by the change in other factors than price of
the goods. Others factors such as income, price of other goods like substitute & complementary or
consumer taste. There is increase and decrease in the demand curve. When income rises consumers
buy more product in the same price so demand curve move rightward or outward. When the income
decline consumers buy less products at the same price so demand curve moves left ward or
inward.
> The absolute value of the coefficient of elasticity of demand ranges from zero to infinity.
> Law of demand- originator of law of demand is Alfred Marshall. It states that other things being
constant, the higher the price of a commodity the smaller is the quantity demand for a commodity and
lower the price of a commodity, higher will be the quantity demand of a commodity.
> Elasticity of demand- the degree of responsiveness of change in quantity demanded due to a change
in price or change in its determinants is called elasticity of demand.
> There are three types of elasticity of demand-
1) Price elasticity.

2) Income elasticity.

3) Cross elasticity.

>Price elasticity of demand - it is the proportionate change in the quantity demand due to the
change in the price.

> Ep= % change in quantity demand/% change in price or delta q/delta p * p/q.
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> In price elasticity minus sign is ignored

> Methods of measuring elasticity are as follows-

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1) Percentage & proportionate method- In this method ep= % change in quantity demand/ %
change in price.
2) Point elasticity or geometric method- point elasticity of demand is the elasticity at a finite point on a
demand curve. Point elasticity= lower segment/upper segment.
3) Total outlay or total expenditure method- total expenditure= price * quantity.
4) Arc method- It is the average method. Ep= delta q/delta p * p0+p1/q0+q1. It did not ignore
minus sign.
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> Types of elastic demand-

1) Perfect elastic demand- In this consumer have infinite demand at a particular price and none at all
at even slightly higher than the given price. Ep= infinite. Shape of perfect elastic demand is
horizontal and it is parallel to x-axis.
2) Relative elastic demand- In this quantity demand is changes by a larger percentage than a price.
Ep>1, it is also known as flatter. Mainly in prestigious and expensive goods.
3) Unitary elastic demand- In this quantity demand is changes by exactly the same % as the price
change. It is also known as rectangular hyperbola with 45 degree of angle.
4) Relative inelastic demand- In this quantity demand is changes by a smaller percentage than a price.
Ep<1. It is also known as Steeper.
5) Perfect inelastic demand- demands remain unchanged whatever be the price. Ep=0, it is vertical in
shape and parallel to y-axis.

> On the basis of factors whether the things are elastic or inelastic-
1) Luxury- elastic ep>1
2) Necessities- inelastic
3) Close substitute- elastic
4) No substitute- inelastic
5) High income- inelastic
6) High cost- elastic
7) More uses- elastic
8) Few uses- inelastic
9) More time period required to find substitute- inelastic
10) Durable- elastic
11) Perishable- inelastic
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12) Habits- inelastic

> Income elastic demand- % change in quantity demand/ % change in income. Income elasticity is

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graphically shown by Engel curve named after Ernst Engle. It establish a systematic relationship
between household income and expenditure on commodities. It shows optimum quantity of a
commodity purchased at different levels of income, in order to equilibrium.
>Cross elastic demand- % change in quantity demand of x / % change in price of y. The value of cross
elasticity ranges from minus infinity to plus infinity.
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INDIFFERENCE CURVE
> Persons associated with indifference curve is F Y Edge worth, Vilfredo Pareto, EE Slustky, J
R Hicks and Rgd Allen.
> An indifference curve shows a set of different combination of quantities of two goods that yield same
satisfaction to the consumer.
> Slope of indifference curve is known as Marginal rate of substitution. (MRSxy)
> MRSxy is defined as the amount of good y consumer is willing to give up in exchange for good x while
leaving total utility unchanged.
> A family of indifference curve is known as indifference map.
> Features of indifference curve are as follows-
1) Downward sloping to the right.
2) Convex to the origin due to decreasing slope.
3) Never intersect each other.
4) Higher indifference curve shows higher level of satisfaction.
5) Indifference curve should generally not touch x-axis or y-axis.
6) It may not be parallel to each other.

> Slope of indifference curve MRSxy= MUx/MULJ= Δy/Δ x

> Because of marginal rate of substitution indifference curve is convex to the origin.
> If increasing slope indifference curve is concave
> If constant slope indifference curve is straight line.
> Indifference curve is also known as iso equality curve or equal utility curve or producer iso quant
curve.
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> Slope of Iso Quant Curve is known as Marginal rate of technical substitution.

BUDGET LINE

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> Budget equation M= Px.Qx + Py . Qy

> Px.Qx is price of two goods
> Py. Qy is a quantity.
> M is the income and Px.qx + Py. Qy is an expenditure.
> The budget equation states that the total expenditure of the consumer in goods x and y cannot
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exceed his total income m.

> Budget line is also called price line, iso cost line, consumption possibility line.
> If the price changes then budget line changes its slope and positions.
> If the income changes then budget line shifts.
> Slope of budget line= Px/Py

CONSUMER EQUILIBRIUM
> A Consumer attain his equilibrium when he maximizes his total utility given his income and market
price of goods and services that he consumes.
> Equilibrium is said when there is a tangency between the budget line and the indifference
curve.
> Consumer equilibrium is a point where a consumers get maximum satisfaction.
> Slope of consumer equilibrium= slope of indifference curve= slope of budget line
> MRS xy= Mux/Muy= Δy/Δx= px/py.

CONSUMER AND PRODUCER SURPLUS

> Alfred marshal has given the concept.
> Consumer surplus is the difference between what a consumer is willing to pay for a good and what the
consumer actually pays. It is an area below an individual demand curve and above the price line.
> Producer surplus- It is the difference between the amount actually received by the producers and the
amount required to induce them to sell. It is area above the supply curve and below the market
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price.

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UTILITY
> Wants satisfying capacity of a commodity is known as utility.
> Total utility is the sum of the utility derived by a consumer from the various units of goods or services
he consumes at a point or over a period of time.
> Marginal utility is defined as the utility derived from the marginal or one additionalun it consumed. It
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refers to the change in the total utility obtained from the consumption of an additional unit of a
commodity. MU= Δ Tux/Δ qx or MU= TUn- TUn-1.
> Point of saturation is a point when total utility is maximum and constant and marginal utility
is zero.
> Equal marginal utility= Mux/Px= MUy/Py= Mum
> Utility is measure in terms of utils
PRODUCTION FUNCTION
> It expresses the relationship between the quantity of output and the quantity of various
inputs used for the production.
> When a firm decide to do the job itself in house is called command principle.
> Production is defined as the transformation of input into output.
> Production function is the process of getting maximum output from given quantity of inputs
in a particular time period.
> Level of output land, labour, capital, entrepreneurs Short run production function= variable
cost + fixed cost
> Long run production function= variable cost
> Total production= It is the total quantity of goods produced by a firm during a specified period of time.
Total production starts at origin, increase at an increasing rate then increase at a decreasing rate,
reaches maximum and start falling.
> Marginal production- It is defined as the change in total production resulting from the employment of
an additional unit of variable factor. MP= ΔTP/ΔQ or TPŶ- TPn-1
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> Average production- It measures the productivity of the firms labour in terms of how much output
each labour produces on an average. AP= TP/q
> Relationship between AP MP TP

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1) When AP=0 , MP=AP

2) When AP> 0, MP>AP
3) When AP<0, MP<AP, when TP is maximum and constant MP is zero. When TP starts declining MP
becomes negative as long as TP is positive AP will positive.
> Law of variable proportion or diminishing return- It is a short run concept. It takes place when
production is increased by using more of the variable factor while keeping all other factors fixed. Law
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of diminishing return Marshal has applied this first to agriculture then Joan Robinson, Stigler
called it law of variable proportions which is applied in all sectors of an economy. It states that when
total output or production of commodity is increased by adding units of a variable input, while the
quantities of other inputs are held constant, the increase in TP becomes after some time
smaller and smaller.
> Three stages of law of variable proportions are
1) Stage of increasing return- TP initially increasing at an increasing rate and then starts increasing at a
decreasing rate from the point of inflexion.
2) Stages of decreasing return- A point from where AP is maximum to the point where the MP= 0, TP
increases but at a decreasing rate, when TP is maximum and constant MP =o
3) Stages of negative return- It is a point where TP starts declining and MP becomes negative.

The law of returns to scale- It states that when all factors of production are increased in the same
proportion output will increase but the increase may be at increasing rate or constant rate or
decreasing.
>Three stages of return to scale are as follows
1) Increasing return to scale- It occurs when increase in output is more than proportional to
an increase in inputs.
2) Constant return to scale- It occurs when increase in output is proportional to an increase
in inputs.
3) Decreasing return to scale- It occurs when increase in output is less than proportional to
an increase in inputs.

>The reason of IncreasIng return to scale is economies of scale.

> Economies of scale are the advantages or benefits which a firm gets when it expands its output.
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> Internal economies- internal firm

> External economies- external firm
>Diseconomies of scale- It means that the size of the firm grows so large that it becomes very difficult to

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manage it. It increase the cost & give rise to decreasing return to scale.
> Point of inflexion- It is a point from where slope of total production changes up to point. Total
production has been increasing at increasing rate & from this point onwards totals production
increase but only at decreasing point.
>Cobb Doughlas function Q= AK∞.Lβ, alpha+ beta > 1 (increasing return) alpha + beta<1 (decreasing return)
alpha+ beta= 1 (constant return)
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> Properties of Cobb Doughlas-

1) Power function
2) Constant return to scale
3) Elasticity of substitution as unity or constant.
MARKET
> Market is a place where buyers and sellers meet each other to effect a business transactions.
> Market is divided in to perfect competition market and imperfect competition market.
> Imperfect market includes monopoly, monopolistic competition, oligopoly, duopoly,
monopsony, bilateral monopoly.

PERFECT COMPETITION
> It is also known as myth.
> Large numbers of sellers and buyers.
> Homogenous products.
> Free entry and exit.
> Factor mobility.
> No transportation and selling cost.
> Price takers.
> Perfect knowledge.
> Automatic price mechanism according to demand & supply.
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> Highly elastic demand.

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> No discrimination.
> Demand curve of the firm is perfectly elastic in it.
> Firms are very small and are large in numbers.
> Absence of government regulations.
> Uniform & low price.
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> When the ownership is one it is called firm and group of small firms known as industry.
> Conditions for equilibrium is MC=MR. MC should cut MR curve from below at the
equilibrium point.
> In short run perfect competition market has supernormal profit, normal profit and loss.
> Supernormal profit when Average revenue> average cost.
> Normal profit when Average revenue= average cost
> Loss is when Average revenue< average cost
> In long run perfect competition has only normal profit left with them because when there is an
abnormal profit a firm starts entering into a market then the firms come in a normal profit and when
the firm faces a loss then the firm starts existing the market as a result again it come to a normal
profit.

MONOPOLY
> A situation where there is only one producer is called monopoly.
> Only one seller and large number of buyers.
> Different products as there are no substitutes.
> Perfectly inelastic demand as there is no options.
> Barrier to entry & exit.
> Price makers & price setters.
> Price discrimination the main features.
> Unique product.
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> Size of market is large.

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> Faces tradeoff between output & prices (at one time take decisions on output or price)
> Regulated by government.
> Demand is inelastic very low ie steeper.
> Price discrimination or discriminating monopoly.
> Conditions for price discriminations are as follows:-
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1) There should be no contact between two markets

2) Elasticity of demand in different markets should be different
3) Market must be imperfect
4) No possibility of resale

> Price discrimination is profitable when the price elasticity of demand is different in different
market.
> Price discrimination in which a monopolist by selling a product at two different prices pocket a part of
consumer surplus Pigou calls it third degree price discrimination.
> Dumping- when a monopolist is charging a higher price in the home market and a lower
price in the international market.
> A. c Pigou has told that price discrimination is the ultimate aim of monopolist to earn
maximum profit.
> In short run it earns normal profit, abnormal profit and in rare almost nil in case of loss.
> In long run it earns normal profit but tries to be in abnormal profit as always
Multiplant monopoly is a more realistic situation where a monopolist produces in two or more plants
and each plant having different cost structure.
> Price discrimination- It is the practice of charging different prices from different consumer for the
same goods or services at the same time. It is also called discriminating monopoly, selective pricing by
market segmentation, charging what the traffic will bear.

MONOPOLIST COMPETITION
> When such monopolist producers are competing amongst themselves it is called
monopolistic competition.
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> It is also known as cut throat competition.

> Followers of monopolistic competition are beggar thy neighbour tactics.

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> Many number of sellers and large number of buyers.

> Product differentiation- same old product are sold under a different trade name, style, design & color.
Only outward appearance change.
> High selling cost & advertisement cost on publicity.
> Demand is elastic ep>1
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> Price difference with different price range.

> Own price policy.
> Create brand loyalty.
> Price war.
> Gift articles.
> Free entry and exit.
> Absence of interdependence- large number of firm are different in their size each firm has its own
production and marketing policy so on. Firm is influence by other firms all is independent.
Two dimensional competitions
1) Price competition- firms compete with each other on the basis of price.
2) Non price competition- firms compete on the basis of brand product, quality and
advertisement.

> In short run abnormal profit, normal profit and loss, in long run there is always normal profit.
> Output is much less.
> Inefficient market also survive.

MONOPOSONY
> Under this there are many sellers but only one buyer.
> It is opposite of monopoly
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BILATERAL MONOPOLY
> If there is one seller and one buyer then it is called bilateral monopoly.

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OLIGOPOLY
> It is derived from the two Greek word Oligi- Few and Polein- to sell
> Few is the main point of oligopoly
> Large number of buyers and few number of sellers
> Homogenous or differentiated product
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> Restrictions to entry

> Large size of market to each firm
> High price
> Low elastic of demand
> Depends on rival strategy
> Firms are mutually dependent on each other
> Informative advertisement
> Oligopoly refers to an industry that contains only a few competing firm. Each firm has enough market
power to prevent its being a price taker, but each firm is subject to enough inter firm rivalry to
prevent it considering the market demand curve as its own.
> Mutual interdependence means that the firms are significantly affected by each other price
& output decisions.
> They can retain long run abnormal profit as high barrier of entry
> In oligopoly cross elasticity of demand is very high between the products of the oligopolistic because
the products are close substitutes.
> Advertisement has main role in oligopoly
> Price rigidity- It means that firms would not like to change the prices. It will stick to price. If a firm
tries to reduce the price the rivals will also retaliate by reducing their prices, so it will not be of any
advantage to it. Likewise if a firm tries to raise its price, other firms will not do so. As a result the firm
will lose its customers and incur loss. So there is a price rigidity in an oligopoly market.
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> Keen competition in oligopoly market, as the number of sellers is so small that any move by one seller
immediately affects the rival sellers. As a result each firm keeps a close watch the activities of the

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rival firms and prepares itself to counter it.

> Oligopolist is the highest form of competition.
> Existence of non -profit motive , motives like sales maximization, security maximization, risk
minimization.
> They are price setters and makers
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STRATEGIC AND NON-STRATEGIC BEHAVIOUR

> Strategic behavior refers to that behavior of a firm in which the firm, while deciding its price & output
has to take into account for the possible reactions of the rival firms in the market. Oligopoly form of the
market is a typical example of strategic behavior of the firms.
>Non-strategic behavior refers to that behavior of a firm in which the firm while determining its price &
output does not account for the possible reactions of the rivals in the market. It focus on its own cost
structure and demand conditions in the market.
> The behavior of oligopolistic is necessary strategic. In deciding on strategies, oligopolists face a
dilemma that whether to compete or co-operate. If firms co-operate they will make more profits as a
group. If firms do not co-operate but compete, they will have loss of profit
> Price leadership is an example tacit collusion in which the firms in an oligopolistic industry tacitly
decide to set the same price as the price leader or low cost firm for that industry.
> Nash equilibrium – It is the equilibrium that is reached by firms when they proceed by calculating only
their own gains, without co- operating with others.
> Covert cheating- secret price concessions to buyers or secret discounts or rebates.

KINKED DEMAND CURVE 1939 PAUL SWEEZY

> The kinked is formed at the prevailing price level because the segment of the demand curve above the
prevailing price level is highly elastic & the segment of the demand curve below the prevailing price
level is relatively inelastic.
> Paul Sweezy given an explanation of price rigidity that the individual oligopolistic saw that if they raise
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the price his rivals will not follow the suit and would do the same thing quickly. As a result at a
price higher than the customary one demand is seen to be highly elastic while at price lower
than ruling one the demand is seen to be highly inelastic.

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REVENUE
> Revenue is the money payment received from the sale of a commodity.
> Total revenue- amount that a firm gets by selling a given quantity of a product. Price*
quantity
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> Marginal revenue- It is the change in total revenue which results from the sale of one more or less unit
of a commodity. MR = ΔTR/ΔQ, TRn- TRn-1 Average revenue- It refers to revenue per unit of
output sold. AR= TR/q or AR= Price
> When TR is maximum and constant MR = 0
COST
> Private cost- It is money cost incurred by a firm in producing a commodity.
> Social cost- It is cost of producing a commodity to the society as a whole.
> Fixed cost- It is also called Supplementary Cost. These are costs that do not change with a change in
output. Also known as Overhead Cost or Unavoidable Cost.
> Variable cost- These are the costs which vary with the quantity of output produced. It is also
called prime cost.
> Fixed cost cannot be zero when production is stopped
> Shutdown cost- It incurred in the events of a temporary shut- down of a business firm
> Abandonment cost- It is the cost of retiring a fixed asset from use. It involves a
permanent shutdown of an activity.
> Accounting cost- These costs are the cash payments made by an entrepreneur to the supplier of
various factors of production
> Economic cost- It includes accounting cost plus normal return on capital invested by an entrepreneur
himself, salary not paid to an enterprise
> Accounting cost are explicit cost.
> Economic cost are both explicit and implicit cost.
> Money cost- The amount spent in terms of money for the production of a commodity is
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called money cost

> Real cost- The mental & physical efforts & sacrifices undergone with a view to producing a commodity

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are its real cost. Real cost is expressed not in money terms but in terms of efforts & sacrifices.
> Opportunity cost- The cost of producing one thing is measured in terms of what was given up in terms
of next best alternative that is sacrificed. The opportunity cost is the cost in terms of the alternative
foregone. It is also called alternative cost and transfer earning.
> The cost of self- owned & self-used resources are called implicit cost, also called imputed cost
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> The cash payments which firms make to outsiders for their services and goods are called explicit cost,
also called direct cost, accounting cost.
> Opportunity cost refers to both explicit and implicit cost.
> The expenditure incurred on land, labor, capital and entrepreneurship is called cost of production.
Organization is also a part of cost of production.
> In long run there are only variable cost.
> In short run there are both fixed cost as well as variable cost.
> Total cost – It denotes the sum of all expenditure incurred by a producer on producing a
given quantity of commodity.
> Fixed cost- It is the sum of total of expenditure incurred by the producer on producing or hiring fixed
factors of production. These costs do not change in volume of output is zero or maximum fixed cost
remains the same. Fixed cost is also called supplementary cost or indirect cost.
> Variable cost – These are the expenditure incurred by the producer on the use of the variable factors f
production. It is also called as prime cost and direct cost.
> Total cost= Total fixed cost + total variable cost
> Total fixed cost (TFC)- These cost do not vary with the output. Also called Overhead or Unavoidable
Cost. Straight line parallel to x- axis
> Total variable cost (TVC)- These cost varies with the quantity of output produced. It is inverse s-
shaped because of law of variable proportion
> Average fixed cost can never be U shaped.
> Average fixed cost is also called as rectangular hyperbola.
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> Relationship between average cost and marginal cost are-

1) Ac and mc can be calculated from tc

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2) When ac falls mc is lower than ac

3) When ac rises mc is larger than ac
4) Mc cuts ac from its lowest point

> Relationship between total cost and marginal cost

1) When tc increases at increasing rate mc is increasing
2) When tc increases at a constant rate then mc is constant
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3) When tc increases at decreasing rate then mc is decreasing

4) Mc cuts both ac and avc ( average variable cost) at its lowest point

NORMAL, INFERIOR AND GIFFEN GOODS

> Nominal income- It is an income which we receive in our hand.
> Real income- It tells the purchasing power of consumers.
> Income effect- With the change in income the consumer moves from one equilibrium point to
another. Such movement show the rise and fall in the consumption basket due to income change.
This change is called income effect
> Price effect- The price effect may be defined as the total change in the quantity consumed of a
commodity due to change in price.
> Substitution effect- It arises due to the consumer inherent tendency to substitute the cheaper goods
for the relatively expensive ones.

NORMAL GOODS

> Normal goods are those whose substitution effect is negative but income effect is positive
> Positive income effect moves in the same direction as the negative substitution effect
> Both substitution & income effects lead to an inverse relationship between price & quantity
demanded.
> Demand curve for normal goods must slope downward.
> Price effect= income effect+ substitution effect
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> Income & substitution effects in case of normal goods work in the same direction and will lead to the
increase in quantity demanded of the goods whose price has fallen.

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> Quantity demanded will vary inversely with price when income effect is positive.

INFERIOR GOODS
> Substitution effect= price + income effect
> Income effect is negative
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> Substitution effect> income effect

> It follows therefore that as a result of the fall in price of a good the substitution effect which always
induces the customers to buy more of the goods whose price has fallen will usually outweigh the
negative income effect.
> In case of inferior goods quantity demanded varies inversely with price when income effect is negative
but is weaker than the substitution effect. Even in case of inferior goods having weaker income effect,
the demand curve will be downward sloping so it follows law of demand.

GIFFEN GOODS
> Robert Giffen has given this.
> This is one of the exception of law of demand or law of demand is violated in this Income
effect= price effect+ substitution effect.
> Negative income effect> substitution effect.
> In this quantity purchased r demanded will vary directly with price.
> Such an inferior goods in which case the consumers reduces the consumptions when its price falls and
increases the consumption when its prices rises is called Giffen Goods.

SOME POINTS
> Negative substitution effect sustains the negative relationship between price of the commodity &
quantity demanded in accordance with the law of demand
> Negative income effect contributes to positive relationship between price of the commodity &
quantity demanded in violation of the law of demand.
> Law of demand is violated only when income effect emerges stronger than the substitution effect
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ie in case of giffen goods.

> Positive cross elasticity of demand- substitutes goods.

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> Negative cross elasticity of demand- complementary goods.

> Zero cross elasticity of demand- when goods are not related to each other eg wheat and car.
> Normal goods shows positive income elastic of demand.
> Inferior goods shows negative income elasticity of demand.
> Zero income elasticity of demand when the change in income of the consumer evokes no
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change in his demand.

> A cartel consist of a group of firms that have explicitly & openly agreed to work
together as monopolist
> Allocative efficiency- It occurs when the sum of consumer surplus & producer surplus is
maximum.
> Zero economic profit- It means that firms are just able to cover their full opportunity cost. If a firm is
earning normal return on its investment it is doing as well as it could by investing its money elsewhere.
Under perfect competition economic profit is zero in the long run (zero economic profit implies firm
is competitive)
> Shutdown point= price= AVC and losses = TFC
> Shutdown or close down situation occurs when the price is so critically low that it
cannot cover the fixed cost
> Break -even point= this is the point where TR=TC, AR=AC , no profit no loss
> Derived demand= the demand for factors of production is a derived demand that is derived from the
finished goods & services which resources help to produce. It indirect demand.
> Relative income hypothesis is given by J S Densenberry.
> Perfect competition- no control
> Monopoly= control
> Monopolistic = simple control
> Oligopoly- some control.
DEMAND FORECAST
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Predictions of future demand for a firm product or products are called demand forecast.
> Techniques of demand forecast are established goods and new goods

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> Established goods includes-

1) Interview & survey method
2) Opinion polling method
3) Collective opinion method
4) Sample survey method
5) Panel of experts
6) Composite management opinion
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7) Projection approach includes – correlation & regression & Time series analysis

> New goods includes-

1) Evolutionary method
2) Substitution method
3) Growth pattern method
4) Opinion method
5) Sample survey method
6) Indirect opinion method

PRICING STARTEGIES

1) Full cost or cost plus pricing- The price is set to cover the cost of material, labor, overheads and a
certain percentage of profit cost to be included are actual cost, expected cost and standard cost.
2) Going rate pricing- The going rate pricing emphasize the market conditions where a price leader
exists and he charges a price keeping with what the followers are charging.
3) Marginal cost pricing- The marginal cost pricing appears to suggest that the price charged should be
equal to the marginal cost. A firm can set a price that ensures the targeted or possible level of
profitability also called incremental cost pricing. It refers to the change in total revenue following a
unit change in total revenue following a unit change in output.
4) Intuitive pricing- It is a response or reaction to feel the market.
5) Experimental pricing- In search of an optimum price, the firm takes some cognizance of the demand
for the product and proceeds to fix a price by the trial and error method. Usually a sample of test market
is selected and price is varied to see the reactions. These reactions are observed and then a price
that maximizes the profit is fix , widely used in new products.
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6) Imitative pricing- the firm fixes its price equal to or in the same proportion of the price of
another firm
7) Skimming pricing- A firm can decide to skim the cream of the market by charging a very high

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price
8) Penetration pricing-charging a low price to penetrate the market
9) Cyclical pricing- firm may decide to respond to these fluctuations by reducing off season prices &
raising price when conditions are brisk.
10) Refusal pricing- surgical equipment is example of this type. No price reduction is possible so at less
than this the seller just refuses to supply the product.
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11) Psychological or double pricing- on the price tag two prices are printed and the higher one is
crossed. The consumer get the feeling that the price is lowered by the company & therefore
sales get boost.
12) Prestige pricing- a high price is maintained where buyers attach prestige considerations to
the product.
13) Customary pricing- it is charged in kinked demand curve.

MISCELLANEOUS POINTS-
Absolute advantage: A principle that refers to the ability of an individual/firm or a
country to produce more quantity of products/goods/services than their
competitors, using the same amount of resources.
Adam Smith: A Scottish Economist, author and a moral philosopher. Best known for
his works: An Inquiry into the nature & causes of the wealth of nations in 1776 and
the theory of moral sentiments in 1959.
Average revenue: Refers to the revenue received for selling a good per unit of
output sold. This is found by dividing the total revenue by quantity sold.
Accounting profit: A company’s total earnings which includes explicit costs of doing
business, such as taxes, depreciation, expenses, etc. It is the total revenue minus the
explicit cost.
Average tax rate: Tax rate that is paid when all sources of taxable income is added
and divided by number of taxes owed.
Average total cost: Total cost per unit including fixed and variable costs, found by
dividing total cost by the quantity of output.
Average fixed cost: Per unit output of fixed costs, found by dividing fixed cost of
production by quantity produced (output).
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Average variable cost: Variable costs divided by number of units produced.

Business cycle: Economy-wide fluctuations in economic activities such as,
production, trade, employment, etc.

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Budget surplus: Excess of receipts or income over expenditure or outlays.

Budget deficit: A financial health indicator where expenditures exceed revenue.
Circular flow diagram: Basic visual model used in Economics to show how Economy
functions (flow of money through firms, markets, etc.)
Comparative advantage: a law referring to ability of an economic actor to produce
goods & services at lower opportunity cost than others.
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Complements: Goods or services used in conjunction to other goods or services. A

complementary good or service has no value when consumed alone, but value is
added when it is combined with another good or service.
Cross price elasticity of demand: Measures responsiveness of quantity demanded
for a good to a change in price of another good.
Cost: Combination of losses & gains that have value attached to them by an
individual. The value of everything a seller must give up to produce a good.
Consumer surplus: Difference between what consumers are willing (and able) to pay
for a service/good relative to its market price, and what they actually spend on the
service/good.
Coase theorem: An economic theory which affirms that where there are competitive
markets without any transaction costs, an efficient set of inputs & outputs, to & from
production-optimal distribution are selected, regardless of how property rights are
divided. When there is involvement of property rights, people involved will naturally
gravitate toward the most beneficial and efficient outcome.
Constant returns to scale: Constant ratio between inputs and outputs. Occurs when
increase in number of inputs leads to equivalent increase in output.
Competitive market: Market where large number of producers compete with each
other to satisfy needs of large number of consumers.
Collusion: Agreement between firms in market, sometimes illegal, to limit
competition by deceiving, misleading or defrauding others of their legal rights. An
agreement to divide markets, set prices, limit production and opportunities.
Cartel: Organization created from formal agreement between group of producers of
goods or services to regulate supply to manipulate prices.
Capital: Wealth used to start a business or other meaning is, a factor of production,
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others being land and labor.

Diminishing marginal product: An economic principle that states: while increasing
one input & keeping the other inputs at the same level may increase outputs initially,

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further increase in that input will have a limited effect, & eventually no effect or a
negative effect on the output.
Deadweight loss: Fall in total surplus caused by market inefficiency. Can be applied
to any deficiency caused by an inefficient allocation of resources.
Diseconomies of scale: Economic concept that refers to a situation in which
economies of scale no longer function for a firm.
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Economics: Study of how society manages its scarce resources or a science

concerned with production, distribution and consumption of goods & services.
Efficiency: A property of society in which resources are optimally allocated to serve
each individual or entity in best way while minimizing waste and inefficiency.
Explicit costs: Clear cash outflow from a business that reduce its bottom-line
profitability.
Equity: Value of assets minus the liabilities of the asset. Equity = Assets – Liability.
Externality: The positive or negative impact of an economic activity experienced by
an unrelated bystander.
Exports: Function of international trade where goods produced domestically are
shipped abroad.
Equilibrium: State in which economic forces are balanced where quantity demanded
= quantity supplied.
Elasticity: Measure of variables responsiveness to change in another variable.
Economic profit: Total revenue – total cost (including implicit and explicit costs)
Efficient scale: Quantity of input that minimize the average total cost.
Economies of scale: Cost advantage that arises as quantity of output increases.
Fixed costs: Cost that doesn’t change with quantity of output produced or sold.
Free rider problem: Market failure that occurs when people who receive benefits of
common resource and don’t pay their fair share of taxes.
Factors of production: Inputs used to produce goods and services to make economic
profit.
Game theory: Study of human behavior within competitive or strategic situations.
Inflation: Rate of increase in overall prices of goods and services with consequent fall
in purchase power of currencies.
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Interdependence: Relation between two of more entities where each is dependent

on other for goods or services.
Imports: Goods that are produced abroad and sold domestically

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Inferior good: Good for which demand declines with increase in income or real GDP.
Income elasticity of demand: Sensitivity of the quantity demanded for certain goods
or services to change in the real income of its consumers keeping all things constant.
Import quota: A limit set on the quantity of goods that can be produced abroad &
sold domestically.
Implicit costs: Cost occurred but not necessarily reported as an expense.
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John Maynard Keynes: A 19th Century British Economist & Philosopher who spent his
working years with East India Company, and whose radical ideas had great impact on
modern political & economic theories. He’s also known as the father of Keynesian
Economics.
Law of supply: Another microeconomic law that states, all factors being equal,
quantity of supply of goods/services increases, when the price of goods/services
increases.
Laffer curve: A curved graph, developed by Arthur Laffer, that illustrates the
relationship between tax rates & amount of tax revenue collected by Governments.
Lump sum tax: Fixed amount of tax, regardless of change in circumstances of taxed
entity.
Lorenz curve: A curve representing wealth/income inequality. Plots percentile of
population according to income/wealth on x-axis and cumulative wealth/income on
y-axis.
Monopoly: Industry dominated by one entity/corporation without close substitutes
Marginal product of labor: Change in amount of output from employing additional
unit of labor.
Monopolistic completion: Market structure where firms sell similar products but not
perfect substitutes.
Marginal cost: Change in total cost that arises from producing an extra unit
Marginal revenue: Change in total revenue resulting from sale of one additional unit
of output.
Marginal product: Change in output from employing one more unit of an input.
Marginal tax rate: Extra tax paid on additional dollar of income.
Market Economy: Economic system that allocates resources through decentralized
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decisions of individuals and business.

Microeconomics: Study of implications of actions of individuals and how these affect
distribution & utilization of resources.

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Macroeconomics: Study of how economy behaves, including studying phenomena

like economic growth, inflation, unemployment, etc.
Normative statements: Subjective & value-based claims that attempt to prescribe
how world should be
Normal good: Goods for which, all things equal, increase in quantity demanded
increases as individuals’ real income increases.
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Natural monopoly: Type of monopoly that arises as result of high startup or fixed
costs of operating a business in specific industry.
Nash equilibrium: concept where no player has incentive of changing their chosen
strategy after considering opponents choice.
Oligopoly: Market structure where small number of firms have large majority of
market share.
Opportunity cost: Benefit that must be given up to obtain something else.
Phillips curve: a curve that shows the concept that inflation & unemployment have
stable & inverse relationship.
Production possibilities curve: Graph that represents alternative combination of
outputs that an economy can produce by transferring resources from one
service/good to another.
Positive statements: Claims that attempt to describe the world the way it is.
Price elasticity of demand: Measure of relationship between chance in price of a
good and the quantity demanded of that good. Price elasticity of demand = Change
in quantity demanded (%)/change in price (%).
Price elasticity of supply: Measure of relationship between chance in price of a good
and the quantity supplied of that good. Price elasticity of demand = Change in
quantity supplied(%)/change in price (%).
Price ceiling: Max legal price a seller is allowed to charge for a good or service.
Price floor: Minimum legal price at which a good can be sold
Producer surplus: Measure of the difference between the amount producer is willing
to accept for a good and amount he receives.
Pigovian tax: Affluent fee assessed against business/individuals for engaging in a
specific activity.
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Private goods: Goods that must be purchased for consumption by individuals which
prevents others from consuming it.

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Public goods: Opposite of private goods. Products consumed by individuals without

reducing availability of said product to others.
Proportional tax: An income tax system where same percentage of tax is levied from
higher income tax payers & lower income tax payers.
Progressive tax: Tax that takes higher percentage from higher income tax payers
than lower income tax payers.
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Profit: The total revenue minus total cost

Production function: Relationship between physical inputs or factors of production
and physical output of production process.
Price discrimination: Business pricing practice of selling same good at different prices
to different customers.
Regressive tax: Tax where higher income taxpayers pay smaller percentage of tax
than lower income tax payers.
Scarcity: Limited nature of society’s resources
Specialization: Focus on a particular area
Substitutes: Product/service consumers see as same/similar to another product.
Another definition is, two goods are substitutes if increase in price of one leads to
increase in demand for the other.
Surplus: Situation where quantity supplied is greater than quantity demanded
Shortage: Situation where quantity demanded is greater than quantity supplied
Supply side economics: Branch of economics that argues that the Economic growth
can be created effectively by lowering the barriers on production & investing in
capital.
Sunk cost: Cost already incurred/committed and cannot be recovered.
Tariff: Tax imposed on goods and services that are imported
Tax incidence: Division of burden of tax between buyers and sellers.
Total revenue: Total receipt of a firm, from sale of given quantity of service/good.
Total cost: Total economic cost of inputs used in production by a firm
Variable cost: The costs that changes in proportion to the quantity of output
produced
Welfare economics: Study of how allocation of resources affects social welfare.
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UNIT-3
BUSINESS ENVIRONMENT
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INDUSTRY:
1) Industrial policy Resolution 1948
> After independence the first industrial policy was declared on 6th April, 1948 by then union industry
minister Mr. Shyama Prasad Mukherjee.
> Resolution accepted importance of both public & private sector.
> This policy established a base for mixed & controlled economy in India.
> This policy divides the economy in four categories:
1) Exclusive state monopoly
2) State monopoly for new units
3) State regulation
4) The field of private enterprises.
> Exclusive state monopoly includes industries of armed & ammunition, atomic energy, railway,
transport. A monopoly of central government.
> State monopoly for new units includes coal, iron, steel, aircraft, manufacturing, Shipbuilding etc.
central government look after this but after 10 years government will review the situation.
> State regulations includes industries of machine, tools, chemicals, fertilizers, Cement, paper etc.
government of India did not undertake responsibility.
> The field of private enterprises includes industries which did not come under the above three groups. It
also give importance to small and cottage industries.
2) Industries development and regulation act 1951
>An act was passed by parliament on Oct 1951 known as industries development regulation act
1951.
> It came in to force on 8th may 1952.
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> Main task was development and regulation of private sector.

> Protection of small Entrepreneurs.
>Prevention of monopoly.

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>Balanced regional development.

3) Industries policy resolution1956.
> Also known as economic constitution of India.
> It was declared on 30th April 1956.
> Basic objective was socialist pattern of society.
> Every new policy accepted the 1956 industrial policy resolution as its base.
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>Develop heavy industries & machines institutions, speed up industrialization and excelerate rate of
growth and expand public sector.
>Reduce disparities of income and wealth, build up co-operative sectors, prevent monopoly &
concentration of wealth & income in the hands of a small number of individuals’.
> Stress was laid on co-operation between public & private sectors but more importance given to
public sector.
> Under this policy reservation of industries came.
> Reservation of industries means clear cut clarification of industries.
> Three schedules came under the reservation of industries
1) Schedule A – 17 industrial areas, complete monopoly. Under this provisions known as CPSU (central
public sector undertakings) which was latter known as PSU (public sector undertakings)
2) Schedule B- 12 industrial areas, state government review, included the compulsory licensing
and transportation
3) Schedule C – the field of private enterprises.
---Schedule B & C industries came under the license quota permit regime.
---Focus on small industries & khaddi and village industries.
---This is considered as the most important industrial policy of India.
Industries policy statement1969.
> For solving the shortcomings of licensing policy which was started in 1956.
>Experts & industrialist told that licensing policy is serving just an opposite purpose.
>Reasons of licensing- exploitation of resources, price control of goods, checking concentration of
economic power, channelizing investment in to desired direction.
>Finally in 1969 a new industrial licensing policy was allowed.
>Under this MRTP act came known as monopolies restrictive trade practices act with a limit of 25 crore.
Green field ventures and take- over of other firms as per MRTP act came to be known as MRTP
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companies.
Industrial Policy statement 1973.

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>Core industries such as iron, steel, cement, coal, electricity in future known as basic industries
and infrastructure industries.
>Schedule A is not a part of compulsory licensing policy out of 6 crore industries. Firm apply for licensing
policy having assets of 25 crore or more.
>Concept of joint sector was developed, partnership among center, state & private sector.
>Government has been facing foreign exchange regulation so in 1973 FERA ( Foreign Exchange
Regulation Act ) came, known as Draconian Act because it hamper the growth and modernization
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of industry.
>MNCs allowed to set-up their subsidiaries.
Industrial policy statement 1977
>Established by Janta Government.
>This statement is opposite of industrial policy statement 1973.
>Foreign investment were prohibited which promote foreign investment through technology
transfer.
>In 1977 concept of tiny enterprises came.
>Redefinition of small and cottage industries and emphasis on village industries.
>DIC (district industries center) were set up to promote small & cottage industries.
>Democratic decentralization at khadi and village industries
>Attention on prices of essential commodities of everyday use.
Industrial policy resolution1980
>Revised of industrial policy statement 1977.
>Foreign investment through technology transfer allowed.
>MRTP limit 50 crores.
>DIC continued.
>Licensing was simplified, liberal attitude towards expansion of private sector.
Industrial policy resolution 1985 & 1986
>Foreign investment further simplified, equity holding of MNCs in Indian subsidiary 49% with Indian
partnership holding 51% share.
>MRTP limit 100 crores.
>Compulsory licensing of industries.
>Sunrise industries such as telecommunication, computerization & electronics.
>Modernization & profitability of public sector.
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>Imported raw materials got boost, use of foreign exchange permits in area of FERA.
>Many new technologies & scientific approach for agriculture.

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NEW INDUSTRIAL POLICY 1991

>In June 1991 Narsimamh Rao government took over charge and new industrial policy came under
the liberalized form Sever BOP crisis, gulf of war higher oil prices, depleting fastly foreign
reserves, inflation peaking and gross fiscal deficit also.
>Financial support from IMF.
>Government declared broad changes in industrial policy on 24th June 1991.
>De reservation of industries came of three industries-
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1) Atomic energy ( nuclear, mining, fuel fabricant)

2) Arms ammunition, Defense equipment and warship

3) Railway transport
>Delicensing of industries came
1) Distillation & brewing of alcoholic drinks
2) Cigar cigarettes and other substitutes of prepared tobacco
3) Electronic, aerospace and all types of defense equipment
4) Industrial explosive including match box, detonating fuses, safety fuses, gunpowder and
nitrocellulose.
5) Hazardous chemicals
>Liberalized policy of FDI (foreign direct investment) 1991, FPI (Foreign portfolio investment)
1994
>Government announced its policy towards small scale sector on 6th august 1991.
>Micro small medium enterprise development act 2006.
>Small and medium enterprises development bill 2005 was introduced in parliament on 12th may 2005
approved by parliament and named as small medium enterprises development act 2006
effective from 2nd oct2006.
>Manufacturing
1) Micro- 25 lakh
2) Small- 5 crore
3) Medium- 10 crore
>Service equipment
1) Micro- 10 lakh
2) Small- 2 crore
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3) Medium- 5 crore
> Foreign exchange regulation act was liberalized on 8th January 1993.
> FERA was replaced by FEMA (foreign exchange management act) in Dec 1999

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> BIFR (Board for industrial and financial reconstruction) was established under sick industrial
companies act 1985. The board started its functions from 15th may 1987
> Process of disinvestment started in public sector in 1991-1992
> To minimize the financial burden on public sector enterprises the government has started voluntary
retirement scheme for the employees by giving full compensation to employees. This is called
golden handshake scheme.
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> To evaluate the problems of financial sickness of small industries the government had constituted
Nayak committee which submitted its report in September 1992.
> NELP- New exploration licensing policy 1999
> Government has granted MINI RATANA status to three public sector units-
1) IRCTC (Indian railway catering and Tourism Corporation)

2) Satluz hydro power corporation

3) National hydro power corporation

>SIDO- small industries development organization 1954
>MAHARATNA STATUS given to these public sector units:-
1) ONGC- oil and Natural Gas Corporation.

2) NTPC- national thermal power corporation.

3) Steel authority of India.

4) Coal India ltd.

5) Indian Oil Corporation.

6) BHEL- Bharat heavy electrical ltd

7) GAIL- Gas authority of India ltd

>Rest all NAVRATNA COMPANY
>In 1985 Tiwari committee recommendations government introduced SICA sick industrial companies
act later on 1st Jan 1987 a statutory institution named BIFR( board for industrial & financial
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reconstruction was setup) later on Omkar committee gave recommendations to modify SICA &
role of BIFR.
> Disinvestment commission appointed in august 1996 under the chairmanship of GB Ram Krishna.

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Commission was reconstituted under the chairmanship of RM Patil in 2001 objectives- to protect
interest of employees.
ECONOMIC PLANNING
> Planning commission is a non –constitution body.
> It is central body for making plans in India.
> A book entitled Planned Economy For India was published in 1934 by Sir M Vishweshwarya.
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> Indian national congress constituted a National Planning committee in 1938 to discuss the
requirement & possibility of planning in India. Pundit Jawaharlal Nehru was the president that time
of this committee
> In 1944 a plan called Bombay Plan was presented by eight industrialist of Bombay. There after in
same year 1944 Gandhian plan by Mannaragan in 1945, the peoples plan by labour leader MN Raj
and in 1950 the Sarvodya plan by Mr. Jai Prakash Narayan were presented.
>Planning commission constituted on 15th march 1950
>First chairman of planning commission was Pt. Jawaharlal Nehru.
>Prime minister of India is the ex-officio chairman of planning commission. There is also a deputy
chairman of Planning Commission.
> The National development council NDC was formed on 6th august 1952.
> Format of five years plan came in 1951.
> Concept of planning commission is derived from Russia USSR.
> It was constituted by union cabinet on the proposal of a member of union parliament.
> Planning commission is approved by NDC (national development council).
> NDC is non-statutory body which is built to co-operate between states & planning commission.
> Planning commission is in concurrent list.
> The member of planning commission are appointed by the government.
> Second five year plan- Prof P C Mahalanbosis.
> Eleventh five year plan- Prof C Rangaranjan.
1) First five year plan (1st April 1951 to 31st march 1956).
> Rehabilitations of refugees from Pakistan.
> To check inflationary tendency.
> Agriculture was given a highest priority.
> To solve food problems.
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> Reconstruct economy damaged due to war.

> Revival of small and cottage industries.
> Community development programme (NDC came on 6th Aug. 1952).

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2) Second five year plan (1956 to 1961).

> Prep by Prof P C Mahalnobis.
> Basically industrial policy resolution 1956 based on socialist pattern of society.
> Faster growth of national income.
> Rapid industrialization with special emphasis on basic and heavy industries.
> To reduce inequality of income & wealth.
> Expansion in employment opportunities.
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> Steel plant at Bhilai, Rourkela, Durgapur.

> Shortage of foreign exchange.
3) Third five year plan (1961 to 1966).
> To make Indian Economy self-reliant and self -sustain economy.
> Development of Agriculture.
> Self-reliance in food grains.
> Balanced regional development.
> Two war Indo-china (1962) Indo-Pak (1965) as ill- fated plan.
> India also faced drought in 1965-1966.
> Reduce inequality of Income & wealth.
> Optimum utilization of country’s labour power.
4) Three Annuals plan (1966 to 1969).
> To overcome the ill effects of war.
> To solve the food problem.
> To prepare base for fourth plan.
> Green revolution (1966-1967) to develop new varieties of seeds.
> Currency devaluation (1966 June).
> Economist called this period 1966 to 1969 as plan holiday, also known as GADGIL PLAN.
5) Fourth five year plan (1969 to 1974).
> Growth with stability and progress towards self-reliance.
> Establishment of buffer stock.
> Implement family planning.
> To develop public sector, reduce regional imbalance.
> Balanced development of all the sectors.
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> MRTP act came.

> Oil crisis, population explosion, war with Pakistan, 14 banks nationalized.
6) Fifth five year plan (1974 to 1979).

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> Janata government declared this plan closed one year prior to its schedule.
> Eradication of poverty (GRABI HATAO).
> Attainment of self-reliance.
>National programme for primary education, drinking water, medical facilities in rural areas, nourshing
food, and land for houses of landless labor, rural roads, electrification, cleanliness.
> Policy of import substitution and export promotion.
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> Prepared by planning commission.

> Reduce regional economic, social inequality, unemployment problem.
> Prohibition of unnecessary consumption price wage policy.
> Janata government terminated in 1978.
7) Annual/ rolling plan (1978 to 1980).
>Janata Government fail in 1978.
> Reduce poverty.
> Reduce unemployment.
> Also called rolling plan.
8) Sixth five year plan (1st April 1980 to 31st March 1985).
>Generate employment.
> Control population explosion.
> Efficient use of resources.
> Modernization.
> Encourage people to participate in education.
> Policy adopted to control population explosion.
> Rapid efficient utilization of energy resources.
> Indian economy made all round progress.
> Integrated rural development.
> Minimum needs programme.
> Industrial development regulation.
>Drought (1984-85).
9) Seventh five Year plan (1st April to 31st march 1990).
>Progress towards a social system based on equality & justice.
> Prepare a firm base for technological development in industrial & agriculture.
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> Ecological & environment protection.

> Productive employment.
> First time private sector was given priority.

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10) Annual plan (1990-1992).

>Due to economic crisis.
> Political instability at center.
> New industrial policy was announce.
> Considered the beginning of large scale liberalization in Indian economy.
> LPG Policy come under this
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11) Eighth five year plan (1992 to 1997).

> Human resource development.
> Primary education, drinking water, health. Vaccination in all villages & complete elimination of
scavengers.
> Eliminate illiteracy among people of ages 15-35 years.
> Universalization of primary education & 100% literacy in the age 06 to 14 years.
> Achieving full employment by the end of century.
> Sufficient employment opportunity.
> PMRY- Pradhan Mantri Rojgar Yojana and many more Yojanas come.
> Basic infrastructure (energy transport, communication, irrigation)
12) Ninth five year plan (1997 to 2002)
> Growth with equity and distributive justice.
> Equitable distribution and growth with equality.
> To give priority to the development of agriculture and villages for eradicating poverty.
> To accelerate pace of economic development by keeping the price stable & under control.
> To create sufficient productive employment.
> Improve lifestyle, remove environmental imbalances.
> To ensure provision of food and nourishment to all and especially to weaker sections of society.
> To provide the basic minimum services like clean drinking water, primary health care facility, universal
primary education & housing (basic facilities).
> To control population growth rate.
>To encourage & develop the mass participation institutions, co-operative & voluntary sections.
> To provide strengthen to women especially the weaker sections of SC & ST & backward castes,
handicap.
> NEAS- national employment assurance scheme.
> To ensure better life, improve living of standard of people
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13) Tenth five year plan (2002 to 2007).

> Growth with human development.

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> Reduction of poverty ration by 5% points by 2007 and by 15% points by 2012.
> Providing gainful & high quality employment at least to addition to the labor force over the 10th
plan period.
> All children in school by 2003, all children to complete 5yrs of schooling by 2007.
> Reduction in gender gap in literacy & wage rate by at least 50% by 2007.
> Reduction in decadal rate of population growth between 2001 & 2011 to 16.2%.
> Increase in literacy rate to 75% within the plan.
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> Reduction of infant mortality (IMR) to 45 per 1000 live births by 2007 and to 28 per 1000 lives by
2012.
> Reduction of maternal mortality rate (MMR) to 2 per 1000 live birth by 2007 as to 1 per 1000
live.
> Increase in forest and tree covers to 25% by 2007 and 33% by 2012.
> All villages to have sustained access to potable drinking water within the plan.
> Cleaning of all major polluted river by 2007& other by 2012.
> Doubling the per capita income in next 10 years.
14) Eleventh five year plan (2007 to 2012).
>It setup the economic growth rate at 9% but it was revised 8.1% due to economic crisis by Mr.
Montek Singh Alluwaliah.
> Increase in agricultural GDP growth rate 4% per year.
> Fast sustainable & more inclusive growth.
> Industrial growth 9.2% in 10th plan and want between 10% and 11%.
> Manufacturing 12% .58 million new work opportunities.
> Reduce educated unemployment to 5% below.
> Increase literacy rate for persons of age 7 or more to 85%.
> Reduce total fertility rate 2.1% provide clean drinking water.
> Reduce malnutrition between child 0-3 years, reduce anemia among women & girls.
> Raise sex ratio for age group 0-6 to 935 by 2011-12 & 950 by 2016.
> 33% beneficiaries of government schemes to girls & women.
> Ensure electricity connection to all village & BPL family by 2009.
> Provide telephone by Nov 2007 and broadband connectivity by 2012.
> Increase forest area by 5% points.
> Much stress on agriculture (4%).
> Promoting industrial (10-11%).
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> Focus on service sector (9-11%) 15).

15) Twelve five year plan (2012 to 2017).

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>Enhancing skills and faster growth & generation of employment.

> Managing the environment.
> Market for efficiency & inclusions.
> Decentralization empowerment & information.
> Securing energy future for India.
> Rural transformation and sustained growth of agriculture.
> Improved access to quality education.
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> Better preventive, curative health care as government providing free treatment to pregnant
women.
> Vision is of rapid, sustainable and more inclusive growth.
> Enhancing the capacity for growth- today GDP is 8% increase it to 9% or 10%, mobilization of
investment resources, better allocation of resources, higher investment in infrastructure through
public & PPP, efficient use of public resources.
> Enhancing skills and faster generation of employment.
> Managing the environment.
> Market for efficiency & inclusion.
> Decentralization , empowerment & information.
> Technology& innovation.
> Securing the energy future for India.
> Accelerated development of transport infrastructure.
> Rural transformation & sustained growth of agriculture.
> Managing the environment.
> Improved access to quality education.
> Better preventive & curative healthcare.
> GDP= 8%, agriculture – 4%, manufacturing- 7.1%, industrial- 7.6%, service sector- 9%.
> Every state must have a higher average growth rate in 12th plan.
> Head count ratio of consumption poverty to be reduced by 10% points over the preceding
estimate.
> Generate 50 million new work opportunities in the non-farm sector & provide skill
certification to equivalent.
> Mean year of schooling to increase to 7 year by end of 12th plan.
> Enhance access to higher education by creating two million additional seats for each age cohort aligned
to skill needs of economy.
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> Elimination of gender & social gap in school enrollment (between boys & girls, SC & ST).
> Reduced IMR to 25 per 1000 live and MMR to 1 per 1000 lives, improve sex ratio (0-6 yr.)
to 950 by end of 12th plan.

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> Reduced total fertility rate to 2.1 by end of 12th plan.

> Reduced under- nutrition among children age (0-3 yr. to half of NFHS-3 levels by end 12th plan.
> Increase investment in infrastructure as per of GDP to 9%.
> Increase gross irrigated area 90 million hectare to 103 million hectare.
> Provide electricity to all villages.
> Upgrade national & state highways to minimum 2 lane standard.
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> Complete eastern & western dedicated freight corridors.

> Increase rural tele density to 70%.
> Ensure 50% of rural population has access to 55 LPCD piped drinking water supply & 50 % Gram
Panchayat achieve the nirmal gram status.
> Increase green cover by 1 million hectare.
> Add 30000 MW of renewable energy capacity.
> Reduce emissions intensity of GDP in line with the target of 20% to 25% reduction by 2020 over
2005 levels.
> Provide access to banking services to 90% Indian houses.
> Major subsidies & welfare related beneficiary payments to be shifted to a direct cash transfer
by end.
INDIA VISION 2020
>Planning commission has released India vision 2020 on Jan 23rd 2003, progress of next 2 decades by
Mr. Shyam Prasad Gupta.
> Expected annual growth rate 9% by 2020.
> Elimination of unemployment, illiteracy & poverty by 2020.
> Per capita income to get doubled by 2020.
> Cent percent registration of children (age 6 to 14) in schools.
> 1.35 billion population having better life by 2020.
> Environment situation to remain as unbalance as present.
> 20 crores new employment opportunity.
> Present employment share in agriculture came down 56% to 40%.
> Unorganized sector to create more additional employment opportunity.
> Urban population percentage to get increased from 25.5% to 40%.
> Water problem remain as it ease in metro’s cities.
List showing names of Chairman, Planning Commission
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1. JAWAHARLAL LAL NEHRU MARCH, 1950 27.05.64

2. LAL BHADUR SHASHTRI JUNE, 64 JAN,66

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3. SMT. INDIRA GANDHI JAN, 66 24.03.77 JAN, 80 31.10.84 D) MORARJI DESAI 25.03.77
09.08.79
4. CHARAN SINGH 10.08.79 JAN, 80
5. RAJIV GANDHI NOV,84 DEC, 89 G) V.P. SINGH 22.12.89 NOV, 90
6. CHANDRA SHEKHAR DEC, 90 24.6.91
7. P.V. NARASIMHA RAO JUNE 1991 15.05.96
8. ATAL BEHARI VAJPAYEE 16.05.96 31.05.96 K) H.D. DEVE GOWDA 01.06.96 20.04.97
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9. I.K. GUJRAL 21.04.97 18.03.98

10. ATAL BIHARI VAJPAYEE 19.03.98 22.05.2004
11. DR. MANMOHAN SINGH 22.05.2004 …………
12. DR. MANMOHAN SINGH ……………. 26.05.2014
TARGETS AND ACHIEVEMENTS
1ST PLAN- TARGET 2.1% ACHIEVE 3.6%
2ND PLAN- TARGET 4.5- ACHIEVE 4.21
3RD PLAN- TARGET 5.6- ACHIEVE 2.72
4TH PLAN- TARGET 5.7- ACHIEVE 2.05
5TH PLAN- TARGET 4.4- ACHIEVE 4.83
6TH PLAN- TARGET 5.2- ACHIEVE 5.54
7TH PLAN- TARGET 5-5. ACHIEVE 54
8TH PLAN- TARGET 5.6- ACHIEVE 6.68
9TH PLAN- TARGET 6.5- ACHIEVE 5.55
10TH PLAN- TARGET 8- ACHIEVE 7.7
11TH PLAN- TARGET 9 THEN REVISED 8.1 ACHIEVED 6.3%
12TH PLAN- TARGET 8.2-

MRTP (Monopolies trade practices Act 1969)

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>MRTP passed in 1969

> All over the India except Jammu & Kashmir
The main objectives of MRTP Act are as follows:-

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• To prevent concentration of economic power to the common detriment& control of

monopolies.

• To prohibit monopolies trade practices act

• To prohibit restrictive trade practices act & unfair trade practices act.
> From curbing monopolies to promoting competition government of India appointed a committee
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under the chairmanship of SVS Raghvan which submitted report in May 2000. Accordingly Competition
Bill 2001 was introduced in the parliament and a new act called competition act was introduced in
December 2002.
> The main objectives of competition act 2002 are as follows-
1) To provide for the establishment of a commission to prevent practices having adverse effect
on competition

2) To promote & sustain competition in the market

3) To protect the interest of the consumers

4) To ensure freedom of trade carried on by other participants in the markets

> A new law, the competition act has been enacted and published in the gazette of India on 14th
January 2003 for bringing competition in the market.
> The act covers the following aspects according to the schedule- 1) Schedule (2) – deals with anti –
competitive agreements (3)- deals with abuse of dominance (4) – deals with mergers and
acquisitions
> The act is expected curb those practices, which would have an appreciable adverse effect on
competition.
> Parliament on 10th Sep 2007 passed the long pending competition (amendment) bill 2007 that
empowers the competition commission of India to act as the competition regulator.
> Competition commission of India has finally become operational on 20th may 2009.
> So MRTP will not handle any cases after 20th May 2009.
> The government has introduced the bill for competition amendment act 2012 in parliament to give the
competition a watch dog teeth.
> The amendment 2012 provides that all corporate mergers be cleared by the competition commission
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of India within 180 days.

> The bill proposes 18 amendments to the competition act 2002
> The competition bill 2012 was introduced to promote fair trade practices, aimed at giving more powers

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to the competition watchdog to monitor anti-competitive activities that impact trade in the
market place.
> The amendment bill 2012 insert a new schedule 5(a) for approval of combinations by
commission.
> CCI has introduced the mergers and acquisitions from 1st June 2011. A company going for mergers and
acquisitions and having turnover Rs 1500 cr or combined assets exceeding Rs 1000 cr or combined
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turnover Rs. 3000 cr.

> A Company either having assets more than Rs. 200 cr. or turnover exceeding Rs 600 cr will also need
permission from CCI before its acquisitions
> CCI has also declared while releasing rules for mergers and acquisitions that 95% agreements will be
approved within 30 days span while the rest deals will be cleared within the maximum period of
180 days.
CONSUMER PROTECTION ACT 1986
>It was introduced to protect the interest of the consumers & to check their exploitation from
producers & consumers.
>It came into force on 1st July 1987 all over the states except Jammu & Kashmir.
> It is also known as COPRA
> Under this act consumer’s forum have been constituted at district, state and national level.
> COPRA was amended in 1993 and 2002
> Objectives of consumer protection act as follows:-
1) Protecting the consumers against immoral and unfair activities of the traders

2) Compensating to the consumers

3) To setup consumer forums and consumer commission or council for the disposal of consumer
disputes.

4) To educate the consumers for their rights controlling to markets

>Limits of the amount to be filed-
1) District – up to 20 lac

2) State- 20 lakh to 1 crore

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3) National- above 1 crore

>It covers the six rights of the consumers- 1) Right to safety 2) Right to be informed 3) Right to

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choose 4) Right to be heard 5) Right to redressal 6) Right to consumers education 7) Right

to healthy environment
>It covers some areas also such as – 1) Banking 2) Insurance 3) Transport 4) Processing 5)
Physicians
> Consumer protection amendment act 2002 passed on 17th December 2002 and implemented
on 15th march 2003
> Admissibility of complains is 21 days
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> If someone wants to move from national to state or state to district then it can be moved within
30 days
> AWARE- Association of women against rising expenses
> Consumerism- consumer as king
> Caveat emptor- let the buyer beware
> Caveat vendor – let the seller beware
> If someone is filing a fake case then penalty will be imprisonment of 1 month to 3yrs according to case
or Rs 2000 to 10000. The period of appeal is 30 days from date of order

>Responsibilities of consumers-
1) To provide adequate information to seller.

2) To exercise caution in purchasing.

3) To insist on cash memo & receipt.

4) To file complain against genuine grievances.

5) To be quality conscious.

6) To be cautious against false & misleading advertisements.

7) To exercise legal rights.

>Followings are the types of laws which protect the interest of the consumers: -
1) The contract act 1872
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2) The sales of goods act 1930

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3) The law of torts (when seller fraud with buyer or seller is negligent)

4) The essential commodities act 1955 (equitable distribution of essential commodities at

reasonable price to consumers)

5) The prevention of food adulteration act 1954 (to ensure purity in food articles)
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6) The standards of weights and measures act 1976 (weights, measures or numbers)

7) The trade and merchandise marks act 1958 (protection of trade mark and to prevent the use of
fraudulent marks on merchandise)

8) The monopolies and restrictive trade practices act 1969 ( to prevent consumers from unfair
trade practices)
>The supreme court of India in its important decisions has brought medical services under the purview of
COPRA. The Supreme Court has classified the medical services in to three Category-
1) Such centers where free medical services are provided ( now it is exempted)

2) Such centers where medical services are provided to all on payment

3) Such centers where free medical services are provided to some people & some are
provided on payment.
>On 29th Feb 1996 a trail court f Calcutta high court declared COPRA ultravires and cancelled its
operations on the writ petitions.
> Justice Ajay Nath Roy declared this act as ultravires of the constitutions & cancelled it.
> The union government filed a petition against the decision bench of justice SK Mukherjee & justice R
Bhattacharya of Calcutta high court cancelled the order trail court and as a result COPRA again
came inti force with an immediate effect.
BHARAT NIRMAN (16TH DEC 2005)
>It was launched by Government of India in 2005.
> Bharat Nirman is an Indian plan for creating basic rural infrastructure. It comprises projects on
irrigation, roads, housing, water supply, and electrification and telecommunication connectivity.
> Bharat Nirman is a business plan for rural infrastructure which was implemented by the government
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of India in order to provide some basic amenities to the rural India.

> The basic objectives are as follows-

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1) It aims at providing safe drinking water.

2) It aims at providing housing facilities.

3) It covers telecommunications and broadband facilities to all.

4) It will construct all weather roads and provide electricity to all.

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5) It will provide irrigational land for cultivation.

>Sequence wise- 1) Irrigation 2) Road 3) House 4) Water supply 5) Electricity 6)
Telecommunications 7) Connectivity
> Irrigation and road come under PRADHAN MANTRA GRAM SADAK YOJANA
> Housing comes under INDIRA AWASS YOJANA
> Water supply and electricity comes under RAJEEV GANDHI GRAMEEN VIDYUTIKARAN
YOJANA
> Telecommunications and connectivity comes under BHARAT NIRMAN SEVA KENDRA
JAGO GRAHAK JAGO SCHEME
>The ministry of consumer affairs food and public distribution, department of consumer affairs,
government of India had recently released an advertisement under the JAGO GRAHAK JAGO
SCHEME.
> The consumers awareness scheme for the 11th plan amounting to Rs 4009 Crores has been approved
by the cabinet committee on economic affairs on 24th Jan 2008.
> This scheme has been formulated to given an increased thrust to a multi-media publicity campaigns to
make consumer aware of their rights.
> The slogan JAGO GRAHAK JAGO has now become a household name as a result of publicity
campaign under taken in the last 3yrs.
> As part of consumers awareness scheme, the rural and remote areas have been given top
priority
> Government has taken up number of activities and schemes increasing consumer awareness in
country such as- 1) Print media advertisement 2) Audio campaigns 3) Video campaigns.
> Realizing the importance of consumer empowerment the ministry of consumer affairs, food and public
distribution has accorded top priority to consumer education, consumer protection, and
consumer awareness.
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CAPITALISM SOCIALISM AND MIXED ECONOMY

> CAPITALISM- A capitalist economy is an economy in which productive resources are owned by

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private individuals who used the resources to earn profits and in which the state intervention is
minimum so that economic activities are most unplanned and uncoordinated. A capitalist economy
is also known as free enterprise economy, free market economy and laissez faire economy.
Features of capitalism-
1) Private property
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2) Freedom of enterprises and occupation

3) Freedom of choice for consumers

4) Price mechanism (based on demand and supply)

5) Invisible hand concept given by Adam smith (government intervention, law and order)
6) Cut throat competition

7) Profit motive/ self-interest

8) Minimum government interference

Merits- 1) Spirit of enterprise ( profit motive) 2) Incentive for technology progress 3) New consumer
goods 4) Flexibility & adaptability 5) Economic freedom 6) Expansion of International trade
Demerits 1) Inequality of Income and Wealth 2) Class struggle 3) Economic Instability (over production,
under production) 4) Misallocation of resources 5) Emergence of monopoly power 6) Neglect of
social welfare
SOCIALISM- Proposed by Karl Marx, it is an economic system in which the means of production are
owned by the entire society and operated by the public authority according to a general economic plan
for the benefit of entire community > first soviet Russia (socialist) was the first country to establish a
socialist (communist china) economy .Most of the east European countries adopted the communist
system after the second world war.
Features- 1) Socialist ownership of productive resources i.e. land, mines 2) Economic planning replace
price mechanism 3) Social welfare as a motivating force 4) Economic equality 5) Class less society 6)
Elimination of compensation
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Merits 1) Better allocation of resources 2) Full utilization of resources 3) Elimination of economic

stability 4) Equitable distribution of income 5) Elimination of class struggle 6) Provision of social

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security 7) Production of more useful goods, railway etc.

Demerits 1) Loss of efficiency 2) Loss of incentive 3) Loss of consumer’s sovereignty/ freedom 4)
Concentration of economic and political power 5) Loopholes in the planning process
MIXED ECONOMY- In this both capitalism and socialism is present.
Features 1) Co- existence of public private sector 2) Co-existence of capitalist & socialist 3) Economic
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planning 4) Regulation & control of private sector 5) Promotion of social welfare 6) Price
mechanism 7) Profit motive
Merits 1) Economic stability 2) Proper allocation of resources 3) Check on concentration of economic
power 4) Economic & political freedom
Demerits 1) Conflict between two sectors 2) Short lived 3) Poor performance of the public sector 4)
Excessive regulations 5) Inefficient of operations
Sequence wise according to their existence Capitalism> lassiez faire> communism> socialism.

LPG (LIBERALISATION, PRIVATISATION, GLOBALIZATION)

Liberalization shows direction of reform, privatization shows the path of the reform and globalization
shows the ultimate goal of the reforms. Liberalization shows the process of decreasing traits of a state
economy and increasing traits of market economy.
Privatization it is used as a process under which the state assets were transferred to the private sector
Globalization means integrating the Indian economy with the world economy.
BUSINESS ENVIRONMNENT

>The term business environment refers to the aggregate of all forces, factors and institutions which are
external to and beyond the control of individual business enterprises and their management, but
which influence their function.
> Business environment divided into internal environment and external environment.
> Internal environment such as value system, ethical standards, mission, goal, objectives, organizational
structures, physical assets, availability of technology sources of funds, policies. These internal sources of
a company determine the degree of strength or weakness which a company has.
> External environment it is beyond the control of individual firms and which may provide opportunities
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and threats to an organizations. Factors such as economic, demographic, political, legal, socio cultural,
technological and natural environment.
> External environment divides into micro environment and macro environment

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> Micro environment refers to the environmental forces which are in the immediate contact of the
business such as customers, competitors, marketing intermediaries, suppliers and public.
> Macro environment includes demographic, political, economic, socio cultural, technology,
international and national forces
MISCELLANEOUS:Various committee

1) Hazari committee – Industrial policy.

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2) Subimal dutt committee- Industrial licensing.

3) Abid Hussain committee- small scale industry.

4) C Rangaranjan- committee on disinvestment.

5) Arjun sengupta- MOU.

6) AC shah committee- NBFC.

7) Bimal Jalan committee- market infrastructure instruments.

8) Malegam committee- micro finance.

9) Birla committee- corporate governance.

10) Kirti parekh committee- petroleum products.

11) Chaturvedi committee- national highways.

12) SR Hashim committee- urban poverty.

13) Abhijit sen- wholesale price index.

14) C Rangaranjan- services price Index.

15) Abid hussian committee- developments of capitals markets.

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16) Damodaran committee- customer service in banks.

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17) Khandelwal committee- human resources in commercials banks.

18) Patil committee- corporate debt.

19) Vk Sharma committee- credit to marginal farmers.

20) Sarangi committee- NPAs.

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21) Khanna committee- RRB.

22) Dantawala committee- lead bank scheme.

23) Gadgil committee- financial inclusions.

24) S C Sahoo committee – capital market.

25) FKF Nariman committee- branch expansion programme.

26) Khusro committee- small and cottage industry.

27) N Narsimhan committee- establishment of RRBs.

28) B Shivraman committee- establishment of NABARD.

29) Chakravarty committee- review of monetary system in banking industry.

30) A Ghosh committee- priority sectors and 20 point programme.

31) Uk Sharma- review of lead bank scheme.

32) Tiwari committee- industrial sickness and rehabilitation of sick units.

33) Vaghu committee- money market.

34) GS Patel- management of stock exchange.

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35) Sm Kelkar- RRB.

36) M N Goporia committee- customer service requirement.

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37) M Narsimhan committee- financial sectors reforms.

38) S A Dave committee- functioning of mutual funds.

39) Raj Chelliah committee- tax reforms.

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40) Ghosh- frauds and malpractices in banks.

41) Tarapore committee- capital account convertibility.

42) LC Gupta committee- financial derivatives.

43) M S Verma committee- measures for weak banks.

44) Goswami committee- industrial sickness and exit policy.

SOMEIMPORTANTPOINTS:-
1. The fiscal policy of India is formulated by finance ministry.
2. The Indian railway is a departmental enterprise.
3. The core sector does not include '' Detergents ''
4. The Khadi and village industries commission (KVIC) was set up during the second
plan.
5. SIDCO is related to the development of small industries.
6. Dandakaranya project ensured '' Rehabilitation of refugees '’.
7. The most important small scale industry in India is the industry '' Handloom ''.
8. The major finance for small scale industries is '' Bank loans ''.
9. Banking ombudsman is appointed by RBI.
10. Tiger is the animal on the insignia of the RBI.
11. Since 1983, the RBI's responsibility with respect to regional rural banks was
transferred to NABARD.
12. The new name of IRCI is IRBI.
13. Fiscal policy is connected with public revenue and expenditure.
14. In India, present trend of rapid urbanization is due to '' lack of employment
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opportunities in rural areas.

15. The minimum permissible age for employment in small scale industries is 14
years.

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16. Credit creation increases purchasing power of the currency.

17. The philosophy of Laissez fair is associated with industrial state.
18. The modern state is welfare state.
19. Economic planning refers to the allocation of resources.
20. Economic planning is an essential feature of socialist economy.
21. In the state of India, the state financial corporations have given assistance
mainly re develop medium and small scale industries.
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22. The term '' plastic money'' applies to transactions made up of credit cards
mainly issued by banks.
23. Corporate businesses provides the largest part of the demand for loanable
funds in India.

OTHER IMPORTANT POINTS

1. JOB PRODUCTION - The method of production were products are made

individually.
2. BATCH PRODUCTION – Method of production where one type of product is
made and made and then production is switched to make a different product.
3. FLOW PRODUCTION – Production of one product takes place continuously using
a production or assembly line. Sometimes called mass production.
4. AUTOMATION - Machines, controlled by computer, are introduced into the
production process.
5. LEAN PRODUCTION – A production system which helps ensure that waste is
kept to a minimum.
6. PRODUCTIVITY – A means of measuring the efficiency with which a business
produces goods.
7. QUALITY CONTROL – A system of checking the quality of finished goods.
8. TQM – Total management control: the process where all workers are
responsible for the quality throughout the process of production.
9. SALES REVENUE- The amount of money that a business receives from selling
what it provides or produces
10. INELASTIC PRODUCTS – People will still buy these products if the price
increases as they are essential products, e.g. petrol. This means that if price
increase revenue will increase.
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11. ELASTIC PRODUCTS – People will cut back on these items if the price increases
and will buy more if the price falls. Clothing is an elastic product and revenue will
increase if the price falls.

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12. FIXED COSTS - The costs that do not change as a business changes the amount
it produces.
13. VARIABLE COSTS – Those costs that rise as business increases production and
fall when it reduces production
14. TOTAL COSTS – The fixed and variable costs of a particular level of production
added together.
15. AVERAGE COSTS – The cost of each unit produced.
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16. BREAK-EVEN POINT- When total revenue is equal to total cost. Profits are zero.
17. BREAK-EVEN FORMULA – Fixed costs / price – variable costs
18. ECONOMIES OF SCALE – Occur when a business increases its scale of
production and this leads to a decrease in average costs. Bulk-buying is a type of
economy of scale.
19. INTEREST RATE – The charge made to businesses and people for lending
money.
20. OVERDRAFT – A short term method of finance. The bank allows the business to
withdraw more than is in their current account. Interest charged is high.
21. TRADE CREDIT – Goods and materials are obtained from a supplier and
payment is made at a later date.
22. RETAINED PROFIT – Profit which is kept by the business for its own use.
23. HIRE PURCHASE – A business uses equipment but does not own it until the
final payment has been made.
24. SHARE ISSUE – Finance is raised from selling shares. This finance does not have
to be paid back. However, dividends will need to be paid and shareholders can
vote. Only Plc’s like AS plc can sell shares on the stock exchange.
25. DIVIDEND – That part of the company’s profit paid out to shareholders of
limited companies.
26. MORTGAGE –Allows a business to borrow a large sum of money to purchase or
improve a building.
27. PROFIT –Money left over from sales after all costs have been paid.
28. GROSS PROFIT – Sales revenue minus cost of sales (variable costs).
29. NET PROFIT – Gross profit minus all expenses
30. NET PROFIT MARGIN – Net profit / sales revenue x 100 GROSS PROFIT MARGIN
– Gross profit / sales revenue x 100 OPPORTUNITY COST – The cost of having to
miss out on something else.
31. CASH FLOW FORECAST – A statement showing the expected flow of money
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into and out of the business over a period of time.

32. PERFECT COMPETITION – A market in which there are a large number of
sellers, all competing for customers.

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33. MONOPOLY – When one single business has least a 25% share of the market.
34. MARKET SHARE – The percentage of the total sales in a market accounted for
by a firm.
35. BUSINESS ETHICS – When businesses act in a morally correct way.
36. RECESSION – A period of falling consumer incomes, demand and output.
37. INWARD INVESTMENT – When foreign firms set up in the INDIA. This brings
wealth and jobs to an area and can lead to the multiplier .
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38. MULTIPLIER – The amount by which an increase or decrease in spending on a

specific item is multiplied in its effect on total spending in the economy.
39. INFRASTRUCTURE – The provision of roads, railways, ports and airports in an
area or country.
40. TARIFF – Taxes on imports that raise the price of imports so that it will be
harder for foreign firms to sell their goods.
41. QUOTA – Limits on the amounts of a good or service that can be imported. This
restricts competition from foreign firms.
42. EXCHANGE RATES – The amount of one currency that another can buy.
43. INFLATION – When prices of a range of goods and services increase throughout
the economy.
44. GLOBLISATION – The process by which business activities in different countries
are becoming more and more connected with each other.

45. EUROPEAN UNION – A collection of 27 countries in Europe which trade

together without restrictions such as tariffs and quotas.
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UNIT-4
BANKING
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>First bank in the country was started at Calcutta in 1770 bank of Hindustan.
> The bank of Bengal, the bank of Bombay, the bank of madras these all presidency banks were merge
and in 1921 Imperial bank were established.
> On 1st July 1955 the Imperial bank was partially nationalized and it was name as STATE BANK OF
INDIA. At present state bank is the largest commercial bank in the country.
> STATE BANK OF INDIA has completed 200 years of banking business in India.
> Denmark’s saxo bank enters in to Indian market to replicate its global strategy of providing
international stocks& financial instruments to clients who are exploring investment opportunities
in overseas market.
> UCO bank introduces pre funded Cheques series of Rs. 1000, 5000, 10000.
> Bank of Rajasthan merge with ICICI bank 13 Aug. 2010.
> Punjab national bank was the first Indian bank. It established in 1894.
> Reserve bank of India established on 1st April 1935 under the act 1934 and it is a central bank of
India. Its head office is in Mumbai earlier in Calcutta. RBI nationalized on 1st January 1949.
Raghuram Rajan 23rd governor of RBI.
> On 19th July 1969 , 14 large commercial banks nationalized then on 15th April 1980 , 6 more banks
were nationalized as new bank of India merge with PNB so total nationalized bank is 19.
> Those banks whose names are included in the second schedule of RESERVE BANK ACT 1934 are
called commercial banks.
> Prime lending rate is replaced by base rate 1st July 2010
> USB (Ultra small branches) in all villages under the financial inclusion scheme by march 31 2012
> Regional rural banks were established in 1975 are working in all states of country except in Sikkim &
Goa. At present 67 RRBs are working in India.
> The nation largest lender state bank of India has commence operations in Qatar by opening a branch
in the Qatar financial Centre, Doha.
> As per the declaration made by government in parliament, ten rupees coins are being introduced
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shortly into circulation to meet the increasing demand of currency notes of lower value.
> RBI occupies the apex position in the Indian money market.

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> RBI of India (amended) bill 2005 has been approved by Lok Sabha on 17th may 2006. This bill amends
the RBI act for providing flexibility to the central bank in India fixing CRR & SLR.
> SBI launches Parivartan scheme to provide better training to its staff including high officials,
clerks and peons.
> SBI commercial & international bank ltd (SBICI BANK LTD) has been finally merged with state bank of
India in July 2011. SBICI two branches in Mumbai.
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> SIDBI amendment bill 2012 introduced in parliament on 22nd may 2012 definition of industrial
concern to cover floriculture , setting up or development of tourism related facilities, construction
and entertainment industry film & to accept repayment of foreign currency loans in foreign
currency & maintaining foreign currency loan a/c.
> SBI merges its Mauritius based subsidiary, Indian ocean International bank IOIB with SBI
international (Mauritius) in African island nation.
> Money market is that organization which provides short term credit. Capital market is to provide
long term capital.
> Government share in SBI reduced to 51% from 59% to mobilize Rs. 12000 Crores.
> IDBI (Industrial development bank of India) has been the apex institutions of industrial finance in
country. Commencement of business on 8th Sep 2004. It became IDBI ltd on 1st Oct 2004 and
established in 1964.
> Finance Asia award to Kotak bank (7th time)
> Imperial bank established in 1921.
> SIDBI established on 2nd April 1990, its headquarter is at Lucknow.
> Unit trust of India (UTI) was established in 1964 with the objective of mobilizing the small savings of
the people for their suitable & profitable investment. It has now been bifurcated in UTI – 1 and
UTI- 2.
> UTI bank ltd has been renamed as AXIS bank ltd. This was from 30th July 2007.
> NABARD (national bank for agriculture and rural development) established on 12th July 1982 as the
apex financing institutions for agriculture & rural development.
> Export import of India (EXIM) is the apex institution for financing exports and imports. It was
established on 1st Jan 1982.
> UTI started the first bank in private sector on 2nd April 1994. Its head office is at Ahmedabad. It
renamed as AXIS bank.
> SBI becomes the first registrar for UNIQUE IDENTIFICATION AUTHORITY OF INDIA (UDAI) now
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renamed as Aadhaar for collecting both demographic and biometric information’s of bank a/c
holders.
> Mobile number portability (MNP) launched on Nov 25, 2010 in Haryana, now all over country

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from Jan 20, 2011.

> Chandigarh 10th largest e commerce hub in India.
> India oil corporations (IOC) has completed 50 years of its establishment on 30th June 2009.
(Golden jubilee)
> First bank with limited liability managed by Indian board was Oudh commercial bank in 1881.
SFCS (STATE FINANCIAL CORPORATIONS)
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>It was established in 1948.

> State financial corporation act was passed by parliament on Sep 1951.
> First SFCs set up in Punjab in 1953.
> At present there are 18 SFCs (out of which 17 SFCs were established under SFC act 1951).
> Tamil Nadu Industrial Investment corporation Ltd establish under company act 1949 (18th
SFCs).
> SFCs promote small and medium industries of the states.
> SFCs are helpful in ensuring balanced regional development, higher Investment, more employment
generation and broad ownership of Industries.
> Act as a regional development bank.
> It has failed to meet the demand of small and medium industries.
IDBI (INDUSTRIAL DEVELOPMENT BANK OF INDIA).
>Industrial development bank of India established under industrial development bank of India
act 1964.
> A principal financial institution for promoting credit and other facilities for developing industries &
assistant developing institutions.
> Till 1976, IDBI was a subsidiary bank of RBI.
> In 1976 it was separated from RBI and the ownership was transferred to government of India.
> To provide financial assistance to industrial enterprises & to promote institutions engaged in
industrial development.
> IDBI which was established as development finance institution under IDBI act 1964 has been
converted as a banking Company.
> IDBI got certificate of commencement of business on 28th Sep 2004 and IDBI was transformed into
IDBI Ltd on 1st Oct 2004, a company under companies act 1956 and scheduled bank under RBI act
1934.
> Apex organization in development financing
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> Act as a lender of the last resort

> Headquarter is at Mumbai.

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RRB (REGIONAL RURAL BANK).

> Regional rural bank was established on 2nd Oct 1975 under the provisions of RRB act 1976 with a
view to develop rural economy.
> It was established to take banking services to the door step of rural masses, especially in remote rural
areas with no access to banking services.
> It also provide institutional credit to weaker sections of society at concessional rate.
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> On 2nd Oct 1975, 5 RBBs were established at 1) Moradabad (U.P) 2) Gorakhpur (U.P) 3) Bhiwani
(Haryana) 4) Jaipur (Rajasthan) 5) Malda (West Bengal)
> With effect from 1997 priority sector lending was made applicable to RRBs.
> The union cabinet on 31st Jan 2013 gave its approval to the proposed amendments in RRBs Act 1976
to enhance authorized and issue capital to strengthen their capital base.
> RBI on 13th June 2006 announced its liberalized licensing policy for RRBs.
> RRBS KNOWN AS SMALL MAN BANK.
> Total 82 RRBs , in which 46 are amalgamated and 36 are standalone. New 82nd RRBs was
Puduval Bhathiar Grama Bank Pondicherry 26 mar 2008.
> All RRBs to adopt core banking system (CBS) by Sep 2011.
> KHUSHRO COMMITTEE- agriculture credit review committee. KHUSHRO said that RRBs to
merge with sponsor bank.
> MC BHANDARI COMMITTEE to restructuring of RRBs.
> PROF VS VYAS recommendation advising committee on flow of credit to agriculture & related act to
restrict RRB in order to improve their operational viability & to take advantage of economies of
scale were accepted.
NABARD (NATIONAL BANK FOR AGRICULTURE & RURAL DEVELOPMENT).
>ARC- AGRICULTURAL REFINANCE CORPORATIONS 1963.
> It is the apex banking institution providing finance for agriculture & rural development.
>It was established on 12th July 1982.
>Start with paid up capital of Rs. 100 crore 50:50 (Gov.: RBI) but now it’s (99:1) (GOV: RBI).
> NABARD amendment bill 2000 was accepted by the president in Jan 2001.
> Authorized capital of NABARD to Rs. 20000 crore from Rs 5000 crore.
> Paid up capital increased in 2 phase of Rs 2000 cr to 5000 crore.
> In 2006-2007 Bharat Nirman construction of rad under PMGSY total sanctions of NABARD TO NRRDA
(National rural road development) under RIDF on 31st mar 2010 Rs 18500 crore to NRRDA.
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SIDBI (SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA).

>It was established as a wholly owned subsidiary of IDBI under the small industries development bank
of India Act Oct 1989 as the principal financial institution for promotion, financing &

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development of industries in small scale sector.

> SIDBI act as a apex role to provide finance to small scale sector.
> It started its functions from 2nd April 1990.
> Its headquarter is in LUCKNOW.
> SIDBI provides loan under its single window service.
> IDBI largest shareholders of SIDBI, SBI & LIC next.
> SIDBI amendment bill 2012 introduced by Pranab Mukherjee in LOK SABHA on 22nd May 2012. In
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SIDBI amendment bill definition of Industrial concern is :-

1) Expand activities to floriculture .
2) Development of tourism related .
3) Construction facilities .
4) Entertainment industry.
> It also provides to accept repayment of foreign currency loans in foreign currency & maintaining foreign
currency loan account as required under any law or accounting standard.
> Government of India announced in budget 1988-1989 to establish SIDBI.
IFCI (INDUSTRIAL FINANCE CORPORATION OF INDIA).
>IFCI Ltd was established in 1948 under a special act on the recommendation of central
banking enquiry committee.
> IFCI was the first all India development financial institution to be set up
> To arrange medium & long term credit carious industrial enterprises of country.
> On 1st July 1993 IFCI given the status of Ltd Company with the name IFCI Ltd. It got its
registration under company act 1956.
> IFCI will soon merge with PNB.
UTI (UNIT TRUST OF INDIA).
>First private bank & popular in west.
> UTI set up on 26th Nov 1963 after an act passed on 1962.
> It was effective from 1st July 1964
> Objective of UTI is to mobilize the small savings of the people for their suitable and profitable
investment.
> UTI are open end investment as they sell their shares units continuously in order to raise additional
capital. Redeem their shares (repurchase) to ensure high liquidity.
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> UTI 1 has been named as administrator of the specified undertakings of the unit trust of India
(private)
> UTI 2 SBI, PNB, BOB, LIC set up. (Public)

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> UTI mutual fund, UTI Trustee Company, UTI Asset Management Company.
> Government signed as agreement on 15 Jan 2003 for transfer of undertakings.
> 1st Feb 2003 was appointment day and bifurcation of UTI 1 an UTI 2.
> UTI abolish Raj Laxmi unit plan 2 which came in 1992 for girls benefit on 1st Oct 2000.
> On 31st May 2003 US-64 came to an end.
> On 31st July 2007 UTI was renamed as AXIS bank
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> UTI mutual fund join hands with Sri Mahila SEWA Sahkari scheme to unorganized women workers
through UTI retirement benefit pension fund.
> UTI has launched a pension scheme for the extremely poor among the India workers for a minimum
contribution of Rs. 50 women working with SEWA (Self -employed women association)
LABELS OF ATM
> The automated teller machine (ATM) entered India by 1980s
> First bank to introduce ATM in India was HSBC bank in 1987, Mumbai.
> Three types of ATMs are-
1) Bank’s own ATMs- These are owned and operated by the concerned bank and carry the Banks
logo.
2) Brown Label ATMs BLAs- These are owned by third party. The concerned banks only handle part of
the process that is cash handling & backend server connectivity. They carry logo of the bank which
outsources their services.
3) White label ATMs (WLAs) - These are owned & operated by a third party. They do not bear logo of
the banks they serve in place they carry logo of the firm which own them. They serve customers of all
banks & are interconnected with the entire ATM network in the country. The Tata communications
payment solutions became the first such firm to get permission of RBI to setup such ATMs, its brand
name is Indi cash.
MERGERS AND AMMALGAMATION
>United western bank of India- IDBI.
> Lord Krishna bank- Centurian bank.
> Ganesh bank of kurundwar- Federal bank.
> IFCI- Punjab National Bank.
> Bank of Punjab- Centurian bank.
> Global trust of India- oriental Bank of commerce.
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> Nedugandi Bank- Bank of Punjab.

> Banaras state bank- Bank of Baroda.

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> Bank of Mudura- ICICI.

> Times Bank- HDFC.
> Sikkim Bank- Union bank.
> Barely corporation – Bank of Baroda.
> Bharat overseas bank- India Overseas Bank.
> Sangali Bank- ICICI.
> American express bank- standard chartered bank.
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> Centurian bank of Punjab- HDFC.

> 20th century finance company- Centurian bank.
> New bank of India- Punjab National Bank.
Repo Rate Introduced In Dec 1992, Also Known As Policy Rate, Rate Of Repurchase And Rate Of
Discount.
> Reverse repo rate introduced in Nov 1996.
> Marginal standing facility rate in May 2011 also known as penal rate.
SBI AND ITS ASSOCIATES BANK
>Imperial Bank established in 1921 and nationalized on 1st July 1955 and became SBI Bank.
>Its 5 associates banks are-
1) SBI of Bikaner & Jaipur.
2) SBI of Hyderabad.
3) SBI of Mysore.
4) SBI of Patiala.
5) SBI of Travancore.
> 13 Aug 2008 SBI of saurashtra merge with SBI.
> 19 June 2009 SBI of Indore merge with SBI.
BANKING OMBUDSMAN SCHEME.
>RBI introduced a banking ombudsman scheme in the country on 14th June 1995 for giving
solutions for customer complains.
> Bank can send their complains to these ombudsman if concerned banks fail to satisfy them. These
ombudsman scheme will take action and ensure relief to customers.
> According to RBI all schedule primary co-operative banks & commercial banks & now from
2002 RRBs also included in that.
> Matter reported within the period of 1 month after getting final reply from concerned bank & after 1
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month it will not be entertained.

> Mainly this ombudsman came to overcome the delays in banking facilities.

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JANKIRAMAN COMMITTEE
> RBI set up a high level enquiry committee on 30th April 1992. Under the chairmanship of Mr. R
Jankiraman.
> Committee submitted final report on 7th May 1993.
> This was formed to check all irregularities in securities transactions.
> Irregularities were committed by public sector banks, sector banks, private banks & foreign
banks.
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GOIPORIA COMMITTEE
> RBI constituted a committee under the chairmanship of MN Goiporia, president of SBI in Sep
1990.
> Committee submitted its report on 5th Dec 1991.
> For consumer service improvements in Banks.
> To exceed public hour for all worker excluding cash payment.
> Re-adjustment of bank opening time
> Spot deposits of outstations cheques of Rs 5000 instead of Rs. 2500.
> Increase in Bank rate on saving account.
> Provide tax benefit on deposit amount.
> Optimum use of powers available with bank staff.
NARSIMHAM COMMITTEE
> Government of India constituted this on 14th August 1991 for making recommendations on existing
financial system & to give suggestions for improving the existing structure.
> Submitted it on Nov 1991 placed on table on Dec 17, 1991.
> Focus on DFIs (development financial Institutions & money & capital market)
> 4 tier banking system should be introduced
1) 1st Tier – 3 & 4 International Banks.

2) 2nd Tier- 8 or 10 national Banks.

3) 3rd Tier- regional banks.

4) 4th Tier – Rural banks.

>In 1991 the country was caught into deep economic crisis & government at this juncture decided to
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introduce comprehensive economic reforms.

> Damodaran committee- Banking sector Reforms.

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NITI AYOG – NATIONAL INSTITUTION FOR TRANSFORMING INDIA

>1st Jan 2015 planning commission replaced.
> Government of India replaced planning commission with a new institution named NITI Ayog.
> The institution will serve as Think tank of government-a-directional and policy dynamo.
> Its roles are as follows-
1) The center to state one way flow of policy, that was the hallmark of the planning commission era, is
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now sought to be replaced by a genuine & continuing partnership of states.

2) It will seek to provide a critical directional & strategic input into the development process.

3) RAJIV KUMAR took charge as vice chairman of NITI Ayog.

4) It will emerge as Think tank that will provide government at the central & state levels with relevant
strategic & technical advice across the spectrum of key elements of policy.
5) AMITABH KANT was appointed as the chief executive officer of NITI Ayog with effect from 1st April
2016. She will serve the position for one year.
6) It will also seek to put an end to slow and tardy implementation of policy, by fostering better Inter-
Ministry co-ordination and better center-state co-ordination. It will help evolve a shared vision of
national development priorities and foster co-operative federalism, recognizing that strong states
make a strong nation.
7) It will develop mechanisms to formulate credible plans to the village level and aggregate these
progressively at higher levels of government. It will ensure special attention to the sections of society
that may be at risk of not benefiting adequately from economic progress.
8) It will create knowledge, innovation& entrepreneurial support system through a collaborative
community of national & international experts, practitioners & partners. It will offer a platform for
resolution of inter-sectoral and inter-departmental issues in order to accelerate the implementation
of the development agenda.
9) It will monitor and evaluate the implementation of programmers and focus on technology up
gradation and capacity building
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OBJECTIVES AND OPPORTUNITY

>An administration paradigm in which the govt. is an “enabler” rather than a provider of first &
last resort.

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> Progress from food security to focus on a mix of agricultural production, as well as actual returns that
farmers get from their produce.
> Ensure that India is an active player in the debates and deliberations on the global commons
> Ensure that the economically vibrant middle class remains engaged & its potential is fully
realized.
> Incorporate the significant geo-economic& geopolitical strength of the Non -resident Indian
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community.
> Use urbanization as an opportunity to create a wholesome & secure habitat through the use of
modern technology.
> Use technology to reduce opacity & potential for misadventures in governance.
NITI AYOG WILL COMPRISE OF –
> Prime minister of India as the chairperson.
> Governing council comprising the chief ministers of all the states & Lt Governors of Union
Territories.
> Regional councils will be formed to address specific issues and contingencies impacting more than
one state or a region. These will be formed for a specified tenure. The regional councils will be
conveyed by the prime ministers and will comprise of the chief ministers of states & Lt Governors
of UT in region. These will be chaired by the chairperson of the NITI Ayog or his nominee.
>Experts, specialists and practitioners with relevant domain knowledge as special invitees nominated
by the Prime ministers.
> The Full time organizational framework will comprise of, in addition to the PM as the
chairperson.
> Vice chairperson – To be appointed by PM.
> Members full time.
> Part time members – Max of 2 from leading universities research organizations other relevant
institutions in an ex-officio capacity. Part time members will be on a rotational basis.
> Ex-officio members- maximum of 4 members of the union council of ministers to be nominated
by the PM.
> Chief executive officer- To be appointed by the PM for a fixed tenure, in the rank of secretary to
the GOI.
MUDRA BANK- MICRO UNITS DEVELOPMENT REFINANCE AGENCY
>Finance minister has proposed to create a micro unit development refinance agency bank with a corpus
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of Rs. 20000 crore and credit guarantee corpus of Rs 3000 crore MUDRA bank will refinance
Micro finance institutions through Pradhan Mantri Mudra Yojna.
> In lending priority will be given to SC/ST enterprises.

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> These measures will greatly increase the confidence of young, educated or skilled workers who would
now be able to aspire to become first generation entrepreneurs.
> Existing small business to expand their activities.
> The center has ensured credit flow to SMEs sector & has also identified NBFC as
a good fit to reach out them.
> People will now be able to get refinance at subsidized rate and it would be passed on to SMEs.
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Moreover it would enable SMSs to expand their activities.

RESERVE BANK OF INDIA
>It is the central bank of India
> Established on 1st April 1935 under an act 1934.
> Nationalized on 1st Jan 1949.
> Its Headquarter is at Mumbai but earlier was at Calcutta.
> URJIT PATEL 24rd governor of RBI.
> It is the issuing agency of the currency & coins except 1 rupee & coins which is issued by Ministry of
finance (signature finance secretary)
> It is a distributing agent of currency & coins.
> Banker of government.
> Bankers of bank/ bank of last resort.
> Announces the credit & monetary policy.
> Stabilizing the rate of inflations.
> Stablishing the exchange rate of rupee.
> RBI agent of IMF.
> Earlier RBI changes its rate two times in a year but now it can be change according to the
requirement. (60 days).
> 10 Rs 20 Rs 50 Rs RBI has introduced star bank note.
> Controller of credit both quantitative and qualitative.
> Quantitative are Cash Reserve Ratio, Bank Rate, Statutory Liquid Ratio, Open Market
Operations.
> Qualitative controls are Publicity, Rationing Of Credit, Regulation Of Consumer Credit, Moral
Suasion, and Variation In Margin Requirements.
> 6th July 2005 financial market department for surveillance on financial market.
> 1st July 2010- RBI introduced plastic currency notes.
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> Australia 1st to issue plastic currency notes.

> RBI to issue non-sequentially numbered Rs 500 notes.
> RBI established on 1st April 1935 under the act 1934 on the recommendations of John Hilton Young

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Commission 1926 called Royal Commission on Indian Currency & finance.

> Prior to RBI Imperial bank (now SBI) was conducting the central bank functions.
> RBI is managed by a central board of directors with 4 local bodies at Delhi, Mumbai, Chennai,
and Kolkata.
> Schedule bank means a bank whose name is in the 2nd Schedule of RBI Act 1934.
> Rs 2 and rs 5 note discontinued.
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> Tools which are regulated by RBI credit & monetary policy are
1) CRR 2) SLR 3) BANK RATE 4) REPO RATE 5) REVERSE REPO RATE 6) MARGINAL STANDING FACILITY 7)
PRIME LENDING RATE/ BASE RATE
> RBI adopted Minimum reserve system for note issue.
> RBI released Rs 1000 currency note on 9th Oct 2000
> Base Rate- It is the interest rate below which scheduled commercial banks will lend no loans to its
customers. It is replaced by BPLR on 1st July 2010 (BENCHMARK PRIME LENDING RATE). The base rate
system is aimed at enhancing transparency in lending rates of banks & enabling better assessment
of transmission of monetary policy.
> PLR (PRIME LENDING RATE) chaired by Deepak Mohanty to suggest changes to make credit pricing
more transparent. All categories of loans are priced with reference to the base rate, only except
differential rate of interest DRI, loans to bank depositors against their own deposits.
> SLR (Statutory liquid ratio) – It is the ratio fixed by RBI of total deposits of a bank which is to be
maintained by the bank with itself in non- cash form prescribed by Government.
> Bank rate- It is the interest rate which the RBI charges on its long term landings. The client who
borrow through this route- GOI, state government, banks, financial institutions, co-operative bank
and NBFC.
> Repo rate- Introduced in Dec 1992. It is the rate of interest the RBI charges from its clients on their
short term borrowings. It is also known as rate of repurchase and rate of discount. Higher the repo
rate costlier the loan.
> Reverse repo rate- Established in Nov 1996, LAF liquidity adjustment facility is a part of it. It is the rate
of interest the RBI pays to its clients who offer short term loan to it.
> Marginal standing Facility rate- May 2011, under this scheme banks can borrow overnight up to 1%
of their NDTL (Net demand time liabilities) from RBI at the interest rate 3% higher than the current
repo rate.it is penal rate for banks.
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MICRO FINANCE BILL

NABARD is to be appointed as regulator for the micro finance sector and bank would later frame rules

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for maintenance of credit adequacy ratio (CAR)

> Micro finance Institute bill has a provision to safeguard the interest of people depositing
their money in self-help group (SHG).
> MFI bill is an attempt to link the resource rich commercial banks
> Union finance Ministry has directed banks to set up ultra -small branches (USB) in all villages under
financial inclusion scheme by 31st Mar 2012
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PRADHAN MANTRI JAN DHAN YOJANA

>28th Aug. 2014
> Target to open 1.5 crore account on a single day.
> Benefits of this yojna are as follows-
1) A Rupay debit card for every card holder.

2) 1 lakh accident insurance cover.

3) 5000 overdraft facility.

4) Additional 30000 life insurance before 26 Jan 2015.

>KPMG services was hired by finance ministry to undertake a validation exercise of number of basic
bank account opened by the bank under PMJDY.
> KPMG target to open 7.5 crore bank.
> Punch line of Pradhan Mantri Jan Dhan Yojana- Mera Khata Bhag Vidhata (My bank account- The
Good Fortune creator)
> Pehla kadam (minor) and pehli udan (10+) two savings bank product for the children’s launched
by SBI.
> BCSBI= Banking codes standards Board of India
> Dr. Nachiket MOR committee – on comprehensive financial services for small business and low
income households.
> Luthiana 19th member of Eurozone
> Prescribed age of minor 10 years for operating financial Inclusion
> Saumitra chaudhari a committee recommended recasting of the index of industrial production
IIP & WPI
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FINANCIAL INCLUSION
>Department of financial services, ministry of finance.
> Financial inclusion or inclusive financing is the delivery of financial services at affordable costs to
sections of disadvantaged & low income segments of society, in contrast to financial exclusion where

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those services are not available or affordable.

> It is argued that as banking services are in the nature of public good, the availability of banking and
payments services to the entire population without discrimination is the prime objective of
financial inclusion public policy.
> Goals of financial inclusions-
1) Access at a reasonable cost for all households to a full range of financial services, including savings or
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deposit services, payment & transfer services, credit & insurance.

2) Sound & safe institutions governed by clear regulation and industry performance standards
Financial & institutional sustainability to ensure continuity & certainty of investment.

3) Competition to ensure choice & affordable for clients.

>In India Financial Inclusions came in 2005.
> Mangalam became the first village in India where all households were provided banking
services.
> GCCs- General credit cards
> NGOs/SHG- Self-help group
> Pradhan mantra Jan Dhan Yojana.
> Opening of no frills account- basic banking no frills account is with nil or very low minimum balance as
well as charges that make such accounts accessible to vast sections of population.
> BCs- Business correspondent’s
> Relaxation on KYC know your customer
> Adaption of EBT- To transfer social benefits electronically to the bank account of beneficiary & deliver
government benefits to the door step of beneficiary.
> CRISIL Incuses is one of its kind tool to measure the extent of inclusion in India.
NON PERFORMING ASSETS
> Non- performing assets is an advance where payment of interest and repayment of installment of
principal remain unpaid for a period two quarters more the advance is treated as ‘past due’ if it
remains unpaid for 30 days beyond due date.
> An asset including a leased asset becomes an NPA when it lease to generate income from the
banks.
> An NPA is a loan or advance where:-
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1) The interest and installment of principal remain overdue for a period of more than 180 days in
respect of a term loan.

2) An accounts remain out of order as indicated in the paragraph below, in respect of overdraft cash

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credit (overdraft – no payment continuously for 90 days)

3) A bill remains overdue for a period of more than 90 days in case of bills purchase and
discounted.

4) An instalment of the principal or the interest thereon remains overdue for two crop seasons
for short duration cost.
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5) An instalment of the principal or the interest thereon remains overdue for one crop season for long
duration crops. So total 2 and half years.
>Bank should classify an account as an NPA only if the interest charged during any quarter is not serviced
fully within 90days from the end of the quarter.
> In the absence of a clear agreement between the bank and the borrower for the purpose of
appropriation of recoveries in NPAs bank should adopt an accounting principle and exercise the right of
appropriation of recoveries in a uniform and consistent manner.
> Bank are required to furnish a report on NPAs as on 31st March each year after completion of
audit.
> Categories of NPA – Based on periods & realisabilty of due-
1) Substandard NPA

2) Doubtful assets

3) Loss assets
> Substandard asset – with effect from 31st march, 2005 a substandard asset would be one, which has
remained a NPA for a period less than or equal to 18 months
>Doubtful assets- with effect from 31st march 2005, an asset would be classified as doubtful if it has
remained in the substandard category for a period of 18 months or more
> Loss asset- a loss assets is one , where the bank or the internal or external auditors or the RBI inspector
has identified the loss but the amount has not been written off wholly.
MICRO FINANCE
>It is a source of financial services for entrepreneurs and small business lacking access to banking &
related services. The two main mechanism for the delivery of financial services to such client’s are-
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1) Relationship based banking for individual entrepreneurs and small business.

2) Group based models where several entrepreneurs come together to apply for loans & other
services as a group.

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>Micro finance is a movement whose object is a world in which as many poor and near poor households
as possible have permanent access to an appropriate range of high quality financial services, including
not just credit but also savings, insurances fund transfers.
CAPITAL ADEQUACY RATIO
>The central banks of the world started devising tools to minimize the risks of banking at one hand and
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providing cushions (shock absorbers) to the banks at the other hand so that banks do not go bust
(shut down after becoming bankrupt)
> Providing cushion/shock absorbers to banks has seen three major developments-
1) The provision of keeping a cash ratio of total deposits mobilized by the banks (known as
CRR)

2) The provisions of maintaining some assets the deposits mobilized by the banks with the banks
themselves in non-cash form (known as the SLR)
3) The provision of the capital adequacy ratio norm (CAR)
> It was in 1988 that the central banking bodies of the developed economies agreed upon such a
provision the CAR- also known as the Basel Accord. The accord was agreed upon at Basel, Switzerland at
a meeting of the bank for International settlements (BIS)
> The capital adequacy ratio is the percentage of total capital to the total risk-weighted assets.
> The new norms (Basel 3) has devised a third category of capital tier-3 capital.
> The RBI introduced the capital-to-risk weighted assets ratio (CRAR) system for the banks
operating in India in 1992.
> BCBS (Basel committee on banking supervision)
> The first Basel Accord, known as Basel 1, was issued in 1988 and focuses on the capital adequacy of
financial institutions. The capital adequacy risk (the risk a financial institutions faces due to an
unexpected loss) categories the assets of financial institutions into five risk categories (0%, 10%, 20%,
50%, 100%). 8% loss.
> The second Basel Accord, known as Basel 2, is to be fully implemented by 2015. It focuses on three main
areas, including minimum capital requirements, supervisory review and market discipline, which
are known as the three pillars. The focus of this accord is to strengthen international banking
requirements as well as to supervise and enforce these requirements
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MISCELLANEOUS POINTS

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Banking Ombudsman: Banking Ombudsman is a quasi-judicial authority, which

functions under India’s Banking Ombudsman Scheme 2006. It was created by
Government of India with a purpose to deal with the complaints of customers of the
banks related to various services rendered by the banks.

Deflation: It is a decrease in the general price level of goods and services.

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Inflation: It can be defined as a sustained increase in the general level of prices for
goods and services.

Liquidity: Liquidity describes the degree to which an asset or security can be quickly
bought or sold in the market without affecting the asset’s price.

Merchant Banking: It is a combination of Banking and consultancy services.

Monetary Policies: It refers to the use of instruments by Reserve Bank of India

(RBI) to regulate the availability, cost and use of money and credits.

Plastic Money: It is a term used in reference to the hard plastic cards we use every
day in place of actual bank notes.
Direct Instruments:-

Cash Reserve Ratio (CRR): Cash reserve Ratio (CRR) is the amount of funds that the
banks have to keep with the RBI.

Refinance Facilities: RBI offers refinance facility to help out the exporters by
replacing an existing debt obligation with another.

Statutory liquidity ratio (SLR): SLR is the minimum proportion of their Net Demand
and Time Liabilities, which every bank maintains in the form of cash, gold and
securities, at the close of business every day.
Indirect Instruments:-

Bank rate: The rate of interest which the RBI charges on the loans and advances to a
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commercial bank.

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Liquidity adjustments facility (LAF): It’s a monetary policy tool which allows banks
to borrow money through repurchase agreements and adjusting the day to day
mismatches in liquidity.

Marginal standing facility (MSF): It’s a window for banks to borrow from the RBI in
an emergency situation when inter-bank liquidity finishes completely.
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Market Stabilization scheme (MSS): Securities that are issued with the objective of
providing a stock of securities to the RBI to intervene in the market for managing
liquidity.

Open Market Operations (OMO): It’s an activity by a RBI to give or take liquidity in
its currency to or from a bank or a group of banks.

Repo rate: The rate at which the RBI lends money to commercial banks in the event
of any shortfall of funds.

Reverse Repo Rate: The rate at which the RBI borrows money from commercial
banks within the country.

Term Repo: A repurchase agreement with a term of more than one day.

Money Market Instruments:-

Authorized Capital: The authorized capital/ registered capital/nominal capital of a

company is the maximum amount of share capital that the company is authorized by
its constitutional documents to issue to shareholders.

Bonds: It is an instrument of indebtedness of the bond issuer to the holders.

Call Money: Money loaned by a bank or other institution which is repayable on

demand.

Commercial Bills: A bill of exchange issued by a commercial organization to raise

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money for short-term needs.

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Commercial Papers: An unsecured, short-term debt instrument issued by a

corporation for the financing of accounts receivable, inventories and meeting short-
term liabilities.

Certificates of deposits (CD): A savings certificate entitling the bearer to receive

interest.
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Dated government securities: These are long-term securities and a fixed or floating
coupon/interest rate which is paid on the face value, payable at fixed time periods.

Debentures: A long-term security bearing a fixed rate of interest, issued by a

company and secured against assets.

Issued Capital: The share capital that has been issued to shareholders.

Mutual Funds: It is a professionally managed investment fund that pools money

from many investors to purchase securities.

Net Asset Value (NAV): A mutual fund’s price per share or exchange-traded fund’s
(ETF) per-share value.

Paid up Capital: The amount of a company’s capital that has been funded by
shareholders.

Treasury bills: A short-dated UK/US government security, bearing no interest but

issued at a discount on its redemption price.

Negotiable Instruments:-

Bill of Exchange: A bill of exchange is a binding agreement by one party to pay a

fixed amount of cash to another party as of a predetermined date or on demand.

Cheques: An order to a bank to pay a stated sum from the drawer’s account, written
on a specially printed form.
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Ante Dated Cheque: Cheques which have been written by the maker, and dated at
some point in the past.

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Bounced Cheque: Check that cannot be processed because the writer has
insufficient funds.

Crossed Cheque: These cheques can only be deposited directly into a bank account
and cannot be immediately cashed by a bank or any other credit institution.
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Post Dated Cheque: Cheque that is written by the drawer (payer) for a date in the
future.

Stale Cheque: A cheque which a bank will not accept and exchange for money or
payment because it was written more than a certain number of months ago.

Cheque Truncation: It is the conversion of a physical cheque into a substitute

electronic form for transmission to the paying bank.

Promissory Note: A financial instrument that contains a written promise by one

party to pay another party a definite sum of money either on demand or at a
specified future date.
Various Types of Accounts:-

Current Account/Demand deposit Account: An active account catering for frequent

deposits and withdrawals by cheque.

DeMat Account: This account is opened by the investor while registering with an
investment broker (or sub-broker).

Fixed deposit account or time deposit account: It is a financial instrument provided

by banks which provides investors with a higher rate of interest than a regular
savings account, until the given maturity date.

NOSTRO Account: A bank account held by a UK bank with a foreign bank, usually in
the currency of that country.

Recurring Deposit Account: It is opened by those who want to save regularly for a
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certain period of time and earn a higher interest rate.

Saving Account: A deposit account held at a bank or other financial institution that
provides principal security and a modest interest rate.

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Current Account Deficit: A current account deficit is when a country’s government,

businesses and individuals import more goods, services and capital than they export.

Financial Inclusion: Financial inclusion is the delivery of financial services at

affordable costs to massive sections of disadvantaged and low income groups.
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Fiscal Deficit: When a government’s total expenditures exceed the total revenue.

Foreign Direct Investment (FDI): It is a controlling ownership in a business

enterprise in one country by an entity, based in another country.

Foreign Institutional Investors (FII): FIIs are those institutional investors which
invest in the assets belonging to a different country other than that where these
organizations are based.

General Anti-Avoidance Rules (GAAR): A GAAR is a statutory rule that empowers a

revenue authority to deny taxpayers the benefit of an arrangement that they have
entered into for an impermissible tax-related purpose.

Money Laundering: Any act to hide the identity of illegally obtained proceeds so
that they appear to have originated from genuine sources.

Participatory notes or P-Notes: These are instruments, issued by registered foreign

institutional investors (FII) to overseas investors, who wish to invest in the Indian
stock markets without registering themselves with the market regulator, the
Securities and Exchange Board of India (SEBI).

Quantitative easing and tapering: A monetary policy in which RBI purchases

government securities or other securities from the market in order to lower interest
rates and increase the money supply.

Electronic Payment Systems in Banks:-

National Payments Corporation of India (NPCI): NPCI is an umbrella organization for
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all retail payments system in India.

Clearing Corporation of India Limited (CCIL): It is a joint stock company with share
capital contribution by major banks and financial institutions.

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Electronic Clearing Service (ECS): ECS is an electronic mode of funds transfer from
one bank account to another and can be used for both

Electronic Funds Transfer (EFT): It is a system of transferring credit and debit

purposes.money from one bank account directly to another without any paper
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money changing hands.

National Electronic Funds Transfer (NEFT) System: It is an Indian system of

electronic transfer of money from one bank or bank branch to another.

Real Time Gross Settlement (RTGS) System: These are specialist funds transfer
systems where the transfer of money or securities takes place from one bank to
another on a “real time” and on “gross” basis.

Important Organizations:-

International Bank for Reconstruction and Development (IBRD): An international

financial institution that offers loans to middle-income developing countries.

International Monetary Fund (IMF): An international organization that foster global

monetary cooperation, secure financial stability, facilitate international trade,
promote high employment and sustainable economic growth, and reduce poverty
around the world.

Bank for International Settlements (BIS): An international company, limited by

shares owned by central banks which look after international monetary and financial
cooperation and serves as a bank for central banks.

Asian Development Bank (ADB): A regional development bank to promote social

and economic development in Asia.

EXIM Bank: A premier export finance institution that works as both a catalyst and a
key player in the promotion of cross border trade and investment.
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Reserve Bank of India (RBI): The central bank of India that is charged with regulating
the country’s currency and credit systems.

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National Bank for Agriculture and Rural Development (NABARD): An apex

development bank that review arrangements for institutional credit for agriculture
and rural development.

Industrial Development Bank of India (IDBI): An Indian government-owned financial

service company to provide credit and other financial facilities for the development
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of the fledgling Indian industry.

Institute of Banking Personnel Selection (IBPS): An autonomous agency in India

enhancing human-resource development through personnel assessment selection
and recruitment of Officers and Clerks in Indian banks.

Indian Banks’ Association (IBA): A representative body of management of banking

in India operating in India.

Securities Exchange Board of India (SEBI): The regulatory body for the
investment/securities market in India.

National Housing Bank (NHB): An apex financial institution for housing.

Small Industries Development Bank of India (SIDBI): An independent financial

institution aimed to aid the growth and development of micro, small and medium-
scale enterprises (MSME) in India.
Other Essential Terms of Banking

Acquiring Bank: A bank or financial institution that processes credit or debit card
payments on behalf of a merchant.

Adjustable-Rate Mortgages (ARMS): The initial interest rate is normally fixed for a
period of time after which it is reset periodically, often every month.

Amortization: It is an accounting term that refers to the process of allocating the

cost of an intangible asset over a period of time.
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Annuity: A fixed sum of money paid to someone each year, typically for the rest of
their life.

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Arbitrage: It is basically buying in one market and simultaneously selling in

another, profiting from a temporary difference.

Automated Teller Machine (ATM): A machine that automatically provides cash and
performs other banking services on insertion of a special card by the account
holder.
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Authorization: A document giving official permission.

Bancassurance: The selling of life assurance and other insurance products and
services by banking institutions.

Banker’s Lien: Type of charge that gives a bank automatic claim over a borrower’s
property or assets that come in bank’s possession in the normal course of its
business.

BASEL Committee: A committee established by the Central Bank governors of the

Group of ten countries in 1974 that seeks to improve the supervisory guidelines
that central banks or similar authorities impose on both wholesale and retail
banks.

Basis Point: One hundredth of one percentage point, basically used in expressing
differences of interest rates.

Blue Chips: They generally sell high-quality, widely accepted products and services.

Bull Markets: A market in which share prices are rising, encouraging buying.

CAMELs rating system: An international bank-rating system where bank

supervisory authorities rate institutions according to six factors. The six factors are
represented by the acronym “CAMELS”.

C – Capital adequacy
A – Asset quality
M – Management quality
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E – Earnings
L – Liquidity
S – Sensitivity to Market Risk

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Capital Adequacy Ratio: It is the ratio of a bank’s capital to its risk.

Capital Gain: A profit from the sale of property or an investment.

Credit Rating Agencies of India: An independent company that evaluates the

financial condition of issuers of debt instruments.
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Collateral: Property that a borrower offers a lender to secure a loan.

CORE Banking Solution (CBS): It is networking of branches, which enables

Customers to operate their accounts, and avail banking services from any branch of
the Bank on CBS network, regardless of where he maintains his account.

Coupon Frequency: The yield paid by a fixed income security.

Debtor: A person, country, or organization that owes money.

Derivative Instrument: Financial instruments whose value is derived from the

value of something else.

Demand Deposits: A deposit of money that can be withdrawn without prior notice.

Earnings per Share (EPS): The portion of a company’s profit allocated to each
outstanding share of common stock.

Earnings Yield: The quotient of earnings per share divided by the share price.

Equity: The value of an asset less the value of all liabilities on that asset.

Ex-dividend (XD): A security which no longer carries the right to the most recently
declared dividend.

Face Value: The nominal value of a security stated by the issuer.

Forfeiting: The purchasing of an exporter’s receivables at a discount by paying

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cash.

Forgery: It is the process of making, adapting, or imitating objects, statistics, or

documents with the intent to deceive for the sake of altering the public perception.

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Garnishee Order: A legal procedure by which a creditor can collect what a debtor
owes by reaching the debtor’s property when it is in the hands of someone other
than the debtor.

General Lien: The right to take another’s property if an obligation is not

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discharged.

Hedge: An investment to reduce the risk of adverse price movements in an asset.

Hypothecation: Refers to securities in a margin account that an investor uses as

collateral to borrow funds from a brokerage.

Indemnity: Security against a loss or other financial burden.

Initial Public Offering (IPO): It is a type of public offering in which shares of a

company usually are sold to institutional investors [1] that in turn, sell to the
general public, on a securities exchange, for the first time.

Insolvent: Insufficient to meet all debts, as an estate or fund.

Intrinsic Value: A value which exists as part of something, such as the value of an
option.

JHF (Joint Hindu Family) Account: JHF is account of a firm whose business is carried
out by Karta of the Joint family, acting for all the family members.

Joint Account: Bank account in the name of two or more individuals who jointly
share its concomitant rights and liabilities. Joint holders of an account are regarded
in law as together making up the ‘owner.’

Junk Bond: The first sale of stock by a private company to the public.

Karta: Karta means manager of joint family and joint family properties.
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Kiosk Banking: It is self-service solutions, allowing customers to service themselves

with computer based touchscreen and making different sort of transactions.

KYC Norms: The process of Banks verifying the identity of its clients.

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Lease Financing: A legal document outlining the terms under which one party
agrees to rent property from another party.

Leverage Ratio: Ratio that measures a company’s leverage.

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Libor: The interest rate that the banks charge each other for loans.

Listing: Reference of the Initial Public Offering Company’s shares on the stock
exchange for public trading.

Margin Call: A broker’s demand on an investor using margin to deposit additional

money or securities so that the margin account is brought up to the minimum
maintenance margin.

Mandate: Written authorization by a person, group, or organization (the

‘mandator’) to another (the ‘mandatary’) to take a certain course of action.

Micro credit/micro finance: The lending of small amounts of money at low interest
to new businesses.

Moratorium: The suspension of repayment of DEBT, or INTEREST, for a specified

period of time.

Non-Performing Assets (NPA): It is defined as a credit facility in for which the

interest and/or installment of Bond finance principal has remained “past due” for a
specified period of time.

Negotiation: An act of transferring or assigning a money instrument from one

person to another person in the course of business.

Non-Resident Accounts: These are accounts maintained by Indian nationals and

Persons of Indian origin resident abroad, foreign nationals and foreign companies
in India.
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Notary Public: It is a public officer constituted by law to serve the public in non-
contentious matters usually concerned with estates, deeds, powers-of-attorney,
and foreign and international business.

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Open Offer: It is an exit route, which is given to the existing shareholders by the
acquirer of shares through a public announcement.

Option: A financial derivative that represents a contract sold by one party to

another party.
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Par Value: The nominal value of a bond.

Personal Identification Number (PIN): A number allocated to an individual and

used to validate electronic transactions.

Pledge: It’s a kind of charge created when the lender (pledgee) takes actual
possession of assets.

Power of Attorney: It is a legal document that allows someone else to act on your
behalf.

Portfolio: Refers to any collection of financial assets such as cash.

Preference Shares: It is a share which entitles the holder to a fixed dividend,

whose payment takes priority over that of ordinary share dividends.

Premium: The amount of money that an individual or business must pay for an
insurance policy.

Prime Lending Rate (PLR): The interest rate charged by banks to their largest, most
secure, and most creditworthy customers on short-term loans.

Privatization: The transfer of ownership, property or business from the

government to the private sector is termed privatization.

Provisioning: Can be defined as loss in the profit and loss account while finalizing
accounts of banks.

Relative Strength Index (RSI): It is a technical indicator used in the analysis of

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financial markets.

Rights Issue: An issue of shares offered at a special price by a company to its

existing shareholders in proportion to their holding of old shares.

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Rate of Return: The gain/loss on an investment, expressed as a percentage

increase over the initial investment cost, over a specified period.

Real Interest Rate: An interest rate that is adjusted for inflation.

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Self Help Groups (SHGs): It is a village-based financial intermediary committee

usually composed of 10–20 local women or men.

Speculation: The act of trading in an asset, or conducting a financial transaction,

expecting a substantial gain, but with a risk of losing most or all of the initial
outlay.

Stock Splits: A corporate action in which a company/Bank divides its existing

shares into multiple shares.

Substantial Shareholder: A person, who acquires an interest in relevant share

capital equal to, or exceeding, 10% of the share capital.

Teller: A person employed to deal with customers’ transactions in a bank.

Time Horizon: The length of time over which an investment is made or held before
it is liquidated.

Trust Deed: A formal document which outlines the terms of a trust agreement.

Time Horizon: The length of time over which an investment is made or held before
it is liquidated.

Underwriting: The process by which investment banks raise investment capital

from investors on behalf of corporations and governments by issuing securities.

Underlying Security: It is a financial instrument whose price is derived from a

different asset.
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Universal Banking: A banking system in which banks provide a wide variety of

financial services, including both commercial and investment services.

Valuation: The process of determining the current worth of an asset or property.

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Virtual Banking: Handling all transactions of banks via the Web, e-mail, mobile
check deposit and ATM machines.

Warrant: Official guarantee by a bank.

Wholesale Banking: Banking services between merchant banks and other financial
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institutions.

Window Dressing: It refers to actions taken prior to issuing financial statements in

order to improve the appearance of the financial statements.

Yield to Maturity: It is the internal rate of return of an investment in a bond if the

investor holds the bond until maturity and if all payments are made as scheduled.

Zero Coupon Bond: A debt security that doesn’t pay interest but is traded at a
deep discount, rendering profit at maturity when the bond is redeemed for its full
face value.
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UNIT-5
BUSINESS MANAGEMENT
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LEADERSHIP
>Leadership is the ability to influence the behavior of individual towards the achievement of
goals.
> It is the process of influencing the behavior of others to work willingly (confident) and enthusiastically
(happily) for achieving the predetermined goals.
> Features of leadership- 1) continuous process 2) relationships between leader and his followers 3)
influence the behavior 4) followers work willingly and enthusiastically as there is no coercive force.
> Leader feel the importance of individuals.
> Adopt different leadership styles at different situations.
> Vision – futuristic (what the organization will look in the future (it is a realistic credible and attractive
future for an organization).
> Envisioning – It is the process of formulating a vision for an organization.
> Mission- what are the different planning or steps to reach that vision.
> Transformational leader- It is given by James Burns (1978). It is applied in leadership as it is the
abilities that allow the leader to recognize the change to create a vision to guide that change. It involves
bringing valuable and positive change in the followers and inspire them to transcend their own self-
interest for the good of the organizations.(higher level)(top line growth)
> Transactional leader- It is given by Adams. It involves routine regimented activities, assigning work,
evaluating performance, making decisions and so on. Basically for Management ( lower level) (
bottom line growth and traditional)
> A person having more authority but lacking leadership qualities may be less effective as compared to a
person with less authority but high degree of leadership Qualities.
> Formal leader – Autocratic type as he centralizes the decision making power in himself.
> Informal leader- Participative and democratic, he decentralizes the decision making power with
the subordinates.
> Leadership motivates employees, create confidence and build morale. (Attitudes of
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employees)
> Some of the questions such as what makes a leader effective? Is his success due to his personality or his
behavior or the types of followers he has or the situations in which he works or a combinations of

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all these and to answer these all questions different leadership theories arises.
> Theories such as-
1) Trait theory.

2) Behavioral theory.
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3) Situational theory.

4) System theory.
1) Trait theory- Given by Bernard. It is defined as relative enduring quality of individual. Personal
qualities. It was a hypothesis that a person with a certain trait could become successful leader. Innate
qualities and acquirable qualities include in this. Innate qualities means by birth or god gifted or natural
qualities. Leader are born not made. Acquirable qualities- acquired or learned through training and
experiences.
2) Behavioral theory- Leader is known by what he do rather than what he is. Leadership is shown by a
person’s acts more than by his traits. It includes two approach – 1) task oriented and 2) relationship
oriented. Task related functions also called problem solving functions as it relate to providing solutions
to the problem faced by the groups in performing the jobs and activities. Group related functions
includes social functions, related to mediating disputes and individual feel value. So if an individual is
able to perform both the roles successfully then he would be an effective leader.
3) Situational and contingency theory- It is given by R.M Stogdill. It is first applied in armed force of
Germany. It means a situations in which leadership is exercised. It depends on two factors 1) leader
behavior 2) situational factors. leader behavior includes leader characteristics and leader hierarchical
position. Situational factors include subordinate characteristics, group factors, leader situation,
organization factor (climate, culture)
4) System theory- Behavior is an emergent phenomenon resulting from interactions among subsystem. It
suggests that leadership is an emergent phenomenon in the form of integrative leadership out of
interactions of agents (leader & followers) within variables lying inside and outside the organizations.
From this theory four types of leadership emerges- 1) formal leadership 2) emergent leadership based
on skills 3) shared leadership 4) integrative leadership. System theory of leadership takes as a holistic
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approach as many variables affect the leadership.

> Functional Leadership- It influence positively. It includes setting goals, motivating employees, raising
level of morale, building team spirit, effective in two way communications.
> Dysfunctional Leadership- It influence negatively. Ineffective leadership, unfavorable to employees,

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poor human relations, emotion immaturity.

> Leadership style- It is the pattern of behavior which a leader adopts while influencing the behavior of
his subordinate. Leadership style is based on two approach-1) Behavioral Approach 2) Situational
Approach.
>Behavioral approach of leadership style includes-
1) Power orientation.
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2) Leadership as a continuum.

3) Likert’s management style.

4) Employee production orientation

5) Managerial grid

6) Tridimensional grid
>Situational approach of leadership style includes-
1) Fiedler’s contingency model.

2) Hersey Blanchard’s model.

3) Path goal model.

>Explanation of Behavioral approach of leadership style-
1) Power orientation – Based on degree of authority which a leader uses in influencing the behavior of
his subordinates. Under this there are three leadership style. 1) Autocratic style- also known as
Authoritarian, Directive, Monothetic. A manager centralizes decision making power in himself.
Negative leadership. It includes strict autocrat- follow autocratic style in a very strict sense, negative
motivation. Benevolent autocrat Manager centralizes decision making power in himself but follows
positive motivation. Incompetent autocrat- To hide their incompetence superior adopt this method.2)
Participative Style- It is also called Democratic, Ideographic, Consultative. Participation means mental
and emotional involvement to contribute with group goal. He decentralizes decision making process, he
emphasizes consultation and participation of his subordinates. As because of motivation productivity
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will be high. 3) Free Rein Or Laissez Faire- It means complete freedom to his subordinates as
contribution of manager is almost nil. It helps to develop subordinate independent personality. As
manager makes policies, plan and entire process left to subordinates.

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2) Leadership as a Continuum – Given by Tannenbaum & Schmidt. In this leadership style on a

continuum moving from the authoritarian leadership (boss centered) at the one end to free rein
leadership( subordinate centered) at another end.
3) Likert’s Management System- Given by Rensis Likert’s. It includes four system of management such
as
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1) exploitative- (No trust and confidence in subordinates) 2) benevolent – (confidence but just as
master has confidence in his servant) 3) participative- (substantial interest and trust among workers) 4)
democratic- (complete trust and confidence towards employed, subordinate feel free)
4) Employee Production Oriented – It is based on two concepts 1 )employee orientation- It stress the
relationship of the employees jobs, every individual is important and interest in everyone, as it is based
on democratic concept. Give importance to the employee relations. 2) Production orientation-
Emphasis on production, technical aspects of job, as employees are taken as tool for accomplishing
job. Based on authoritarian concept. This also includes two things 1) initiating structure and 2)
considerations.
Initiating structure refers to the leader’s behavior in delineating relationships between himself and
members of work group, well defined pattern of organization, channel of communication, methods and
procedure. (Basically focus on work). Considerations includes friendship, mutual trust, respect, warmth
in relationship between leader and members of staff. High considerations& low structure, high
structure& high considerations (team best) Low structure & low considerations, high structure & low
considerations (task related)
5) Managerial Grid – Given by Blake and Mouton. It is based on two factors 1) Task
orientation/concern for production and 2) relations orientation/concern for people. It consists
of
1) (1, 9 called country club)-high concern for people& low concern for production.

2) (1, 1 called impoverished) - low concern for people& low concern for production.

3) (9, 9 called team based) –high concern for production & high concern for people.

4) (9, 1 called task based) -high concern for production & low concern for people.
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5) (5, 5 called middle road) - in a middle path of production and people.

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7) Tridimensional Grid – Given by Reddin. It is also known as 3D management. Three

dimensional includes

1) Task orientation 2) Relationship orientation 3) effectiveness.

Task Oriented includes planning, organizing, controlling things towards goal achievement. Relationship
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oriented includes personal relationships, mutual trust, feelings. Effectiveness is defined as the extent to
which a manager is successful in his position. When the style adopted is appropriate to a given situation
it is called effective and when the style is inappropriate to a given situation it is called ineffective. Three
combinations are there- 1) basic styles 2) less effective 3) more effective. Basic styles are 1) Related- high
relations & low task 2) Separated- low task & low relations 3) Integrated- high relations & high task 4)
Dedicated- high task& low relations. Less Effective styles 1) missionary –high relations & low task 2)
Deserter low relations & low task 3) compromiser- high task & high relations 4) autocrat- high task& low
relations. More effective are 1) Developer- high relations& low task 2) Bureaucrat- low task &low
relations 3) Executive – high task & high relations 4) benevolent autocrat – high task & low
relations.

 Explanations of situational approach –

1) Fiedler’s Contingency Model- appropriateness of leadership styles depend on their matching with
situational requirement. It consist of three elements 1) leadership style including (TO task oriented RO
relationship oriented) 2) situational variables 3) interrelationships. Fielder’s uses the two types of
scores to measure the style adopted by a leader 1) score on least preferred co- worker (lpc it depends on
liking/disliking, friendly/unfriendly)2) scores on assumed similarity (AS it based on the degree to which
leader perceived group members to be like him. Situational variables include 1) leader position power 2)
task structure 3) leader member relations.
2) Hersey’s Blanchard’s situational model- Given by Hersey’s Blanchard’s. Based on the need of
maturity leader has to match his leadership style. It is also called life cycle theory of leadership. Two basic
considerations 1) leadership styles (TO Task oriented & RO- Relations oriented 2) maturity of
subordinates depends on their willingness and ability. It includes four combinations 1) telling – low
ability + low willingness= low maturity. 2) Selling- low ability+ high willingness= low to moderate
maturity 3) Participating- high ability+ low willingness=moderate to high maturity. 4) Directing high
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ability + high willingness= high maturity.

3) Path goal model of leadership- Given by Robert house. It is a combination of situational leadership+
vrooms expectancy theory of motivation. It includes different goal paths such as leader identifies

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subordinate needs>appropriate goals are established>leader connects reward with goal>leader

provides assistance on employee path towards goal>employee become satisfied & accepts the
leader>effective performance occurs>both employees & organization are better able to reach the goal. It
includes leadership styles:
1) directive-low task, high relations 2) supportive – low task, low relations 3) participative- high task , high
relations 4) Achievement oriented- high task ,low relations.
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 Locus of control refers to alternative benefits whether the employee’s achievement are the
product of his own effort (internal locus of control) or the result of outside forces (external locus
of control)
It also includes two things 1)characteristics of subordinates – locus of control, willingness, self-
perceived ( ability to work or perform) 2) work environment includes nature of task , formal
authority systems and work group.
 Charismatic theory – Given by Pluto’s Republic and Confucius Analects. It’s a Greek word meaning
gift or a god gifted quality or an extraordinary ability of a person to perform miracles. Also known as great
man theory. It suggested that leader is born not made. (Inspirational leadership)
 Some important theories given by –
 Trait theory- Bernard.
 Situational/contingency theory- R M Stogdill.
 Great man theory or charismatic theory- Pluto’s Republic & Confucius’s analects.
 Followers theory- F M Sansford.
 Half-life cycle theory- A K Korman.
 Life cycle theory continued by- Paul Hersey’s Blanchard’s.
 Leadership as a continuum – Tannenbaum & Schmidt.
 Management system theory- Renisis liket’s.
 Managerial grid- Blake & Mouton.
 Tridimensional grid- V j REDINN.
 Contingency model of leadership- Fiedled’s
 Path goal model- Robert House.
 Transformational- James Burns.
 Transactional- Adams.
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MOTIVATIONS
 Motivation is a psychic force that drives an individual towards goal realizations.
 Rensis Likert has called motivation as the core of the management.

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 Motivation derived from Latin word Movere which means to move.

 Need = physiological + psychological
 If the individual has high intensity for the achieving the goal then his level of motivation is
also high.
 Motivation- A goal directed behavior.
 Motivation related to satisfactions.
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 Satisfactions refers to the contentment experiences of an individual which he derives out of

need fulfillment.
 Persons motivated in totality not in part.
 Nature of motivation – based on motives, affected by motivating, goal directed behavior, related to
satisfaction, person motivated in totality, complex process.
 Need is a natural and biological phenomenon in an individual.
 Three types of need 1) primary need – also called psychological, basic, biological or unlearned
need which is essential for the survival of human beings e.g. food, cloth, shelter, sex, sleep breathe. 2)
Secondary need – also called learned need or derived need which we learn from the experiences and
individual e.g. need for status, recognition, power and achievement. 3) General need- This need is
between primary and secondary needs e.g. need for competence, curiosity, manipulation,
affection.
 Need> Tension arises>goal directed behavior>goal fulfillment in favorable environment>satisfaction
then another need arises so it is continuous process and if need is not fulfilled then frustrations
arises.
 Three things arises because of non-fulfillment of needs- 1) Flight – people quit the job. 2) Apathy –
lack of interest or enthusiasm, employees do everything except his work 3) Aggressions- aggressive and
frustrated and harm themselves or surroundings by their behavior.
 Some important words which may ask sometimes- 1) Sympathy- the feelings of being sorry for
someone. 2) Empathy- The ability to understand & share the feelings of someone else. 3) Apathy –
Lack of interest or enthusiasm.
 Sense of competence- It denotes the extent to which an individual consistently regards
himself as capable of doing job.
 Locus of control – It means whether people believe that they are in control of events or events
control them. An individual with the internal locus of control tends to be a high performer than
those with external locus of control.
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 Ability = knowledge+ skill

 Role ambiguity – Individual is not clear as what is expected from him in the job situation.
 Role conflict- when the persons are engaged in two or more jobs simultaneously and these jobs

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are mutually incompatible.

Different theories of Motivation-
1. Maslow’s Need Hierarchy Theory
 Given by Abraham H Maslow’s.
 According to him needs are arranged in hierarchy.
 If the basic needs are not met, efforts to satisfy the higher needs are postponed.
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 Physiological needs> security /safety needs>social needs> self -esteem needs> self -
actualization needs.
 Physiological needs- The basic necessities of life (food, cloth, shelter) also called basic needs.
 Security/safety needs- need for safety, physical danger and self -preservation.
 Social needs- As man is social animal they need affections, love and they make relations.
 Self- esteem needs- It is concerned with self- respect, self -confidence, a feeling of personal worth,
feeling of being unique and recognition.
 Self- actualization needs- It is the need to maximize ones desire to become more and more, what
one is to become everything that one is capable of becoming.
2. Herzberg Motivation & Hygiene theory (Two factor theory)
 Given by Frederick Herzberg.
 He talked about two things i.e. Maintenance or hygiene theory and Motivational theory.
 Maintenance or hygiene factors – If it is present in the firm then it did not satisfy the employees but
its absent strongly dissatisfy the employees as this is also called dissatisfies.
There are ten hygiene factors:-

1) Company policy & administration

2) Technical supervision

3) Interpersonal relationships with supervisors

4) Interpersonal relationships with peers

5) Interpersonal relationships with subordinates

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6) Salary

7) Job security

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8) Personal life

9) Working conditions

10) Status
 Motivational factors- An increase in these factors will strongly satisfy the employees, any
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decrease will not affect their level of satisfaction.

There are six factors of motivation:-

1) Achievement 2) Recognition 3) Advancement 4) Work itself 5) Possibility of growth 6)

responsibility.
 Positive effect on job satisfaction and in increase in one’s total output.
 Herzberg Model give insight to job enrichment.
 Conclusion – To keep maintenance or hygiene factors higher or constant while increasing
motivational factors.
 Maslow’s lower order needs – physiological, security, social needs come under the maintenance or
hygiene factors whereas higher order needs self- esteem needs and self -actualization needs are
motivational factors.
3. Mc Clelland‘s Need Theory (Three Need Theory)
 It is also called three need theory.
 Need for power, need for affiliation, need for achievement.
 Need for power- high power, great concern for existing influence and control.
 Need for affiliation – Pleasure from being loved and social responsibility.
 Need for achievement – intense desire to achieve Leading advocate of power motive was
Alfred Adler.
 Effective manager has high on achievement & power and low on affiliation.
4. ERG Theory (Existence, Relatedness, Growth)
 Given by Alderfer’s.
 Existence , relatedness, growth theory
 It is an extension of Maslow’s hierarchy theory and Herzberg two factor theory as there is
distinctions between lower order needs and higher order needs.
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 Existence- physiological+ security needs.

 Relatedness- social+ half self-esteem needs.
 Growth – half self-esteem+ self-actualization.
 People try to satisfy their most concrete needs (lower) first then they move on to the abstract

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needs (high)
5. Victor vroom’s Expectancy Theory
 Given by Victor Vroom
 Also called VIE Theory ( Valence, Instrumentality, Expectancy)
 This theory is based on the motivation process
Motivational(force) = valence*instrumentality*expectancy
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
 Valence- It means the strength of an individual preference to a particular outcome.
 Instrumentality- For example – if someone wants a promotions and he know that superior
performance is the key of promotion so superior performance is the instrumental i.e. the strong
factor
 Expectancy- probability that particular action lead to outcome, as superior performance lead
to promotions.
6. Porter Lawler Model of Motivation
 It is a relationship among job attitudes and job performance.
 It includes effort> performance>rewards>satisfactions.
 Given by porter Lawler.
7. Equity Theory of Motivation
 Given by J Stacy Adams.
 Based on social exchange process.
 To maintain fair relationships between their performance & reward in comparison to
others.
Three types of equity as discussed here-
1) Overpaid equity- outcome>input (guilt feeling)

2) Underpaid equity- outcome<input (dissonance/dissatisfy)

3) Equity – outcome=input (satisfaction)

 Based on the principle i.e. Equal pay for equal work.
8. Carrot and stick approach
 Based on principles of Reinforcement given by B F skinner.
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 Reinforcement means when someone behavior repeatedly rewarded.

 Carrot is reward for the performance and stick is the punishment.
 The mixture of both reward and punishment should be used judiciously so that both have positive
effects on the motivation profile of the people in the organization.

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9. Theory X and Y
 Given by Mc Gregor’s.
 It involves certain assumptions, generalizations, hypothesis relating to human behavior and
human nature.
 It serves the purpose of predicting human behavior
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DISTINCTIONS BETWEEN THEORY X AND THEORY Y THEORY X THEORY Y

THEORY X THEORY Y
1) Traditional theory of human 1) Modern theory of human behavior
behavior.
2) Management is responsible for 2) Self direction &self-control.
organizing elements of
productive enterprises.
3) It includes directing, controlling, 3) No external control& threat of punishment.
motivating, modifying
behavior.
4) Management task to get things done 4) Cooperative endeavor of management & employees.
by people through
external control.
5) Includes lower order needs. 5) Maximum output with minimum amount of control
&
direction.
6) Autocratic style. 6) Democratic & participative style.
7) Lack of self-motivation. 7) Decentralizations.
8) Scalar chain/centralization. 8) Higher order needs.

10. Theory Z
 Given by William Ouchi.
 Promotional purposes.
 American + Japanese management services.
 Five broad features of this theory are-
1) Trust.

2) Strong bond between organization and employees.

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3) Employee involvement.

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4) No formal structure (team work) (group spirit is the backbone of success)

5) Coordination of human beings.

Contingency approach of motivation

 It says that what motivates people is situational. This is the basic theme of contingency
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approach of motivation.
 It emphasizes linking between micro motivation and macro motivation. Micro motivation operates
at the level of individual firms while macro motivation operates at the broad social level.
 Sound motivation system is one which takes into account both individual and organizational
variables.
Miscellaneous –
 Maslow’s need Hierarchy theory-Abraham H Maslow’s.
 Herzberg motivation hygiene theory- Frederick Herzberg.
 Three need theory- Mc Clelland’s.
 Leading advocate of power- Alfred Adler
 ERG theory- Alderfer’s.
 Vroom expectancy theory – Victor Vroom.
 Porter Lawler model- effort, performance, reward, satisfaction.
 Equity theory- J Stacy Adams.
 Reinforcement theory- B F skinner.
 Theory x and y – Mc Gregor’s.
 Theory z- William Ouchi.
PLANNING

PLANNING
 SWOT- Strength weakness opportunity threat.
 Management functions include planning, organizing, staffing, directing and controlling. All these
functions are required to achieve the objectives of organizations.
 Planning and plan, there is a little difference between them, planning is an activity or a process
while plan is a commitment to a particular course of action believed necessary to achieve specific
results. Plan are prepared through planning process.
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 Planning as a process involves the determination of future course of action, that is why an action,
what action, how to take action and when to take action. It is a futuristic.
 Features of planning- it is a process, it is a futuristic, it involves selecting of suitable course of action,

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it is taken at all levels of management, planning is flexible as it change according to situations, planning is
pervasive (continuous management functions)
 Planning activity goes in hierarchy- corporate or organizational level>divisional
plan>departmental plan>sectional plan.
 Importance of planning- it precedes all other managerial functions such as organizing, staffing,
directing & controlling, to offset uncertainty & changes, to focus attention on objectives, to help in co-
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ordination, to help in control, to increase organizational effectiveness.

 Co -ordination is the essence of management and planning is the base for it.
 Process of planning- perception of opportunities >establishing objectives >planning
premises >identification of alternatives >evaluation of alternatives >choice of alternatives >formulation
of supporting plans >establishing sequence of activities.
 Planning premises is a conditions under which planning activities will be undertaken. It is
of two types:
1) Internal premises

2) External premises.
 External premises include total factors in task environment like political, social, technological,
competitors, plans & actions, government policies.
 Internal premises includes organizational policies, resources of various types and the ability of the
organization to withstand the environment pressure.
 Top level- externally focused
 Middle & lower level – internally focused
 Types of planning-
 On the basis of coverage of activities –
1) Corporate Planning-planning at the top level also known as corporate level which cover the entire
organizational activities. Long term objectives it is also used as synonymous to long term planning or
strategic planning. It is integrative ( holistic approach)
2) Functional planning- It is segmental and is undertaken for each major function of
organizations.
 On the basis of direction of actions –
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1) Strategic Planning- It sets long term direction of organizations in which it wants to proceed is
external to the environment, time period 3-5 years and formulated at the top level of
management.

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2) Operational planning- It is also known as Tactical Planning or Short Term Planning usually covers 1
year. It basically includes day to day operations. It focus on the internal organizations and
formulated at middle and lower level of management.
 On the basis of time period-
1) Long Term Planning- It is of strategic nature and involves more than 1 year period extending to 20
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years, more common is 3-5 years. It is external to the environment also known as strategic
planning.
2) Short term planning- It is also known as operational or tactical planning usually covers 1 year.
 On the basis of approach adopted –
1) Proactive Planning- In this, organizations do not wait for environment to change but take actions in
advance of environmental change.
2) Reactive planning – In this organizations responses come after the environmental changes
have taken place.
 On the basis of degree of formalizations-
1) Formal planning- It is the form of well structural process involving different steps. Large
organizations undertake planning in formal way. Monitor external environment on continuous basis.
The planning process that is adopted is rational, systematic, well documented & regular.
2) Informal planning- It is taken by smaller organizations based on memory, intuitions, gut
feelings.
 Plan- It is a commitment of resources to a particular course of action believed necessary to
achieve specific results.
 Standing plan or strategic plan or long term plan- It provide guidelines for further course of action
and are used over a longer period of time.
 Single use or operational or tactical or short term plan- This plan are relevant for a specified time
and after the lapse of that time these plans are formulated again for the next period.
 Standing plan/strategic plan/long term 1) Mission or purpose 2) Objectives 3) Strategies 4)
Policies 5) Procedures
 Single use/operational plan/short term 1) Rules 2) Programme & projects 3) Budgets 4)
Quotas 5) Target
 Major plan- projects & budget
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 Minor plan- quotas & target

 Hierarchy of organizational plans- mission or purpose>objectives>strategies>policies>procedures&
rules> programmes & projects>budgets> quotas & target.
 Planning premises- Anticipated (aware of future) environment in which plans are expected to

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operate so basically it is conditions under which planning activities are undertaken.

 Types of planning premises-
1) External premises (opportunities, threat)

2) Internal premises (strength, weakness)

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3) Tangible premises (quantitative)

4) Intangible premises (qualitative)

5) Controllable premises (internal such as organization policies, structures, systems, procedures)

6) Uncontrollable premises (external such as economic, social, cultural, political-legal,

technological, competitive).
 ETOP- Environmental threat opportunity profile
 SAP- Strategic advantages profile
 Forecasting – It is the process of estimating the relevant events of future based on the analysis of
their past & present behavior.
 In planning, decisions are made at the top level whereas in forecasting decisions are
taken at middle or lower level.
 Forecasting as a key to Planning Process.
 In forecasting manager work like a navigator, it means he cannot control the sea tides and other
disturbances but he can take his ship at the right path & can save it from these disturbances if he
knows in advance.
 Importance of forecasting-
1) Promotion of organization

2) Key to planning

3) Coordination & control

4) Success in the organization.

 Limitations of planning-
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1) Based on assumptions i.e. if an event has happened this way in the past, it will happen this
way in the future.

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2) Not absolute truth

3) Time & cost factor.

 Steps in forecasting –
1) Develop groundwork for forecasting
2) Estimating future business
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3) Comparing actual& projected results

4) Refining the forecasting process.
 Technique of forecasting-
1) Historical analogy
2) Survey
3) Opinion poll
4) Business barometers (index number)
5) Time series analysis
6) Extrapolation (it relies on the behavior of a series in the past & projects the same trend in
future).
7) Regression analysis
8) Input output analysis/end use technique
9) econometric models (refers to the science of economic measurement)
 Scenarios- it constitute an effective device for sensing , interpreting, organizing and bringing to bear
diverse information about the future in planning and strategic decision making ( qualitative form)
 Monitoring and forecasting environment factors help in arriving at sales forecast i.e the projected
sales in future which act as base for formulating various plans.
 There are many barriers to effective planning-
1) Difficulty of accurate premising

2) Problems of rapid change

3) Internal inflexibilities such as psychological inflexibility, policy and procedural flexibility,

capital investment.

4) External flexibility such as political climate, trade unions, technological changes

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5) Time and cost factor

6) Failure of people in planning

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 Features of a good plan

1) Linked to long term objectives

2) Direction for action

3) Consistent
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4) Feasible

5) Simplicity

6) Flexible
 Measures for making planning effective: -
1) Establishing climate for planning
2) Initiative at top level
3) Participation in planning process
4) Communication of planning elements
5) Integration of long term & short term plans
6) An open system approach
 Mission –Mission has external orientation and relates the organization to the society in which it
operates. A mission statement helps the organization to link its activities to the needs of the society and
legitimize its existence. It offers guidance to managers in developing sharply focused result oriented
objectives, strategies and policies.
 Formulation of mission – key decisions makers philosophy & vision>organizational philosophy &
vision>organizational mission.
 Philosophy – It consists of an integrated set of assumptions & beliefs about the way things are, the
purpose of the activities and the way these should be.
 Vision- It is the mental perception of the kind of environment a person desires to create within a
broad time horizon and the underlying conditions for the actualization of the perception. It represents
the imagination of future events and prepares the organization for the same. Thus, vision represents
the challenging portrait of what the organization would be in future.
 Explicit mission statement is desirable as it serves the purpose of communicating to the members
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about the corporate philosophy identity character and image which govern their behavior in the
organization.
 Objectives- It is used to specify the end results which an organization wants to achieve. Objectives

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are expressed in quantitative and absolute terms.

 Hierarchy of objectives- Organizational objectives form a hierarchy ranging from the broad aim to
specific individuals objectives. End means chain which suggest that what is a means for one unit may
be an end for another unit.
 Hierarchy of objectives are as follows-
1) Socio economic purpose
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2) Visionary long term concept of organization

3) Organizational mission

4) Organizational objectives

5) Objectives in key result areas

6) Departmental objectives

7) Sectional objectives

8) Individual objectives
 From up to low of above hierarchy is known as top down approach, which is prepared by upper
level manager. From bottom to up of above hierarchy is known as bottom up approach, which is
prepared by lower level manager.
 MANAGEMENT BY OBJECTIVES/ MANAGEMENT BY RESULTS – (MBO/MBR) - It focus on
the objectives or results, emphasizes participants management, an approach which provides high
motivation to individuals in an organizations. MBO is coined by Peter F Drucker in 1954. It is s
comprehensive management system that integrates key managerial activities in a systematic manner,
directed towards the efficient & effective achievement of organizational objectives. It is a result
centered, non-specialist , operational managerial process for the effective utilization of material,
physical & human resources of the organization by integrating the individual with the organization
and organization with the environment.
 Features of management by objectives –
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1) It is an approach and philosophy to management

2) Objective orientation is the essence of it.

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3) MBO tries to match objectives and resources

4) MBO is characterized by the participation of concerned managers in objective setting and

performance reviews

5) Periodic review of performance is an important feature of MBO.

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 Process of MBO-
1) Setting of organizational purpose and objectives (objective settings start at the top level of the
organization and moves downward to the lowest manager level.
2) Key results areas (KRA/KPA) key performance areas
3) Setting subordinate objectives- objectives are set by the mutual negotiation between
superior and subordinates.

4) Matching resources with objectives

5) Appraisal (it is taken as a matter of system to ensure that everything is going as planned)

6) Process continuity (objective setting> action planning>performance review)

 Benefits of MBO-
1) Clarity of objectives

2) Role clarity

3) Periodic feedback of performance

4) Participation by managers in the management process

5) Realization that there is always scope for improvement of performance in every situation

 Strategy – The strategic plans are in the form of long term specific objectives and strategies. In
order to put strategies in operations , managers have to formulate operational or tactical plans in the
form of various standing plans like policies, procedures, rules, method and single use plans like projects,
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budgets and standards. Single use plans are undertaken on regular basis to put the strategic plan in
operations.
 From military science, strategy has entered the management.
 Strategy is a course of action through which an organization tries to relate itself with its

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environment to develop certain advantages which help in achieving its objectives.

 Features of strategy-
1) It relates to an environment (external/internal)

2) It is a combinations of actions
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3) Strategy is forward looking (shows directions)

 Level of strategy –
1) Corporate level strategy (highest level of strategic decision making as decisions are made by
top managers).

2) Business level strategy (SBU – strategy business unit).

3) Functional level strategy.

 Strategies at all the three levels are interlinked in which a higher level strategy generates a lower
level strategy and a lower level strategy contributes to the achievement of the objectives of
higher level strategy.
 Policy – The term policy is derived from the Greek word Pliteia meaning citizen and Latin word
Politis meaning polished that is to say clear.
 A policy is the statement or general understanding which provides guidance in decision making to
members of an organization in respect to any course of action.
 Features of policy- guidelines to the members of the organizations, it limits the area within which
decisions are prepared, it is qualitative ,conditional and it is formulated at all levels, permanent
features of organizations, long term.
 Procedures- a procedures prescribes the chronological sequence in which an activity should be
performed to achieve the objective of the activity.
 Methods- it is defined as a prescribed manner for performing a given task with adequate
consideration to the objective , facilities available, and total expenditures of time ,money and
effort.
 Rules- It is prescribed guide for conduct or action. Rules are plan as they are a course of action
which is chosen from among the alternatives. A rules provides definite action to be taken or not
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taken with respect to a situation.

 Project- It is a single use plan which can be thought of in terms of planned actions integrated into a
unity and designed to bring about a stated objectives. It is a scheme for investing resources which can be
analyzed and appraisal reasonably and independently.

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 Budget- A budget is a kind of single use plan of expected results expressed in numerical terms.
These results are expected to be achieved within specified time period which is generally 1 year. The
term budget has been derived from the French word bougette denoting a leather pouch in which
funds are appropriate for meeting anticipated expenses.

 Types of budget-
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1) Master or summary budget- It is prepared for the entire organization and includes sales,
production budget, cash budget etc.

2) Functional budget- It is prepared keeping in mind different types of functions of

organizations.

3) Capital and revenue budgets- capital expenditures whose returns accrue over a number of years,
revenue budget involves the formulation of targets for a year.
4) Long term and short term budget- long term budget for 2-3 years and short term budget less
than 1year or 1 year.

5) Fixed or static and variable budget.

 Types of Budgeting-
1) Performance Or Programme Budgeting - It is an input output budget or costs and results
budget. It shows costs matching with operations. Programme budgeting measures total cost of
programmes or activities, performance budgeting measures both cost and activities. It is useful for
evaluating past performance & for planning future activities. It emphasizes non-financial measures of
performance which can be related to financial measures in explaning changes & deviations from
planned performance.
2) Zero Base Budgeting- It is in both business and non-business budgeting. It is based on a system
where each function, irrespective of the fact whether it is old or new, must be justified in its entirety
each time a new budget is formulated. It requires each manager to justify his entire budget in detail
from scratch that is zero base.
3) Strategic Budgeting- It is used as a tool of resource allocation to various strategic business units and
other units of an organizations.
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 Decision making- The word decision has been derived from the Latin word decider which
means a cutting away or cutting off.

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 The decision involves cut off alternatives between desirable and undesirable.
 Decision making is a process to arrive at a decision, the process by which an individual or
organization selects one position or action from several alternatives.
 Decision Making Includes Three Aspects Of Human Behavior –
1) Cognition- activities of mind associated with knowledge.
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2) Connation- willing, desire.

3) Affectation- emotions, feelings.

 Features of decision makings-

1) Most desirable alternative is chosen

2) Freedom to choose alternatives.

3) Not completely rational but emotional and judge mental too.

4) Goal directed
 Types of decision making-
1) Programmed decision making

2) Non programmed decision making

3) Strategic decision making

4) Tactical decision making.

Programmed Decision Making- It is a routine, repetitive and are made within the framework of
organizational policies & rules. Policies and rules are prepared in advance. It is static& well
structured, short term and made by lower level of managers.
 Non programmed decision making- It is for solving unique & unusual problems and alternatives
and are not made in advance. It is not well structured, non-recurring, dynamic, uncertain and
prepared by the higher level managers.
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 Strategic decision making- It is just like non-programmed decision making.

 Tactical decision making- It is just like programmed decision making. It relates to day to day
operations of the organization & has to be taken frequently, repetitive and narrow part of an
organization.

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 Decision making process involves- specific objectives> problem identification (diagnosis /analysis) >
search for alternatives> evaluation of alternatives> choice of alternatives> action>result>
feedback.
 Actual process of decision making ends with the choice of alternatives.
 Effective decisions- action oriented, goal oriented, efficiency in implementation.
 Techniques for improving group decision making-
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1) Brainstorming – it is given by Osborn. Technique to stimulate idea generation for decision making.
Using the brain to storm the problem. It is a conference technique by which a group attempts to find a
solution for a specific problem by amassing all the ideas spontaneously contributed by its members. 10-
15 persons are needed. Each member is asked to give ideas through which the problem can be solved.
Emphasis on the quantity of ideas & quality may follow later. It is useful for all types of decisions, it is
more useful for simple well defined problems.
2) Nominal group technique- It is structured group meeting which restricts the verbal communication
among members during decision making process. Each member writes down his ideas silently and
independently & presents his best single idea on the problem. It is widely used in health service,
industry, education and government organization.
3) Delphi technique- The name Delphi indicates a shrine at which the ancient Greeks used to pray for
information about the future. In this members do not have face to face interaction for group decision.
The decision is arrived at through written Consensus mapping communication in the form of filling
up questionnaires often through mail. It is a time consuming process.
4) - It tries to pool the ideas generated by several task subgroups to arrive at decision. The technique
begins after a task group has developed clarified & evaluated a list of ideas. Strawman map-
consolidation of different schemes developed by subgroups into a representative scheme that act as a
Strawman map. Members work to revise Strawman map until the whole group arrives at a single,
consolidated map & final decision.

 Rational – Simon has described it appropriate means are chosen to reach desired ends, the
decision is rational.
 Kepner & Tregoe have suggested approach to managerial problem solving and decision
making.
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 Non quantitative and quantitative bases for decision making-

 Non quantitative as follows-
1) Intuition – uses of hunches, inner feelings or gut feelings to make decisions, its just a way to

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feel about it.

2) Facts – excellent basis on which decisions can be made.

3) Experience- To draw assistance from past.

4) Considered opinion – It uses logic which is made explicit and derived from careful analysis of
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the situation.

 Quantitative as follows-
1) Operations research.

2) Decision tree.

3) Linear programming.

4) Game theory.

5) Queuing theory or waiting line theory.

 Operations research- It is the application of specific methods, tools, and techniques to operations
of system with optimum solution to the problems.
 Decision tree- It is a graphical method for identifying alternative actions, estimating probabilities
and indicating the resulting expected pay off. Some decisions involve a series of steps, the second step
depending on the outcome of the first, the third depending on the outcome of the second and so on.
Often uncertainty surrounds each step, so the decision makes faces uncertainity piled on
uncertainty. This graphical form visually helps the decision maker view his alternatives & outcomes.
 Linear programming- It is a mathematical technique for the purpose of allocation of limited
resources in an optimum manner.
 Game theory- As outcomes depends not only on his own actions but also on the actions of others.
It is simply logic of rational decisions. It is a science of conflict. The basic objective of game theory is to
provide a basis for making decisions in the light of actions taken by the competitors. It is used in
elections, marketing strategies and military.
 Queuing theory or waiting line theory- It involves the mathematical study of queues or waiting
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lines. A group of items waiting to receive service, including those receiving the service is known as
queues. It helps in achieving the balance between the costs associated with waiting time and idle time.
This theory helps in arriving at a decision about the provision of optimum facilities.

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ORGANISATION
 Organizing involves analyzing of activities to be performed for achieving organizational objectives,
grouping these activities into various divisions, departments and sections so that these can be assigned
to various individuals & delegating them appropriate authority so that they are able to carry on their
work effectively.
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 Organizing includes following elements- departmentation, linking departments, defining authority &
responsibility, prescribing authority relationships.
 Organization structure establishes relationship between people and work within which managerial
and operating tasks are performed to achieve organizational objectives.
 Cybernetics involves communication and control it relates to the connation direction of.
 Factors affecting organization structure-
1) Environment

2) Strategy (give direction to a plan)

3) Technology

4) Size

5) People
 SPAN OF MANAGEMENT – It means number of subordinates which should be put under one
superior or it refers to the number of subordinates who can be managed effectively by a superior. It is
also known as Span Of Control And Span Of Supervision. Number of subordinates reporting to a
superior is fixed.
 Factors affecting span of management-
1) Capacity of superiors

2) Capacity of subordinates

3) Nature of work
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4) Degree of decentralization

5) Degree of planning

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6) Communication techniques

7) Use of staff assistance

8) Supervision from others

 Wide Or Narrow Span Of Management
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Wide/flat/horizontal Narrow/tall/vertical
 Modern approach
 Causes flat or horizontal structure  Classical approach.
 Supervisory personnel is required very less  Causes tall or vertical structure.
 Decentralization  More supervisory personnel required.
 Democratic styles  Centralization.
 Employees centered  Autocratic style.
 Boss centered.

 Departmentation- The process of identification of activities and group them properly is

known as Departmentation.
 Departmentation such as divisions, departments, sections, branch, bureau. In military –
battalion, group, company use.
 Importance of Departmentation-
1) Advantages of specialization

2) Fixation of responsibility

3) Development of managers

4) Facility in appraisal

5) Feeling of autonomy (freedom of action)

 Bases of Departmentation-
1) Function- basic or organic functions and secondary functions (includes both line & staff function).
The grouping of common or homogenous activities to form an organizational unit.
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2) Product – It involves grouping together of all activities necessary to produce a product or

product line.

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3) Territory- It is useful to large sized organizations having activities which are physically or
geographically spread such as banking, insurance, and transportation.
4) Process- various types of equipment’s are used.

5) Customer
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6) Time

7) Alpha numerical (military)

 Design of organization structure- It is the totality of both formal and informal
 Formal organization-  Informal organization-
1) Structured. 1) Not structured.
2) Designed by top management. 2) Also known as informal group.
3) Concentrates more on the performance of 3) Design by middle & low level management.
the job. 4) Concentrates more on relations.
4) Official. 5) Membership is voluntary (a person may become
5) Focus on positions. member of several informal organization at the
6) Centralization. same time).
6) Non official.
7) Focus on persons.
8) Decentralization.

 Forms of organizations structures- Henery Mintzberg has given a different scheme of

classification of organization structures.
 There are seven types of organizations structure-
1) Line (includes pure line organization structures and department line organization
structures)

2) Line and staff

3) Functional

4) Divisional

5) Project

6) Matrix
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7) Team based

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8) Free form
 Line Organizations Structures- It is also known as Scalar, Military Or Vertical Organization. It is
the oldest form of organization structures. There must be a single head who commands it. It is divided
in to two -1) Pure Line Organization Structures- In this similar activities are performed at a particular
level. 2) Departmental organization structure- entire activities are divided into different departments
on the basis of similarity of activities. Each department is placed under one department head. Lines of
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authority and instructions are vertical, that is, they flow from top to bottom. Line organization follows
scalar chain method of communication it means that communication going up & down will pass through
the immediate superior. Line organization is based on autocratic approach, vertical relationship, and
downward communication. Line organization is suitable for small scale organizations.

 Line & Staff Organization Structure- line are the managers and staff are the specialists (advisor). It
refers to a pattern in which staff specialists advise managers to perform their duties. Advices are
provided to line managers by staff personnel who are specialists in their fields. It is suitable for
large organizations.

 Functional Organization Structures- It is created by grouping the activities on the basis of

functions required for the achievement of organizational objectives. It is widely used in medium & large
organizations. It works better if the organization has one major product or similar product lines.

 Divisional Organizations Structures- It is also known as Profit Decentralization. Growth

through geographic & product diversification. Three divisions are there 1) Product Divisionalization
2) Territorial Divisionalization 3) SBU (Strategic Business Unit) –In multi-product or multi geographical
area companies, divisions are created in the form of various strategic business units. It is suitable to
organizations having several products with each product having distinct features or for organizations
having coverage of wide geographical area or having distinct market segments. It is very costly too.

 Project Organization Structures – pure project organization is suitable for taking small number of
larger projects with long duration so that a separate division can be created for each project. It is
created for the life time of a project. When a particular project is completed the concern division
may disappear.
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 Matrix Organization Structure- It is a violation of unity of command. Matrix organization is

suitable for taking large number of smaller projects & the activities of various projects can be
accomplished through temporary departments. It is the realization of two dimensional structure which

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emanates directly from two dimensions of authority. Two complementary structures pure project
structures & functional structures are merged together to create matrix structures. Each functional
department has two bosses- administrative head & project manager. Internal environment related.
Matrix structure applied in various types of activities – manufacturing, service, and professional
activities, non -profit organizations, Govt. agencies, United Nations & universities.
Limitations are power struggle, develop anarchy- people have to work under multiple command, busy
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in internal problems so find less time for external affairs.

 Team Based Organization- A team is a small number of people with complementary skill
who are committed to a common purpose, performance, goals & approach for which they hold
themselves mutually accountable. Three types of skills are required in a team- 1) technical or
functional skills 2) problem solving s kills & decision making skills 3) interpersonal skills. Team
work is essentially a mind -set which requires a complete mental revolution from individual
orientation to collective orientation from individual contribution to collective contribution & from
individual rewards to collective rewards. A feeling is generated among team members that no one is
authorized to direct others & no one is in the team to be directed by others. If team performs
well , credit goes to all & if it performs worse than all members share responsibility for that.
 Types of team-
1) Problem solving team

2) Cross functional team

3) Self managing team

4) Virtual team( not face to face. Communications through technology)

COMMITTEE
 The word committee means those to whom some matter or charge is committed.
 A committee is a group of persons in an organization for making or recommending certain
decisions.
 Minimum 2 persons and maximum no limit.
 Committee is charged with dealing with specific problems and it cannot go in for actions.
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 A committee have the authority to make a final decision but it cannot go in for actions.
 Various committee such as finance, budget, purchase, grievance, welfare committee.
 A committee works on theme that two heads are better than one.

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 Reasons for use of committee-

1) Pooling of knowledge & experience

2) Facility of coordination

3) Representation of interest groups

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4) Fear of too much authority in a single person

5) Consolidation of authority

6) Transmission and sharing of information

7) Motivation through participation

8) A tool of management development

9) Avoidance of action
 Problems in committee
1) High cost

2) Slow decisions

3) Indecisions

4) Minority tyranny

5) Splitting of responsibility
6) Misuse of committee
 Measures for making committee effective
1) Appropriate size

2) Selection of members
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3) Well defined authority and scope

4) Nature of subject matter

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5) Effective chairman

6) Logical procedure for conducting meetings

7) Circulation of minutes
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8) Cost considerations
 Task Force- It is made up of a group of people with different backgrounds who are assigned a
specific task or mission. The tenure of a task force is over when the task force or mission is over.
Membership in the task force is temporary. It is similar to an ad hoc committee. It has a broader
power of action & decisions.
 Free Form Organization- It is also known as Naturalistic, Organic, Ad Hoc Organization. It is
in the form of a rapidly changing adaptive, temporary system, organized around the problems to be
solved by a group of people who may be stranger to each other & have diverse professional skills.
 Virtual Organization- It is also known as Networked Organization Or Modular Organization.
It is a temporary network of independent companies- suppliers, customers, even erstwhile rivals
linked by information technology to share skills, costs and access to one another’s market. It will have
neither central nor organization chart. It will have no hierarchy, no vertical integration, and
telecommunication department, temporary.
 Synergy- It is the process of putting two or more elements together to achieve a sum total greater
than the sum total of individual elements separately.
 Boundary Less Organizations- It is coined by Jack Welch. It is also known as T form (technology
based organization). It seeks to eliminate vertical & horizontal boundaries in the organization as well as
the boundaries between the organization & its customers & suppliers. It deemphasizes chain of control,
span of control, & rigid Departmentation. It relies on information technology & self - managing teams.
POWER AND AUTHORITY

 Power – It refers to a capacity that A has to influence the behavior of B so that B does something he
or she would not otherwise do. It is means of influence in different ways.
 Types of power
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1) Positional power (formal) – It includes legitimate (lawful) power, reward (in form of salaries etc. )
power, coercive(forceful by harm) power, Information power. Positional power emerges from a
position that individuals holds in an organization.

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2) Personal power (informal)- It includes expert(knowledge is power) power, referent power,

charismatic( enduring qualities)power. It emerges from the qualities that are unique. Referent power
based on identification. It is the process of learning wherein a person copies the behavior of other
person whom he takes an ideal.
 Authority- It is legitimate rights of a position holder to give orders to others& get these orders
obeyed. Order is legitimate i.e. socially ethically acceptable to all concerned. Basic objectives of use of
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authority is to influence the behavior of the subordinates in terms of doing right things time so that
organizational objectives are achieved.
 Three types of authority-
1) Formal Authority- It holds that the authority inherent in a managerial position is achieved
by delegation from the higher position.

2) Acceptance Authority- role behavior authority.

3) Competence Authority- personal qualities.

Limits of authority – authority is limited only to his span of management. There are many types of
limit such as biological limit economic, technical limits. A manager can only use the authority
which is specifically delegated to him.
 Authority and power are used interchangeably because of the common objective of influencing the
behavior of people on whom these are exercised.
 There is a difference between authority and power as, authority is the right to command whereas
power is the capacity to command.
 Responsibility- It is a duty or activity assigned to an individual in an organization. It is the obligation
of an individual to perform activities or duties which are assigned to him. Responsibility is the obligation
of a person t perform assigned activities to the best of his ability.
 Accountability- It implies that a subordinate is accountable to his superior for the successful
performance of total activities assigned to him whether he performs these activities on his own get
some of the activities performed by his subordinates. It flows upward.
 Principle of parity of authority and responsibility – It suggest that authority of a person
should match his responsibility. Authority is the discretionary right to carry out assignment and
responsibility is the obligation to accomplish. Its logically follows that 30 the authority should
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correspond to responsibility. Lack of parity means to delegate authority inadequately.

 Delegation Of Authority- Assignment of activities to various managers creates responsibilities
and order to carry out these responsibility managers need appropriate authority. Delegate means to
grant or confer. A manager simply does not delegate authority, he delegates authority to get certain

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work accomplished. By means of delegation the manager extends his area of operations. In
delegation subordinates receiver authority from his superior, but at the same time, his superior still
remains all his original authority. It just like imparting knowledge. Authority once delegated can be
enhanced, reduced or withdrawn depending on the situation& requirement. A person exercise an
authority so long as he holds the position. A superior cannot delegates his full authority.
 A manager only delegates his authority to reduce burden from his shoulder and to concentrate
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on some other works also.

 Steps in delegation of authority- 1) Determination of results expected 2) Assignment of duties 3)
Authorization for action 4) Creation of obligation
 Principles of delegation- delegation by results expected, functional definition, clarity of lines of
authority (it includes scalar chain and unity of command) ( scalar chain refers to the chain of direct
authority relationship from the superior to subordinates throughout the organization. Unity of
command refers to a single superior & should receive instructions from the single superior) level of
authority, absoluteness of responsibility, parity of authority & responsibility.
 Centralization and decentralization is the degree of delegation of authority.
 Centralization  Decentralization
1) Concentration of authority. 1) Dispersion of authority.
2) It refers to the reservation of authority at the top 2) It refers to the systematic delegation of authority in the
level of the organization. organization.
3) Formal. 3) Informal.
4) Suitable for smaller organization. 4) Suitable for large organization.
5) Vertical from top to down approach. 5) Horizontal equal level.

 Authority Relationships – It includes line & staff authority.

 Line & Staff Authority- line functions are those that are related directly with the attainment of the
organizational objectives. Staff functions are those that help line functions in attaining the
objectives.
 Line Authority- It is defined as a direct authority which a superior exercises over his direct
subordinates to carry out his direct subordinates to carry out orders and instructions. The exercise of
this authority is always downward i.e. from superior to subordinate.
 Staff authority involves giving advice to line managers to carry on the operations. The flow of this
authority may be in any direction depending on the need of such an advice. Types of staff authority
includes advisory, functional, concurring, control staff authority.
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 Line authority- (Barnard) The direct relationship between a superior and subordinate
relationships in the organization. A line authority is the heart of this relationship because it entitles a
superior to direct the work of his subordinate. Line authority includes chain of command, chain of

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communication, and chain of responsibility.

 An advisory staff manager studies the problems, offers suggestions and prepares plans for the use
and help of line managers. He provides advice, assistance & information & recommend to line
managers.
 Depiction Of Authority Relationship- there are two methods 1) Organization chart- It is
diagrammatical form which shows the major functions & their respective relationships, the channels of
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formal authority and the relative authority of each manager who is in charge of each respected
functions. It shows a formal relationships divided into master chart and supplementary chart. It is top
down, vertical, left or right chart, horizontal, circular chart. 2) Organization manual- It is small book
containing information about the organizational objectives, authority & responsibility of various
positions, methods & procedure followed.
 Conflict- they cause damage to the organization. It includes disagreement, contradiction &
incompatibility.
 Co-ordination is the essence of management- It involves the integration of human efforts for
achieving the goals which is not a particular function but the basic objective of all managerial
functions.
SCIENTIFIC MANAGEMENT

 This concept was introduced by F W Taylor ( Frederick Winslow Taylor 1856-1915).

 Scientific management is concerned with knowing exactly what you want men to do and then see in
that they do in the best and cheapest way.
 F W Taylor is also known as the Father of Scientific Management.
 It is basically traditional approach.
 He carried experiments about hoe to increase the efficiency of people.
 Tailors contribution is divided into two parts –
1) Elements and tools of scientific management

2) Principles of scientific management

 Elements and tools of scientific Management- It includes-
1) Separation of planning and doing.
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2) Functional foremanship (against unity of command).

3) Job analysis (it includes motion study, time study and fatigue study).

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4) Standardization.

5) Scientific selection and training of workers.

6) Financial incentives.
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7) Economy.

8) Mental revolution (mutual co -operation between managers and workers)

 Principles of scientific Management-
1) Replacing rule of thumb with science (organized knowledge should be applied).

2) Harmony in group action.

3) Cooperation.

4) Maximum output.

5) Development of workers.
 The worker was put under the supervision of a supervisor commonly known as gang boss.
14 PRINCIPLES OF MANAGEMENT
 Henry Fayol has given the fourteen principles of management.
 He has made a distinction between management principles and management elements
Management principles is a fundamental truth and establishes cause effect relationships while
management element denotes the function performed by a manager.
 Principles are flexible not rigid.
 Fourteen principles are as follows-
1) Division of work

2) Authority and Responsibility

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3) Discipline

4) Unity of command (superiors get orders from one head only)

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5) Unity of direction (one plan one head)

6) Subordination of individual interest to general interest

7) Remuneration of personnel
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8) Centralization

9) Scalar chain

10) Order (right man at right place)

11) Equity (justice and kindness)

12) Stability of tenure

13) Initiatives (thinking i=out and execution of plans)

14) Espirit de corps (unity is strength)

 Scalar chain of authority and of communication ranging from highest to the lowest must flow
through each position in the line of authority.
 Gang plank is used to prevent scalar chain from bogging down actions.
DIRECTING/LEADING
 Marshall Dimock has called directing is the heart of administration.
 Directing is the process of instructing, guiding, counselling, motivating & leading the human
resources to achieve organizational objectives.
 It guides, motivate, inspire.
 Features of directing-
1) Important managerial functions

2) Performed at every level of management

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3) It is a continuous process

4) Top to down level in the organization

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5) It has dual objectives-

1) It aims at getting things done by subordinates.

2) To provide superiors opportunities for some more important work which their
subordinates cannot do.
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 Importance of Directing-
1) Initiation of actions

2) Integration of employee’s effort Getting maximum out of individuals.

3) Facilitating changes in the organization.

4) Providing stability & balance in the organization.

 Principles of directing
Relating to purpose of direction Relating to direction process
1) Principle of maximum individual contribution.  Principle of unity of command
2) Principle of harmony of objectives.  Principle of appropriateness of directional
3) Principle of efficiency of direction. technique
 Principle of managerial communication
 Principle of comprehension(correct
information)
 Principle of use of informal organization
 Principle of leadership
 Principle of follow theory

 Principle of appropriateness of direction technique- three direction techniques includes

authoritarian, consultative & free rein it can be used in the most appropriate time.

 Direction and supervision- supervision is used as an element of direction & therefore every
manager in the organization performs the function of supervision irrespective of his level in
managerial hierarchy.

 The scope of supervision is much more limited as compared to that of direction which includes
motivating and leading employees & communicating with them besides guiding them. It is used to
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denote the functions performed by supervisor. It includes all supervisory functions planning, organizing,
directing, staffing & controlling. Thus supervision become much wider than directing.

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 Elements of effective supervision-

1) Leadership (high morale, high productivity)

2) Closeness of supervision (successful supervisors follow the less close supervision)

3) Employee oriented or human relations (successful supervisor, employee oriented)

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4) Group cohesiveness (it is a group situation in which all member’s works together for a
common goal)

5) Delegation- appropriate delegation leads to high productivity in the organization. Effective

supervision implies adequate delegation

 Order giving- it is one of the most important elements of direction. Management gives orders &
instructions to subordinates as to how the work should be accomplished.
 Order is defined as a directive to subordinates as to what is to be done or not to be done in the
execution of work for achieving organizational objective.
 General/specific order, written/oral, formal/informal, timing, follow up of orders.
 Techniques of direction 1) Orders & instructions 2) Follow up orders & instructions 3) Standard
practices & procedures 4) Behavioral pattern
CONTROLLING
 Controlling is the process of evaluating actual performance and if necessary taking corrective
actions so that the performance is in accordance with planned performance.
 Controlling is related to planning.
 Features of controlling-
1) It is a forward looking after measuring the past performance.

2) It can take corrective actions.

3) Executive process (each manager has to perform controlling functions in an organization)

4) It is a continuous process.
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5) It is a co-ordinated integrated system.

 It is said that planning is the basis, action is the essence, delegation is the key & information is
the guide control.

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 Importance of controlling-
1) Adjustment in operations

2) Policy verification

3) Managerial responsibility
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4) Psychological pressure

5) Co-ordination in action

6) Organizational efficiency & effectiveness.

 Steps in controlling- 1) Establishment of control standards 2) Measurement of performance 3)
Comparing actual & standard performance 4) Corrective actions
 Types of control- based on elements-
1) Strategic control 2) operational control, based on stages- 1) feedback control 2) feed forward
control 3) concurrent control.
 Strategic control- It is the process of taking into account the changing planning premises, both
external & internal to the organization, on which the strategy is based, continuously evaluating the
strategy as it being implemented and taking corrective actions to adjust the strategy to the new
requirements.
 Operational control- It is concerned with action or performance and is aimed at evaluating the
performance of the organization as a whole or its different components, SBU (strategic business
units), divisions and departments.
 Strategic control 1) External environment 2) Long term 3) Exclusive by top management, may be
through lower level support.
 Operational control 1) Internal environment 2) Short term 3) Exclusive or middle management on
the direction of top management.
 Controlling and Management By Exception- This principle allow managers to detect those places
where their attention is required and should be given. This implies the use of management by
exception particularly in controlling.
 Management by exception is a system of identification and communication that signals to the
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manager when his attention is needed.

 Management by exception has six basic ingredients- 1) Measurement 2) Projection 3) Selection 4)
Observation 5) Comparison 6) Decision making

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 Various areas where percepts of management by exception are used such as statistical control of
product quality, economic order quantities& order points for control of inventories & suppliers, break
even points for determining operating levels, trends in ratios of indirect to direct labor used in
apportioning overhead, attitudes surveys for gauging employee morale.
2) Management by exception is useful because- 1) Saves time because it looks after only on fewer
problems which are important. 2. Concentrate on major problems 3) It identifies crisis & critical
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problems 4) It alerts management to appraise opportunities as well as difficulties. 5) It provides

qualitative & quantitative yardsticks for judging.

 Operational control techniques- control techniques also known as control tools or control
aids.
 Operational control is exercised at the level of various operating units by the concerned operating
managers while overall control is exercised by top management of the organization.
 In an operating system there are two aspects where control is required-
1) Financial aspects known as financial control

2) Operating mechanism of the system known as operating control.

Financial control- In this outcomes are expressed in monetary terms. Budget is used to exercise control
at operative level while budget summary is used to exercise control at overall organization level.
 The major financial control techniques are-
1) Budgetary control

2) Control through costing

3) Break even analysis

4) Responsibility accounting

5) Internal audit

1) Budgetary control- It is a system of controlling costs which includes the preparation of budgets ,co-
ordinating the departments and establishing responsibility comparing actual performance with
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budgeted and acting upon results to achieve maximum profitability.

 Budgetary control as a tool for planning, act as a tool for control, act as an aid to
coordination.

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2) Control through costing- It involves the control over costs in the light of certain predetermined costs
usually known as standard costs. Standard costs are pre-determined operations costs computed to
reflect quantities prices & level of operations.
3) Break even analysis- It is concerned with cost volume profit relationships. Set of relationships of
fixed cost, variable cost, price, sales mix to the profitability of the organization.
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 BEP = FC/Contribution (fc/sp-vc) fc= fixed cost, vc= variable cost, sp= selling price, BEP=
break-even point.
 Margin of safety= total sales- BEP sales
 Profit= sales- total cost/ total contribution-fc
 BEP= neither profit nor loss
 Learning curves implies that an organization is able to reduce its costs because of the improvement
in production operations process.
4) Responsibility Accounting- The use of responsibility accounting focuses attention on management
by objectives (MBO) rather than management by domination. Each person is responsible for his
effective control, he must know what his costs should be and what his costs were. Three types of
responsibility centers are there- 1) cost centers 2) profit centers 3) investment centers
5) Internal audit- It is also known as operational audit. It is much more wider or broader in scope &
encompasses the whole range of activities of the organization. Thus internal audit in addition to
ensuring that accounts properly reflect the facts, als appraises policies, procedures, use of authority,
quality of management, effectiveness of methods, special problems & other options of operations.
 Operating Control- It is closely linked to concurrent control i.e exercise of control during the
operating process itself. Three types of operational control are- 1) Quality control 2) Cost control &
inventory control 3) Time event network analysis. 1) Quality Control- Quality is a sense of appreciation
that something is better than something else. Quality means focusing on the production of increasingly
better products & services at progressively more competitive prices.

 Techniques Of Quality Control-

1) SQC (Statistical Quality Control) – It is also known as Statistical Process Control. It is a
method of measuring & continuously improving work process before the final inspection of the
product. It is a preventive & remedial method. It is based on the theory of sampling which implies that
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the analysis of few items out of the total production can be used to understand the features of the
entire population. It measures the product quality by taking sample for inspection during the production
process. It produce large volume of the product.

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2) Inspection Control- It is applied at the stage of raw materials as well as at the stage of finished
products or in between. It may be done either for the raw materials which are in the form of finished
products resulting from the completion of production process. Inspection is done by comparing the
quality of the product to the standard, commonly known as specifications by means of visual or testing
examination.
3) Quality Control Through Quality Circle- concept of quality circle emerged from quality control.
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Japanese system of management integrated quality control with manufacturing department which give
rise to the idea of quality control circle or simple quality circle.
 It is a group of employees that meets regularly to solve problems affecting its work area.
 Six to twelve volunteers from same work area make up the circle.
 It recommends solutions for quality & productivity problems which may be implemented by
management.
 It can be made a permanent feature of organization. (Voluntary)
 Steering committee the highest level serves as advisory body of quality control.
 Brainstorming methods are used for problem solving.
4) Inventory control- Inventory control tries to specify the optimum level of inventory that an
organizations should keep with itself. In 1970 a Japanese introduced the concept of just in time
inventory system (JIT) known as kanban. The basic theme of this system is to have no inventory.
 Generally there are two techniques of inventory control-
1) ABC Analysis

2) Economic order quantity

1) ABC Analysis- Synder has given this. It is widely used technique for classifying different items. This
technique uses the values of different types of inventory for their classifications.
 A = High value, low number (more attention)
 B= Average value, average number ( average attention)
 C= low value, high number ( low attention)
 So ABC Analysis provides clue where attention should be focused in inventory control.
2) Economic Order Quantity- It includes ordering cost, carrying cost.
 EOQ= √2so/Đ ; s= total quantity, o= ordering cost, c= carrying cost)
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 Safety stock- The estimation of safety stock that an organization should keep regularly to continue
its operation uninterruptedly.
3) Time Event Network Analysis- Programme or project completed within the stipulated time.

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Time element is one of the most significant consideration because if the project is not completed within
the specified time the organization has to pay heavy penalty. There are three techniques of time
event network analysis-
1) Gantt chart

2) PERT/CPM
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3) Milestone budgeting
1) Gantt chart – It is developed by Hennery Gantt. He recognized that total Programme goals
should be regarded as a series of interrelated derivative plans that people could comprehend &
follow. He said some of the activities were independent of others while some of the activities were
dependent on others. It is indicated that two or more activities which have sequential relationship must
be completed in that order. It shows relationships among two activities.
2) Milestone budgeting – It is also known as Milepost Budgeting. A project that can be completed
individually in a time sequence, to be ready when needed. It establishes relationships between two
or more segments of a project.
3) PERT/CPM – PERT (Programme evaluation and review technique) CPM (critical path method)
.There is a difference between PERT and CPM in accordance of duration of activity. CPM assumes
duration of every activity to be constant. PERT assumes uncertainty in the duration of activities by
three parameters- 1) Most optimistic – activities in which least time taken 2) Most likely – most
probable time 3) Most pessimistic – maximum time.
 PERT/ CPM is used either to minimize total time, total cost, cost for a given total time, time for a
given cost or minimize idle resources.
 Process of PERT/CPM – Identification of activities> sequential arrangement> time estimates of
activity> network construction> critical path.
 Advantages of PERT/CPM- For top level manager, solving problems of scheduling the activities, it
presses for right action at right point & at right time in the organization.
 Disadvantages of PERT/CPM- Activities are of non -repetitive type, not useful for routine
planning of recurring events.
CORPORATE GOVERNANCE
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 Corporate governance is about promoting fairness, transparency and accountability

 A code of corporate governance contents the compositions of board of directors, disclosure of
information and management practices.

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BUSINESS ETHICS
 It refers to a set of moral principles which play a significant role in guiding the conduct of
personnel in the operation of any business organizations.
 It is concerned with what is right or wrong in human behavior.
 Ethical dilemma- it is a complex situation in which there are not clear cut guidelines for
ethical or unethical behavior.
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 Values are convictions and a framework of philosophy of an individual on the basis of which he
judges what is good or bad, desirable or undesirable, ethical or unethical.
 Attitudes are pre dispositional, based on this, an individual responds in a positive or
negative way in his environment.

MISCELLANEUS PONITS
1. Administered Vertical Marketing System: An arrangement that coordinates
distribution activities through the market and/or economic power of one channel
member or the shared power of two channel members.
It can also be said that, it is a system in which the channel members, while
retaining much of their autonomy, are informally coordinated in their marketing
activities by the dominant member of the channel. Dominance is achieved through
the exercise of political or economic power rather than through outright
ownership.
Contractual Channel System / Contractual Vertical Marketing System: A system in
which independent channel members at two or more levels have entered into
formal agreements to coordinate their marketing efforts in an attempt to take
advantage of the economies of scale. Contractual vertical marketing systems are
generally of three types: i. Voluntary chains, ii. Retail cooperatives, and iii.
Franchisee operations.
Corporate System / Corporate Vertical Marketing System: A system in which a
large corporation controls two or more levels of a marketing channel. For example,
a manufacturer may own the distribution facilities for his product as well as the
retail outlets through which it is sold.
2. Advertising: All activities involved in presenting to an audience a nonpersonal,
sponsor-identified, paid-for message about a product/service of an organization.
3. Advertising Agency: An independent company that provides specialized
advertising services and may also offer more general marketing assistance.
4. Advertising Media: The communication vehicles (such as newspapers, radio,
television etc) that carry advertising as well as other information and
entertainment.
5. AIDA: A sequence of steps in various forms of promotion, notably personal
selling and advertising, consisting of Attention, holding Interest, arousing Desire,
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and generating buyer Action.

6. Marketing Plan: A written document that presents the master blueprint for a
year’s marketing activity for a specified organizational division or major product.

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7. Automatic Vending: A form of nonstore retailing where the products are sold
through a machine with no personal contact between the buyer and seller.
8. Banner Ad: A boxed-in promotional message often appearing at the top of a web
page Behavioural segmentation: Market segmentation based on consumers’
product-related behaviour, typically the benefits desired from a product and the
rate at which the consumer uses the product.
10. Brand: A name and/or mark intended to identify and differentiate the product
of one seller or a group of sellers.
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11. Brand mark: The part of a brand that appears in the form of a symbol, design,
or distinctive colour or types of lettering.
12. Brand Name: The part of a brand that can be vocalized-words, letters, and/or
numbers.
13. Broker: A middleman who brings buyers and sellers together and provides
market information to either party and that ordinarily neither physically handles
products being distributed nor works on a continuing basis with those sellers or
buyers.
14. Business Analysis: It is one of the stages in the new product development
process which consists of several steps to expand a surviving idea into a concrete
business proposal.
15. Buying Motive: The reason why an individual or an organization buys a specific
product or makes purchases from a specific firm.
16. Channel Conflict: A situation in which one channel member perceives another
channel member to be acting in a way that prevents the first member from
achieving.
17. Comparative Advertising: A form of selective-demand advertising in which an
advertiser either directly (by naming a rival brand) or indirectly (through inference)
points out the differences among competing brands.
18. Consumer buying-decision process: The series of logical stages, which differ for
consumers and organizations, that a prospective purchaser goes through when
faced with a buying problem.
19. Cost-plus pricing: A major method of price determination in which the price of a
unit of a product is set at a level equal to the unit’s total cost plus a desired profit
on the unit.
20. Countertrade: An arrangement under which domestically made products are
traded for imported goods.
21. Culture: A complex of symbols and artifacts created by a society and handed
down from generation to generation as determinants and regulators for human
behaviour.
22. Customer Relationship Management (CRM): An ongoing interaction between a
buyer and a seller in which the seller continuously improves its understanding of
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the buyer’s needs, and the buyer becomes increasingly loyal to the seller because
his needs are being so well satisfied.
23. Decline stage: The fourth, part of a product life cycle during which the sales of a
product drops.

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24. Delphi Method: A forecasting technique, applicable to sales forecasting, in

which a group of experts individually and anonymously assess future sales, after
which each member has the chance to offer a revised assessment as the group
moves toward a consensus.
25. Demand Forecasting: The process of estimating sales of a product during some
future period.
26. Demographic segmentation: Subdividing markets into groups based on
population factors such as size, age, and growth.
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27. Department store: A large-scale retail institution that has a very broad and
deep product assortment, tries not to compete on the basis of price, and offers a
wide array of customer services.
28. Diffusion: A process by which an innovation spreads throughout a social system
over time.
29. Direct distribution: A channel consisting only of producer and final customer,
with no middlemen providing assistance.
30. Direct marketing: A form of nonstore retailing that uses advertising to contact
consumers who, in turn, purchase products without visiting a retail store.
31. Direct selling: A form of nonstore retailing in which personal contact between a
sales person and a consumer occurs away from a retail store. Sometimes called in-
home selling.
32. Discount store: A large-scale retail institution that has a broad and shallow
product assortment, low prices, and few customer services.
33. Distribution channel: The set of people and firms involved in the transfer of
title to a product as the product moves from producer to ultimate consumer or
business user.
34. Drop shipper: A merchant wholesaler that does not physically handle the
product being distributed, but instead sells merchandise for delivery directly from
the producer to the customer. Same as desk jobber.

35. Early adopters: A group of consumers that includes opinion leaders, is

respected, has much influence on its peers, and is the second group (following the
innovators) to adopt an innovation.
36. Economic environment: A set of factors, including the business cycle, inflation,
and interest rates, that affect the marketing activities of an organization.
37. 80-20 principle: A situation in which a large proportion of the total orders,
customers, territories, or products account for only a small share of the company’s
sales or profit, and vice-versa.
38. Electronic Commerce: The buying and selling of goods and services through the
use of electronic networks.
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39. Family branding: A strategy of using the company name for branding purposes.
40. Family-life-cycle stage: The series of life stages that a family goes through,
starting with young single people, progressing through married stages with young
and then older children and ending with older married and single people.

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41. First – mover advantage: Strategy of entering a market during the introductory
stage of a product in order to build a dominant position; also called pioneer
advantage.
42. Focus group: A preliminarly data gathering method involving an interactive
interview of 4 to 10 people.
43. Franchising: A type of contracatual vertical marketing system that involves a
continuing relationship in which franchiser (the parent company) provides the right
to use a trademark plus various management assistance in return for payments
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from a franchisee (the owner of the individual business unit).

44. Gray marketing: Practice of buying a product in one country, agreeing to
distribute it in a second country but diverting it to a third country; also called
export diversion.
45. Geographic segmentation: Subdividing markets into groups based on
geographic locations.
46. Label: The part of a product that carries information about the product and the
seller.
47. Laggards: A group of tradition-bound consumers who are the last to adopt an
innovation.
48. Leader pricing: A pricing and promotional strategy in which temporary price
cuts are made on a few items to attract customers.
49. Mail survey: A method of gathering data by mailing a questionnaire to potential
respondents, and asking them to complete it and return it by mail.
50. Market-aggregation strategy: A plan of action under which an organization
treats its total market as a single segment – that is, as one mass market whose
members are considered to be alike with respect to demand for the product – and
thus develops a single marketing mix to reach most of the customers in the entire
market. Same as mass market strategy and undifferentiated market strategy.
51. Market penetration strategy: A strategy in which the initial price of a product is
set low in relation to the target market’s range of expected prices.

52. Market potential: The total sales volume that all organizations selling a product
during a stated time period in a specific market could expect to achieve under ideal
condition.
53. Market segmentation: The process of dividing the total market for a good or
service into several smaller groups, such that the members of each group are
similar with respect to the factors that influence demand.
54. Market share: The proportion of total sales of a product during a stated period
of time in a specific market that is capturedby a single firm.
55. Market-skimming pricing: A strategy in which the initial price of a product is set
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high in relation to the target market’s range of expected prices.

56. Nonstore retailing: Retailing activities resulting in transactions that occur away
from a retail store.

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57. Odd pricing: A psychological pricing strategy that consists of setting at uneven
(or odd
58. Packaging: All the activities of designing and producing the container or
wrapper for a product.
59. Perception: The process carried out by an individual to receive, organize and
assign meaning to stimuli detected by the five senses.
60. Personal selling: The personal communication of information to persuade
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somebody to buy something.

61. Personal selling process: The logical sequence of prospecting, preapproach,
presenting, and postsale services that a sales person takes in dealing with a
prospective buyer.
62. Physical distribution: All the activities involved in the flow of products as they
move physically from producer to consumer or industrial user. Same as logistics.
63. Positioning: A product’s image in relation to directly competitive products as
well as other products marketed by the same company. Alternatively, a firm’s
strategies and actions related to favourably distinguishing itself from competitors
in the minds of selected groups of consumers. Same as product positioning.
64. Price: The amount of money and/or other items with utility needed to acquire a
product.
65. Price competition: A strategy in which a firm regularly offers products priced
aslow as possible, usually accompanied by a minimum of services.
66. Price war: A form of price competition that begins when one firm decreases its
price in an effort to increase its sales volume and/or market share, the other firms
retaliate by reducing prices on competing products, and additional price decreased
by the original price cutter and/or its competitors usually follow.
67. Product life cycle: The aggregate demand over an extended period of time for
all brands comprising a generic product category.
68. Product line: A broad group of products intended for essentially similar uses
and having similar phyical characteristics.

69. Promotion: The element in an organisation’s marketing mix that serves to

inform, persuade, and remind the market of a product and/or the organization
selling it in the hope of influencing the recipients’ feelings, beliefs, or behaviour.
70. Promotional mix: The combination of personal selling, advertising, sales
promotion, public relations, and publicity that is intended to help an organization
achieve its marketing objectives.
71. Psychographic segmentation: Subdividing markets into groups based on
personality dimensions, life-style characteristics, and values.
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72. Publicity: A special form of public relations that involves any communication
about an organization, its products, or its policies through the media that isnot
paid for by the sponsoring organization.
73. Public relations: Communication efforts that are designed to favourably
influence attitudes toward an organization, its products and its policies.

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74. Pull strategy: Promotional effort directed primarily at end users so they will ask
middlemen for the product.
75. Push strategy: Promotional efforts that directed primarily at middlemen that
are the next link forward in the distribution channel for a product.
76. Reference group: A group of people who influence a person’s attitudes, values
and behaviour.
77. Repositioning: Reestablishing a product’s attractiveness in the target market.
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78. Retailing: The sale, and all activities directly related to the sale, of goods and
services to ultimate consumers for personal, nonbusiness use. Same as retail
trade.
79. Sales forecast: An estimate of probable sales for one company’s brand of a
product during a stated time period in a specific market and assuming the use of a
predetermined marketing plan.
80. Sales potential: The portion of market potential that a specific company could
expect to achieve under ideal condition.
81. Sales promotion: Demand-stimulating devices designed to supplement
advertising and facilitate personal selling.
82. Service: An identifiable, intangible activity that is the main object of a
transaction designed to provide want satisfaction to customers.
83. Service quality: The degree to which an intangible offering meets the
expectations of the customer.
84. Situation analysis: The act of gathering and studying information pertaining to
one or more specified aspects of an organization. Alternatively, a background
investigation that helps in refining a research problem.
85. Social class: A division of, or ranking within, society based on education,
occupation, and type of residential neighbourhood.
86. Societal marketing concept: A revised version of the marketing concept under
which a company recognizes that it should be concerned about not only the buyers
of its products but also other people directly affected by its operations and with
not only tomorrow but also the long term.
87. Specialty store: A type of retail institution that has a very narrow and deep
product assortment (often concentrating on a specialized product line or even part
of a specialized product line), that usually strives to maintain manufacturers’
suggested prices, and that typically provides atleast standard customer services.
88. Sub-culture: Groups in a culture that exhibit characteristic behaviour patterns
sufficient to distinguish them from other groups within the same culture.
89. Supermarket: A type of retail institution that has a moderately broad and
moderately deep product assortment spanning groceries and some nonfood lines,
that offers relatively few customer services, and that ordinarily emphasizes price in
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either an offensive or defensive way.

90. Supply chain management: The combination of distribution channels and
physical distribution to make up the total marketing system.

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91. SWOT Analysis: It is identifying and evaluating an organisation’s most

significant strengths, weaknesses, opportunities and threats.
92. Target market: A group of customers (people of organizations) for whom a
seller designs a particular marketing mix.
93. Telemarketing: A form of nonstore retailing in which a sales person initiates
contact with a shopper and also closes the sale over the telephone.
94. Telephone survey: A method of gathering data by interviewing people over the
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telephone.
95. Test marketing: A method of demand forecasting in which a firm markets its
new product in a limited geographic area, measures the sales, and then – from this
sample – projects the comopany’s sales over a larger area. Alternatively, a
marketing research technique that uses this name approach to judge consumers’
responses to a strategy before committing to a major marketing effort.
96. Trademark: A brand that has been adopted by a seller and given legal
protection.
97. Value chain: The combination of a company, its suppliers, and intermediaries,
performing their own activities to add value to a product.
98. Vertical Marketing System (VMS): A tightly coordinated distribution channel
designed to improve operating efficiency and marketing effectiveness.
99. Wholesaling: The sale, and all activities directly related to the sale, of goods
and services to businesses and other organizations for resale, use in producing
other goods and services, or the operation of an organization.
100. Environmental Scanning: The process of gathering information regarding a
company’s external environment, analyzing it, and foreasting the impact of
whatever trends the analysis suggests. Same as environmental monitoring.
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UNIT-6
HUMAN RESORCE MANAGEMENT
 Business houses are made or broken in the long run not by markets or capital, patents or equipment
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but by men. Of all the resources manpower is the only resource which does not depreciate with the
passage of time. This resource is called human resource.
 Human resource refers to the total knowledge, skills, creative, abilities, talents & aptitudes f an
organization workforce as well as the values, attitudes & beliefs.
 It includes both quantitative & qualitative measurement.
 Human resource are also called human assets or human capital.
 Human resource is wider than the term personnel.
 Human resource management is the planning, organizing, directing & controlling of the
procurement, development, compensation, integration, maintenance & reproduction of human
resource to the end that individual, organizational & societal objectives are accomplished.
 Characteristics of Human resource Management-
1) Comprehensive function (covers all types of people at all levels in the organization).

2) People oriented.

3) Action oriented.

4) Individual oriented.

5) Development oriented.

6) Pervasive functions (at all levels such as production, marketing, finance).

7) Continuous process.

8) Future oriented.
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9) Challenging function, science as well arts, staff function, young discipline, interdisciplinary and
nervous system.
 HRM is a staff function but a line responsibility it means staff will advise and managers will be

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responsible for doing work through employees.

 Human resource system transforms input (people) in to output (productive) human resources in
collaboration with other subsystems.
 Human resource system seeks to achieve following objectives-
1) High productivity
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2) Better quality of life for all employees.

3) An agent of change & progress.

 Functions of Human Resource Management
Managerial functions
 Planning
 Organizing
 Staffing
 Directing/leading
 controlling
Operating functions
1) Job analysis
2) Human resource planning
3) Recruitment
4) Selection
5) placement
6) induction/ orientation

 Scope of Human Resource Management

1) Labour or human resource aspects.

2) Welfare aspects

3) Industrial relations aspects

 Evolution of Human Resource Management:-
1) Commodity concept (guild system- a closely knit group concern with selection, training,
reward and maintenance)
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2) The factor of production concept

3) The paternalistic concept (welfare schemes)

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4) Humanitarian concept (human problems)

5) Human resource concept (employees as valuable assets of organization)

6) Emerging concept
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 Human resource department is established as a staff department to advise all other departments and
the top management on human resource matters.
 Human resource manager as the head of the human resource department exercise line authority
over his own staff but in relation to other department he is a staff expert expected to provide advice &
information on human resource matters.
 Human resource management is a line management responsibility but a staff function.
 HRM department creates & maintains the environment in which employees can work effectively to
accomplish organizational goals & at the same time satisfy their personal needs.
 The recognition that employees are central to achieving competitive advantage has to the emergence
of new discipline known as strategic human resource management.
 Strategic Management is that set of managerial decisions and actions that determine the long term
performance of a corporation. It includes environmental scanning, strategy formulation, strategy
implementation & evaluation & control.
 Strategic HRM is defined as the integration of HRM with the strategic goals and corporate strategy so
as to improve business performance & achieve organizational goal.
HUMAN RESOURCE PLANNING
 The process by which management determines how an organization should move from its current
manpower position to its desired manpower position. Through it management strives to have the right
number and right kind of people at the right place at the right time, doing things which result in both
the organization & the individual receiving , maximum long range benefit.
 The basic purpose of human resource planning is to make optimum utilization of an organization
current & future human resources.
 It has both quantitative and qualitative aspects.
 With the help of human resource planning, areas of surplus manpower can be anticipated & timely
action can be taken it is known as redeployment.
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JOB ANALYSIS
 Job analysis is defined as the process of determining by observation and study the tasks which
comprise the job, the methods& equipment used and the skills and attitudes required for
successful performance of the job.

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 Job- it is a group of task positions involving same duties, responsibility, knowledge & skills. Each job
has definite title & is different from other jobs.
 Positions- it implies a collection of tasks & duties regularly assigned to one person.
 Occupation- it implies a group of jobs which are similar as to the type of work & which contain
common characteristics.
 Duty- it means a related sequence of tasks.
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 Task- it refers to distinct work activity with an identifiable beginning & end.
 Job Family- it implies a similar type of jobs.
 Job classification- it means grouping of jobs in to certain categories on some specified basis.
 Job evaluation- it implies determining the worth of a job to an organization by comparing it with
other jobs within the organization & with job market outside.
 Job is impersonal whereas position is personal. Objectives of Job Analysis-
1) Job redesign – job may be analyzed to simplify the process & methods involved in it. Such work
simplification helps to improve productivity.
2) Work standards
 Uses of job Analysis- 1) Organizational design 2) HR planning 3) Recruitment & selection 4)
Placement & orientation 5) Training & development 6) Performance appraisal 7) Career path
planning 8) Job design 9) Job evaluation, labour relations, employee counselling, health & safety.
 Process of job Analysis- 1) Organizational analysis 2) Organizing job analysis programme 3) Deciding
the uses of job analysis information 4) Selecting representative jobs for analysis 5) Understand job
design 6) Collection of data 7) Developing a job description 8) Preparing job specifications.

 Job Analysis- the process of obtaining all pertinent facts about a job.
 Job description- A factual statement of tasks and duties involved in a job.
 Job specifications – A statement of the minimum qualifications required for the job
 Job Evaluation – the process of ascertaining the relative worth of a job.
 Techniques of job analysis- 1) Job performance 2) Personal observation 3) Interview 4) Critical
evidence 5) Log records
 Job descriptions / position descriptions- it is a functional description of what the job entails. It is
a written record of the appropriate & authorized contents of a job. It is factual and organized statement
describing the job in terms of its title, location, tasks, and duties, responsibilities, working conditions,
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hazards & relationship with other jobs. It tell us what is to be done, how is to be done & why?
 Job duties & responsibility is the heart of job descriptions.
 Job analysis is a process where as job description & job specifications is a Statement.

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 Job specifications/ position specifications- it is a statement of the minimum acceptable human

qualities required for the proper performance of a job. It is a written record of the physical, mental, social,
psychological & behavioral characteristics which a person should possess in order to perform the job
effectively.
 Job design- it is the process of deciding on the contents of a job in terms of its duties &
responsibilities on the methods to be used in carrying out the job, in terms of techniques, systems and
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procedures & on the relationships that should exist between the job holder & his superiors,
subordinates & collegues.
 Methods of Job design-
1) Job rotation

2) Job enlargement

3) Job enrichment
 Job rotation- it implies the shifting of an employee from one job to another without any change in
the jobs. It relieves the employee from the boredom. It broaden the knowledge & skills of an employee. It
improves the self respect & personal worth of employee.
 Job enlargement- It is a process of increasing the scope of a job by adding more tasks to it. The
related tasks are combined. The widened & more complex job is expected to satisfy the higher order
needs of employees. It reduces monotony & boredom by providing the employee a more
complete or whole job to do. It also helps to increase interest in work & efficiency. Horizontal
loading of jobs. More task of similar nature are added to the job.
 Job enrichment- it involves designing a job in such a way that it provides the worker greater
autonomy for planning & controlling his own performance. It is based on the assumption that in order to
motivate employees the job itself must provide opportunities for achievement, recognition,
responsibility, advancement & growth. Through job enrichment a job is made more interesting and
challenging thereby removing the functions of narrow specialization. It involves vertical loading of job and
quality of jobs are improved.

RECRUITMENT
 It is the process of searching for prospective employees & stimulating & encouraging them to apply
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for jobs in an organization.

 Recruitment needs are of three types-
1) Planned recruitment – it arises from change in organization & retirement policy.

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2) Unexpected recruitment – when resignations, deaths, accidents occurs.

3) Anticipated recruitment- When an organization predicts by studying trend in the internal &
external environment.
 Features of Recruitment- 1) It is a process or series of activities. 2) It is linking activity between
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employer & employees. 3) It is a positive function. 4) It is a pervasive function as all organizations

engage in recruitment. 5) It is a two way process. 6) It is a complex process. 7) It aims to create a large
pool of candidates.
 Recruitment process begins with human resource department.
 The human resource requisitions contain details about the position to be filled, number of persons to
be recruited the duties to be performed, qualifications required from the candidate, terms & conditions
of employment and the time by which the person should be available for appointment.
 Lower level staff is recruited centrally whereas middle & top level executives are recruited in a
decentralized manner.
 Sources of Recruitment –
1) Internal sources (within an organization). 2) External sources (outside an organization)
 Promotions.  Press advertisement.
 Transfer.  Educational institutions/ campus recruitment.
 Up gradation.  Executive search agencies/placement
 Retired& retrenched (employees who want agencies/head hunter.
to come).  Employment exchanges act 1959.
 Dependent of disabled or deceased  Labour contractors.
employees.  Unsolicited applicants.
 Employee recommendations.
 Recruitment at factory gate/ gate recruitment/
direct recruitment.
 Similar organizations.

 Casual callers – Due to unemployment many job seekers visit the offices of well - known companies
on their own also called unsolicited visitors mainly for lower level jobs.
 Similar organizations- Experienced employees can be recruited by offering better benefits to the
people working in similar organizations also called poaching or raiding for talent.
 Technique of recruitment-
1) Direct recruitment (campus recruitment)
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2) Indirect recruitment (advertisements in TV, journal, newspaper)

3) Third party (Consulting firm)
4) Internet recruitment (online)
 Tempting or hiring is used for same word.

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SELECTION
 It is the process of choosing the most suitable persons out of all the applicants.
 It is the process of matching the qualifications of applicants with the job requirements.
 It is a process of weeding out unsuitable candidates and finally identify the most suitable
candidates.
 Difference between Recruitment & selection
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 Recruitment  Selection
1) It is the process of searching for 1) It is the process of choosing the right candidates
prospective candidates & encouraging 2) It is a negative process
them to apply for jobs. 3) It aims to identify & reject unsuitable candidates
2) It is positive process 4) It always succeeds recruitment
3) It aims to create large pool of candidates 5) It leads to a contract of services between the
4) It always preceeds selection employer & selected candidates.
5) It does not result in contract of service 6) It involves comparison & choice
6) It involves searching.

 STEPS IN SELECTION PROCESS

 The hurdles or screens are designed to eliminate an unqualified candidate at any point in the selection
process. This technique is called successive hurdles techniques.
 Hiring process consists of go no go gauages – It means candidates who qualify hurdles go to the next
stage while those who do not qualify are dropped out.
 Steps are – 1) Preliminary interview 2) Application blank ( biodata / curriculum vitae) 3) Selection
test ( psychological test – behavior/ attitudes/ performance) 4) Employment interview 5) Medical
examination 6) Reference checks 7) Final approval.
 Selection tests
1) Psychological test- It is based on the assumption that no two individuals are equal in terms of
intelligence, attitudes & personality, behavior. This test is used to judge the ability of a candidate is a
given job situation.
2) Aptitude or potential ability test- It measures the latent ability or potential of a candidate to learn a
new job. It includes 1) mental or intelligence test (IQ) 2) mechanical or aptitude tests 3) psycho-motor
or skill tests (ability to perform specific job)
3) Achievement or proficiency test- It measures the proficiency in typing, shorthand etc. it includes job
knowledge test or trade test and sample test (a Candidate is given a piece of work to judge how
efficiently he does)
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4) Personality test – These are call pen & paper test. It measures the ability of adjustment of employees in
stress of everyday life. It shows all round picture of a candidate personality. It includes objective test,
projective test, and situation test.

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5) Interest test- These tests are inventories of a candidates like & dislikes in relation to work.
 Validity- It means the degree to which a test measure what it is designed to measures. A test cannot
be valid unless it measures with reasonable accuracy the future job performance of a candidate
 Reliability – Test should be used only when found reliable. Test reliability implies the ability of a test
to give consistent results. Test reliability is the consistency of scores obtained by the same person
when re- tested again & again.
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INTERVIEW
 Interview is a process of face to face interaction between two persons for a particular purpose.
 Types of interview-
1) Informal interview (interview may take anywhere)

2) Formal interview (pre-planned and held in formal atmosphere)

3) Patterned or structured interview (also known as directed or guided interview, preplanned to a high
degree of accuracy & precision)
4) Non directed or unstructured interview (unplanned/ candidate is allowed to his mind freely)

5) Depth interview – it is a semi-structured approach wherein details concerning one key areas are
sought. To examine the candidates proficiency in his area of special interest. To get a true picture of
candidate through deep probing into his mind.
6) Group interview

7) Stress interview (how candidate behaves in a stressful situation)

8) Panel or board interview (Interview is conducted by a group of interviewers.

 Group discussion is a useful means of judging the leadership ability & social traits of
candidates.
 Competency mapping – Also known as competency modelling it is the process of describing skills,
traits, knowledge & experience required for a person to be effective in job.
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PLACEMENT, INDUCTION, ORIENTATION

 Putting the right man at the right job is as important as hiring the right person.
 Placement is the process of assigning a specific job to each one of the selected candidates.

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 Placement involves assigning a specific rank & responsibility to an individual.

 Matching the requirements of a job with the qualifications of a candidate.
 Familiarizing of employee with the job and the organization is known as induction or orientation or
indoctrination or assimilation.
 Orientation or Induction is the process of receiving and welcoming an employee when he first join a
company and giving him the basic information he needs to settle down quickly & happily & start
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work.
 Orientation is therefore the process of indoctrination, welcoming, acclimatization,
acculturalization & socialization.
 No show means candidates accepting job offer but do not join duty.
 Little difference between induction and orientation is that induction is only for new employees but
orientation if for both new and existing employees.
 Induction reduces labour turnover, absenteeism, anxiety and employee grievances.
 The essence of indoctrination is to convince the employee that he is working for a good
company and for a good cause.
 Socialization – It is the process of adaptation. It is the process by which new employees attempt to
learn and inculcate the norms and values of work roles in an organization.
 There is a difference between Induction and Socialization as induction is confine to new recruits
whereas socialization also covers cases of transfer and promotion.
TRAINING
 Employee training and executive development are main areas of human resource
development.
 Training is the process of increasing the knowledge and skills for doing a particular job.
 The purpose of training is basically to bridge the gap between job requirements & present
competence of an employee.
 Training aimed at improving the behavior and performance of a person as it is a never ending or
continuous process.
 Difference between training and education- training is any process by which the aptitudes, skills
and abilities of employees to perform specific jobs are increased on the other hand education is the
process of increasing the general knowledge & understanding of employees.
 Education  Training
1) Broad & general 1) Narrow & specific
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2) Pure & theoretical 2) Applied & practical

3) Long duration 3) Short duration
4) Person oriented 4) Job oriented
5) Delayed & in apparent result 5) Quick & apparent results.

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 Difference between training and development

 Training  Development
1) Employee training 1) Manager development
2) Short duration 2) Long duration
3) Technical & mechanical operations 3) Conceptual& philosophical concepts
4) Non managerial personnel 4) Managerial personnel
5) Specific job related skills 5) Total personality development
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6) management external motivation 6) Individual internal motivation

7) Reactive process to meet current need 7) Proactive process to meet future needs

 When new & inexperienced employees require detailed instruction for effective performance then
remedial training is given.
 New employees need to provide orientation training
 Existing employee’s need refresher training.
 Importance of training- 1) Higher productivity 2) Better quality of work 3) Less learning period 4)
Cost reduction 5) Reduced supervision ( self-reliant) 6) Low accident rate 7) High morale 8) Personal
growth 9) Organizational climate
 Types of training-
1) Orientation training- To adjust newly appointed employees to the work environment also
known as pre job training.

2) Job training- To increase the knowledge & skills of an employee for improving the performance
on the job.

3) Safety training- To minimize accidents & damage to machinery.

4) Promotional training- To perform higher level jobs

5) Refresher training- Use of new methods & techniques when existing techniques become obsolete. It is
designed to revive and refresh the knowledge & to update the skills of the existing employees. Refresher
or re-training programmers are conducted to avoid obsolescence of knowledge skills.
6) Remedial training- To overcome the shortcomings in the behavior & performance of old employees.
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This training is conducted by psychological experts.

 The overall aim of training programme is to fill the gap between the existing & the
desired pool of knowledge, skills & aptitudes.
 Objectives of training express the gap between the present & the desired performance levels.

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 Methods & techniques of training-

 On the job training (OJT) the trainee  Off the job training ( the trainee learns
learns under the guidance & supervision of outside the organization & devotes full time
the superior or an instructor. on learning)
 The trainee learns by observing & handling.  Vestibule training
 It is learning by doing  Apprenticeship training
 Coaching , job rotation, committee,  Classroom training
assignments  Internship training
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 E- learning

 A popular form of on the job training is JIT (Job instruction training) or step by step
training.
 Vestibule training – A training center called vestibule is set up & actual job conditions are
duplicated or stimulated in it.
 Apprenticeship training- Theoretical instruction & practical learning are provided to trainees in
training institutes. A stipend is paid, also called earn when you learn. It combines both theory and
practical. It is the oldest method of training.
 Classroom training- lectures, case studies, group discussion, audio- visual aids are used to explain
knowledge & skills to trainees. Also useful for orientations & safety training programme.
 Internship training- It is a joint programme of training in which educational institutions &
business firms co- operate ( theory and practice)
 E- learning- It includes training through internet, intranet, CD ROM, satellite, broadcasts, virtual
classroom. Also known as long trait learning.
 Training Effectiveness is the degree to which trainees are able to learn & apply the knowledge and
skills acquired in the training programme. It depends on the attitudes, interest, values & expectation of
the trainees & the training environment. A training programme is likely to be more effective when the
trainees want to learn are involved in their jobs, have career strategies.
 Improvement in productivity, quality improvement, cost reduction, accident reduction, reduction in
labour turnover & absenteeism are the best criteria for evaluating training effectiveness.
 Reinforcement- B.F Skinner has given this behavior modification model, when behavior is repeatedly
rewarded, it becomes a permanent part of one’s personality.
 Learning is more effective when there is reinforcement in the form of reward and punishment.
Reward like promotions, pay rise, praise and punishment like demotion.
 Retraining is the process of providing training to persons who underwent training earlier in the job.
Are generally arranged for employees who have long been in the service of an organization. It may be
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required at all levels.

 When an organization gets its employees trained by an outside agency it is called training
process outsourcing.

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EXECUTIVE DEVELOPMENT
 Executives (managers) are the most valuable assets of any organization.
 Executive development or management development is a systematic process of learning &growth by
which management personnel gain & apply knowledge, skills, attitudes & insights to manage the work in
their organizations effectively & efficiently. It is a educational process.
 Management development includes the process by which managers & executive acquire not only
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skills& competency in their present jobs but also capabilities for future managerial task of increasing
difficulty & scope.
 Features of executive development are as follows-
1) It is a planned & organized process of learning.

2) Its ongoing or never ending exercise.

3) It is a long term process.

4) It is guided self -development

5) Preparing managers for better performance and t use full potential.

 Objectives of executive development is to improve performance of managers at all levels.
 On the job technique  Off the job technique
1) Coaching. 1) Lectures.
2) Understudy. 2) Case studies.
3) Position rotation. 3) Group discussion.
4) Project assignment. 4) Conferences.
5) Committees. 5) Role playing.
6) Multiple management. 6) Management games.
7) Selected readings. 7) In basket exercise.
8) Sensitivity training.
9) Programmed Instructions.
 Methods and Techniques of executive development
1) Coaching- In this method superior guides and instructs the trainee as a coach. The coach or counsellor
sets mutually agreed upon goals, suggest how to achieve these goals, periodically reviews the trainee’s
progress and suggest chances required in behavior & performance. It is a learning by doing.
2) Understudy – An understudy is a person selected and being trained as the heir apparent to assume at a
future time the full duties & responsibilities of the position presently held by his superior.
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3) Position rotation- It involves movement or transfer of executives from one position or job to another
on some planned basis. It is also known as job rotation. Aim is to broaden the knowledge, skills &
outlook of executives. It is a horizontal process.

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4) Project assignment – A number of trainee executives are put together to work on a project directly
related to their functional area. The group called project team or task force will study the problem &
find appropriate solutions.
5) Committee assignment- A permanent committee consisting of trainee executives is constituted & all
the trainees participate in the deliberations of committee.
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6) Multiple management- This technique is developed by Charles Mc cormick. Under it a junior

board of young executives constituted and major problems are analyzed in the junior board which makes
recommendations to the board of directors.
7) Selective readings- By reading selected professional books and journals, managers can keep in
touch with the latest research findings, theories & techniques in management.
8) Lectures- These are formally organized talks by an instructor on specific topics. It is a one way
communication as listeners are passive.
9) Group Discussion – under it, paper is prepared and presented by one or more trainees and presented
by one or more trainees on the selected topic and followed by critical evaluation.
10) Case study- under it, a real or hypothetical business problem or situation demanding solution is
presented in writing to the trainees. They are required to identify & analyse the problem, suggests &
evaluate alternative course of action and choose the most appropriate solution.
11) Conference method- it is a formal meeting conducted in accordance with an organized plan,
problems of common interest are discussed. The participants pool their ideas & experiences to deal
with the problems effectively.
12) Role playing – In this method the trainees act out a given role as they would in a stage play. Two or
more trainees are assigned parts to play before the rest of the class. Thus it is a method of human
interaction which involves realistic behavior in an imaginary or hypothetical situation. It involves
simulation i.e creating an environment similar to real work situation, two other methods based on
simulation are inbasket & management games.
13) In basket exercise- In this method, the trainee is provided with a basket or tray of papers files related
to his functional areas. He is expected to carefully study these & make his own recommendation on
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the problem situation. The recommendations, observations of different trainees are compared &
conclusions are arrived at.
14) Management games- Management or business games are designed to be representative of real life

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situations. These are classroom simulation exercise in which teams of individuals compete against one
another or against an environment in order to achieve a given objectives.
15) Programmed Instructions- This method incorporates a pre- arranged and proposed acquisitions of
some specific skills or general knowledge. Information is broken into meaningful units & these units are
arranged in proper way to form a logical & sequential learning package. The package involves presenting
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questions, allowing learners to respond and instant feedback is given to indicate the accuracy of answers.
16) Sensitivity training – This method is also called T- group training and laboratory training. The
purpose is to increase self- awareness, develop interpersonal competence & sharpen teamwork skills. It
was developed by Kurt lewin. It is a group experience designed to provide maximum possible
opportunity for the individuals to expose their behavior give and receive feedback, experiment with
new behavior and develop awareness of self & of others.
CAREER PLANNING
 It is the systematic process by which one selects career goals & the path to the goals. It is the process of
matching career goals and individual capabilities with opportunities for their fulfillment.
MANPOWER PLANNING
 Manpower planning provides valuable information to facilitate career planning. It provides
information on the human resources available within the organization for expansion, growth &
technology innovations. But career planning only tell us who could succeed in case of retirement,
death, resignation.
SUCCESSION PLANNING
 Succession planning is the process of ensuring that qualified persons are available to assume key
managerial positions whenever these fall vacant due to untimely deaths, premature, firing,
resignations and retirements.
 Career planning covers all levels of employees whereas succession planning is generally required for
higher level executives.
 Career planning, manpower planning, succession planning are complementary &
interdependent.
 Career counselling- guiding & advising people on their possible career path & what they must do
to achieve promotions.
 Mentoring- The process wherein an executive or senior employee serve as a teacher, advisor, guide,
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friend, philosopher & confident to the new entrant.

 Career anchor – The basic drives that give the urge to take up a central type of career.
 Career plateau- It is a position from which someone unlikely to move to a higher level of work

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responsibility.
 Career development- It is essential for implementing career plans. It consists of activities
undertaken by the individual employees and the organization to meet career aspirations and job
requirements. The most important requirement is that every employee must accept his/her
responsibility for development.
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HUMAN RESOURCE DEVELOPMENT

 Six sigma- Motorola corporation introduced the concept of six sigma. Its purpose is to improve the
quality and reduce costs so as to increase customer satisfaction. Its ultimate target is zero defect products
& process. It goes at the root of the problems and helps to remove it totally.
 Methodology of six sigma- DMAIC ( D= Define, M= Measure, A= analyze, I= improve, C=
control)
 Business process Re-engineering – It means the fundamental rethinking and radical redesign of
business processes to achieve dramatic improvements in critical contemporary measures of
performance such as cost, quality, service & speed.
 Bench marking- It is developed by Xerox Corporation. It is the process of identifying, studying and
building upon the best practices in the industry or in the world so as to match or even surpass the
best competitors.
 Kaizen- It means continuous improvement with the involvement of everybody in the organization
so as to generate value for customers. It is based on the belief that there will be no progress if you keep on
doing things exactly the same way all the time .kaizen stresses upon process oriented thinking as opposed
to result oriented. The message of kaizen strategy is that not a day should go by without some kind of
improvement being made somewhere in the organization.

 Innovation involves a drastic improvement in the status quo as a result of a large investment in new
technology and/or equipment on the other hand kaizen means small improvement on an ongoing
basis.
 Steps of kaizen are – straighten up (identify) > put things in order> clean up> personal cleanliness
(healthy mind in healthy body)> discipline.
 Quality circle- A quality circle is a small group of employees from the same work area which meets
regularly to identify, analyze & solve quality & other work related problems.
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 TQM (Total quality Management) – It is a continuous process of improvement in all aspects of

an organization with the involvement of everybody. It is a total systems approach and an integral part of
corporate strategy. It is about changing the way things are done so as to prevent failures. It is a

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comprehensive effort to enhance an organsations efficiency.

 Special tools & techniques for improving quality- 1) value added analysis, benchmarking,
outsourcing, reducing cycle times, ISO 9000: 2000 and ISO 14000, statistical control, six sigma.
 Implementation of TQM – W. EDWARD Denning has suggested PDCA Cycle, P= Plan, D = Do , C=
check , A= act cycle for implementing TQM in any organizations.
 Mentoring- A mentor is an individual who systematically develops another persons abilities through
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intensive tutoring, coaching & guidance. Mentoring is essentially an emotional kind of support provided
by an experience person to younger people through teaching, coaching, counselling & guiding.
 Emotional quotient – In controlled economy intelligence quotient ( IQ) were popular but now
emotional quotient has become the buzzword. Emotional intelligence states that a managers
effectiveness in a corporation depends more on his emotional intelligence which means his ability to
manage his emotions in the work place & calmy deal with stressful corporate situations
 Human capital – It is the economic value of job, relevant skills, knowledge, ideas, energies &
commitments.
 Employee counselling- counselling is a two way process in which a counsellor, usually a superior
provides advice and assistance to his subordinates. Employee counselling may be formal & informal.
It plays a both curative & preventive role.
 Counselling is the process of advising and employee so as to enable him to overcome his
emotional problems.
 Counselling means discussion of an emotional problem with an employee with the general
objectives of minimizing it.
 Counselling involves discussion in which the counsellor listens sympathetically to the problems of
employees. It is a method of understanding and helping people who are upset emotionally.
 Counselling is concerned with emotional problem, it has no concern with other job problem
such as technical.
 The main objective of counselling is to understand and minimize emotional difficulty of an
employee.
 Need for counselling arises- stress, conflict & frustrations.
 Emotional tension- catharsis.
 Reorientation- counselling performs the functions of reorientation which involves a change in the
employees psychic self through change in basic goals & values.
 Human resource development- It is an organized learning experience aimed at matching the
organizational need for human resource with the individual need for career growth & development.
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 Difference Between Human Resource Management & Human Resource

Department.
 HRM  HRD
1) It is an independent functions with 1) It is an integrated system consisting of inter
independent sub functions dependent sub systems
2) It is a service and reactive function 2) It is a proactive function
3) It seeks to improve the efficiency 3) It seeks to develop the total organization and its
of people and administration culture
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4) It focuses on salary, economic reward. 4) It focuses on autonomous work groups, job

5) It is considered to be the responsibility of challenges & creativity for motivating people
human resource manager 5) It is the responsibility of all managers
6) It considers improved satisfaction and 6) It considers improved performance as the cause of
morale as the cause of improved performance improved satisfaction

EMPOWERMENT
 Empowerment means allowing a person to run the show by himself.
 Empowered employees become self -directed and self -controlled.
 There must be mutual trust between the superior& subordinates.
 Empowerment may be defined as providing employees at all levels the authority & responsibility to
make decisions on their own.
 There is difference between delegation of authority and empowerment as delegation is actioned
by manager whereas empowerment is actioned by the subordinates. In delegation the superior exercise
control but in empowerment the subordinate exercise self- control.
PERFORMANCE APPRAISAL
 Earlier Performance Appraisal is known by different name as Man To Man Rating, Rating
Scores, Merit Rating.
 Performance appraisal is the systematic, periodic and impartial rating of an employee excellence in
matters pertaining to his present job& his potential for a better job.
 Performance appraisal and merit rating used as synonymously but performance appraisal is a
wider term than merit rating.
 Merit rating- To decide salary increment.
 Performance Appraisal- Focus on the performance & future potential of employee.
 Features Of Performance Appraisal- 1) It is a series of steps. 2) It is a systematic examination. 3) It is
a scientific & objective study 4) It is an ongoing or continuous process. 5) It secure information for
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making correct decisions. 6) It aims at both Judgementals & development efforts.

 Process Of Performance Appraisal- 1) Establishing performance standards 2) Communicating
the standards 3) Measuring performance 4) Comparing the actual with the standard performance

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5) Discussing the appraisal 6) Taking corrective actions

 Problems In Performance Appraisal-

1) Errors in rating- A) Hallo Effect- It is the tendency to rate an employee consistently high or low on
the basis of overall impression. B) Stereotyping- This implies forming a mental picture of a person on the
basis of his age, sex, caste or religion. C) Central Tendency- It means assigning average ratings to all the
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employees in order to avoid commitment or involvement. D) Constant Error- some evaluators tend to be
lenient so performance is overrated (leniency norms) some are strict so performance is underrated (
strictness error) E) Personal Bias- performance appraisal depends on rater likes or dislikes. F) Spill -
Over Effect- This arises when past performance affects assessment of present performance. Recent
behavior or performance of an employee may be used to judge him this is called recency.
2) Lack of reliability- Reliability implies stability & consistency in the measurement.

3) Incompetence- Raters may fail to evaluate performance accurately due to lack of knowledge &
experience.

4) Negative approach

5) Multiple objectives

6) Resistance

7) Lack of knowledge
 Essentials of an effective performance appraisal system 1) Mutual trust 2) Clear objectives 3)
Standardization 4) Training 5) Job relatedness 6) Documentation 7) Feedback & participation 8)
Individual differences 9) Post appraisal interview, review & appeal.

METHODS OR TECHNIQUES OF PERFORMANCE APPRAISAL

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Traditional method Modern method

1) Confidential report. 1) Assessment center.
2) Free form & essay. 2) Human resource accounting.
3) Straight ranking. 3) BARS (Behaviorally anchored rating scales.
4) Paired Comparison. 4) Appraisal through MBO.
5) Forced distribution. 5) 360” Degree appraisal.
6) Graphic rating scales.
7) Checklist method.
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8) Critical incidence.
9) Group appraisal.
10) Field review.

 Confidential Report – It is a report prepared by the employee’s immediate superior. It covers the
strengths & weakness, achievement & failure of employee. It is descriptive appraisal used for promotions
& transfers of employees. As appraisal is based on impression rather that data.

 Free Form Or Essay Method- under this evaluator writes a short essay on the employee’s
performance on the basis of overall impression.

 Straight Ranking Method- The evaluator assigns relative ranks to all the employees in the same
work unit doing the same job. Employees are ranked from the basis of overall performance. Oldest &
simplest method.

 Paired Comparison Method – modified of form of straight ranking each employee is judged better
than the other determines his rank. Comparison is made on the basis of overall performance N (N-
1)/2.
 Forced Distribution Method – The rates is required to distribute his ratings in the form of a
normal frequency distribution. The purpose is to eliminate the rater’s bias of central tendency based on
the questionable assumption that all groups of employees have the same distribution of good &
performance.

 Graphic Rating Scales- It is a numerical scale indicating different degrees f a particular trait. The rates
is given a printed form for each employee which contains several characteristics relating to the personality
& performance of employees. The numerical points given to an employee are added up to find out his
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overall performance a standing in the group. Two scale- 1) continuous scale (0 to

5) 2) discrete or discontinuous scale (in the form of square box).

 Checklist Method – A checklist is a list of statements that describe the characteristics & performance

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of employees on the job. The rater checks to indicate if the behavior of an employee is positive or
negative to each statement. The performance of an employee is rated on the basis of number of positive
checks. There are three methods to check 1) simple checklist 2) weighted checklist 3) forced checklist.

 Critical Incidence Method – In this method the superior keeps a written record of critical events and
how different employees behaved during such events. The rating of an employee depends on his
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positive/negative behaviors during this event.

 Group Appraisal Method- under this method a group of evaluators assesses employees. The group
determine the standards of performance for the job, measures actual performance of an employee
analyze the causes of poor performance and offer suggestions for improvement in future.

 Field Review Method – In this method a training officer from the human resource department
interviews line superiors to evaluate their respective subordinates. The interviewer prepares in advance
the questions to be asked. By answering these questions a supervisor gives his opinions about the level of
performance of his subordinate, the subordinates work progress, his strengths & weakness.

 Assessment Center Method- An assessment center is a group of employees drawn from different
work units. These employees work together on an assignment similar to the one they would be handling
when promoted. Assessment center generally measures interpersonal skills, communicating ability,
ability to plan & organize. It help to determine training & development needs of employees.

 Human Resource Accounting Method – under this method a performance is judged in terms of
costs, contributions of employees. Cost of human resources consist of expenditure n human resource
planning, recruitment, selection, induction, training etc. difference between cost and contributions
of employees will reflect the performance of employees.

 BARS (Behaviorally Anchored Rating Scale) – It includes graphic rating scale + critical incidence
method. The rater records the observable job behavior of an employee & compares these observations
with BARS. BARS are descriptions of various degree of behavior relating to specific performance
dimension. The ratings are likely to be accurate because these are done by experts. The method is more
reefed=back liable & valid as it job specific & Identifies observable & measurable behavior. Behaviors used
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are more activity oriented than result oriented, time consuming and expensive too.

 Performance Appraisal Through MBO (Management By Objectives) – The concept was

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developed by Peter F Drucker In 1954. It is also known as Management By Results, Self-Control,

Working Planning & Review or Goal Setting Approach To Appraisal. It is a process whereby the superior
and subordinates managers of an organization jointly identify its common goals, define each individuals
major areas of responsibility in terms of result expected of him & uses these measures as guides for
operating the unit & assessing the contribution of each of its members.
 Steps of MBO- set organizational objectives> define performance targets> performance
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review> feedback.
 360’ Appraisal- In order to make appraisal more objective, transparent & participative
concepts such as Self- Appraisal, Peer- Appraisal, Subordinates- Appraisal, Superior Appraisal were
introduced. It involves evaluation of managers by everyone. Structured questions are used to collect
responses about a manger from his bosses, peers, Subordinate.
JOB EVALUATION
 Pay is related with the nature & worth of the job.
 The relative worth of a job can be judged with the help of job evaluation.
 Job evaluation is an orderly and systematic technique of determining the relative worth of the
various jobs within the organizations so as to develop an equitable wage & salary structures.
 Job evaluation is different from job analysis & performance appraisal. Job analysis is the pertinent
facts about the job whereas job evaluation is related to find out the worth of a job.
 Job evaluation begins with job analysis.
 Job evaluation  Performance appraisal
1) It is the assessment of various jobs to find 1) It is the assessment of performance of different
out their relative worth. employees performing the same job.
2) It takes into consideration the requirements 2) Its takes into considerations the performance of
of different jobs different individuals
3) Its purpose is to identify the basis for fixing 3) Its purpose is to identify the basis for decisions
wages, salary. concerning pay raise, promotion, training and
4) Its rate the jobholder not the job transfer.
5) It is done before an employee. 4) It rates the job not the job holder
5) It is done after an employee joins and perform the
job
 Objectives Of Job Evaluation-
1) To determine equitable wage differentials between different jobs in the organizations.

2) To eliminate wage inequities.

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3) To develop a consistent wage policy.

4) To establish a rational basis for incentive & bonus scheme.

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5) To provide a framework for periodic review and revision of wage rates.

6) To provide a basis for wage, negotiations with trade unions.

7) To minimize wage discrimination on the basis of age, sex, caste, region, religion.
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 Two methods of job Evaluation-

1) Non quantitative method a) Ranking or job comparison b) Grading or job classification

2) Quantitative method-a) Point method b) Factor method.

 Employees moves from one job to another within an organization through transfers, promotions &
demotions such movement is known as internal mobility.
 Employees leaves the organizations due to resignation, retirement and termination is called
external mobility.
 Transfers- It refers to a horizontal or lateral movement of an employee from one job to another in
the same organization without any significant change in status & pay.
 Promotion- It refers to advancement of an employee to a higher post carrying greater responsibility
higher status & better salary. It is the upward movement of an employee in the organization
hierarchy.
 When an employee is assigned to a higher level job without increase in pay it is called a dry
promotion.
 Up gradation implies movement of an employee to higher pay scale without change of job.
 Demotion – It implies the assignment of an employee to a job of lower rank with lower pay it refers
to downward movement of an employee in the organizational hierarchy with lower status & lower
salary.
 Resignation- Resignation or quit is a voluntary separation initiated by the employee
himself. An employee may resign on grounds of ill health, marriage, pregnancy better
opportunities in other organizations.
 Retirement- It is the main cause of separation f employees from the organizations. Compulsory
retirement – after attaining specified age. Pre mature retirement- retire before attaining the specified age
because of ill health, family problem etc. voluntary retirement- when an organizations want to cut down
its operations or to close forever, it may give an option to its employees with a certain minimum service
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for voluntary retirement in return for a lump sum payment. It is called golden handshake scheme.
 Layoff- It implies temporary removal of an employee from the payroll of the organization due to
circumstances beyond the control of the employer.
 Retrenchment – It means permanent termination of an employee’s service for economic

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reasons in a going concern.

 Dismissal- It refers to terminating the service of an employee by way of punishment, misconduct or
unsatisfactory performance.
 Exit interview- It is an interview held with an employee who is leaving the organization voluntarily.
The purpose of an exit interview is to find out the reasons why the employee is leaving.
 Outplacement- It is a human resource programme used to help separated employees deal with the
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emotional stress of job loss & to provide assistance in finding a new job.
 Absenteeism – It means the failure of a worker to report for work when he is scheduled to work.
Absenteeism is unauthorized, avoidable & wilful absence from duty.
 Labour turnover (attrition) – It refers to the rate of change in the workforce of an enterprise
during a given period. The time to time changes in the composition of the workforce that result from
hiring, release & replacement of employee. It is a measure of extent to which old employees leave &
new employee enter the service of a concern.
HEALTH AND SAFETY HEALTH
 It is a state of a complete physical, mental & social well- being and not merely the absence of
disease.
 Ill health leads to high rate of absenteeism & Labour turnover.
Factor’s affecting workers health 1) Cleanliness 2) Lighting 3) Temperature & ventilation 4) Freedom
from noise 5) Dust control 6) Working space and seating arrangements

 Health – factories act 1948

 Protection against health hazards 1) Preventive measures 2) Curative measures
 Preventive measures- It means pre -employment and periodic medical examination and removal of
health hazards to the maximum possible extent & training of first aid staff, educating workers in
health & hygiene.
 Curative measures- It consist of treatment for the affected workers.
 Prevention is always better than cure.
SAFETY
 According to the factories act 1948 accident is an occurrence in an industrial establishment causing
bodily injury to a person which makes him unfit to resume his duties in the next 48 hours.
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 Employee health  Employee safety

1) Physical, mental and social well-being. 1) Protection against all types of hazards & accidents.
2) If not taken care then disease & ill health. 2) If not taken care then injury & death.
3) To avoid ill health, good habits & proper 3) To avoid accidents precaution & safety
working conditions to be adopted. measures to be adopted.
 Accident is an unexpected and sudden event arising out of & in the course of employment. Self-
inflicted injuries, injuries inflicted with the consent of person cannot be regarded as accidents.
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 Survey and studies reveals that wherever safety measures are good, Labour productivity is high. This is
so because employees can concentrate on their work with confidence & without fear.
 Two ratios are there to measure accidents are-
1) Frequency measures 2) Severity measures
 Frequency measures- It is the number of time lost accidents or injuries per employee per
1000000 man hours worked.
 Accident severity rate- It means the total number of days charged or lost because of accidents per
1000000 man hours worked.
 4E’S – Education , engineering, enforcement and encouragement ( in this accidents prevention
depends)
 National safety council 1966
 SAHARA- Safety & Health Accidents Reduction Plan.
 Employee fitness & wellness programmes help to improve employee morale, to reduce employee
absenteeism & Labour turnover.
EMPLOYEE WELFARE

 Labour welfare means the efforts to make life worth living for workmen.
 Labour welfare means anything done for the comfort& improvement, intellectual or social of the
employees over and above the wages paid which is not a necessity of the industry.
 Committee on Labour welfare 1969
 Such facilities as canteens, rest & recreation facilities, arrangements for travel to end from work & for
the accommodation of workers employed at a distance from their homes.
 Labour investment committee 1946
 Employee welfare measures also known as fringe benefits.
 Central government has made elaborate provisions for health, safety & welfare of workers under
Factories act 1948 and Mines act 1952.
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 Plantation Labour act 1951, motor transport workers act 1961, employee state insurance act
1948.
 Types of welfare services- 1) Intramural – facilities within the establishment includes washing,

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bathing, crèches, canteen and rest room. 2) Extramural- facilities outside the establishment such as
housing ( industrial housing scheme 1952) 3) Education 4) Transportation 5) Recreation 6) Consumer
co-operative stores
 Statutory provisions for employee welfare are – 1) The factories act 1948 2) The plantation labour
act 1951 3) The mine act 1952 4) The motor transport workers act 1961 5) The contract labour (
regulation & abolition act 1970)
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SOCIAL SECURITY
 Social security act 1953 this act introduce the old age pension scheme.
 Social security is the protection which society provides for its members through a series of public
measures, against the economic & social distress. It is a measure of ensuring social justice.
 Social security schemes are of two types- 1) Social insurance- under it, workers & employers make
periodical contributions and the funds so collected are used to provide benefits like provident fund, group
insurance. 2) Social assistance- under it, the cost of benefits provided is financed fully by the
government. Example old age pension.
 Social insurance is provided through the following Labour laws-
1) The workers compensation Act 1923- The objective of this act is t improve an obligation upon
employers to pay compensation to workers for accidents arising out of and in the course of
employment.
2) The Employee’s state insurance Act 1948- This act provides medical facilities & unemployment
insurance to industrial workers during their illness. Its objects is to provide social insurance for workers. It
is a compulsory & contributory health insurance scheme.
3) The employee’s provident funds Act 1952- This act provides for retirement benefits in the form of
provident fund, pension & deposits insurance and this act doesn’t apply to cooperative socities.
4) The Maternity benefit act 1961- The main purposes of this act are to regulate the employment of
women in certain establishments for certain specified periods before and after child birth, to provide for
the payments of maternity benefits to women worker’s and to provide certain benefits in case of
miscarriage, premature birth or illness arising out or pregnancy.
5) The payment of gratuity Act 1972- The act is applicable to all factories, mines, oilfields, plantations,
ports, railways, ships or establishment in which 10 or more workers are employed. Gratuity is payable on
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retirement, death, disablement or termination after 5 years of continuous service.

 Group Insurance is a scheme which provides insurance cover n the lines of several persons under one
insurance policy or contract. It is generally provided to the employees working under one employer. A

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contract between insurance company & employer & policy is master contract
MORALE
 Morale is a mental condition or attitudes of individuals and groups which determines their
willingness to co-operate.
 Morale is a state of mind or willingness to work which in turn affects individuals &
organizational objectives.
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 Morale is psychological feeling, intangible, influences human behavior & performance, aggregate of
attitudes feelings, emotions & sentiments & subjective concept.
 Impact of Morale on Productivity-
1) High morale- high productivity- this situation is likely to occur when employees are motivated to
achieve high performance through financial & non- financial rewards.
2) High morale – low productivity- This situation arises when employees spend their time 7 energy in
satisfying their personal objectives inspite of company’s goal.
3) Low morale – high productivity- This situation can occur for a temporary period due to fear of loss of
job, exceptionally good supervision.
4) Low morale – low productivity- This is a normal relationship in long run low morale is likely to
result low productivity.
 Job enrichment & job rotation also helps to improve employee morale.

INDUSTRIAL RELATIONS AND INDUSTRIAL DISPUTES INDUSTRIAL RELATIONS

 Industrial relations means the relationships between employers & employees in industrial
organizations.
 Features of industrial relations are as follows-
1) Relationship between employer and employee.

2) Industrial relations include both individual & collective relations. Individual relations is a relations
between employer & employee. Collective relations is a relations between employer’s association &
employee’s trade union as well as the state in regulating these relations.
3) The concept of industrial relations is complex & multidimensional
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4) It is a dynamic & developing concept

5) Industrial relations do not work in vacuum.

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6) Industrial relations is an integrated part of social relations.

 Main purpose of industrial relations is to maintain harmonious relations between management &
Labour. Scope of it is very wide.
 Main issues relating to industrial relations are- 1) Grievances & their redressal 2) Workers
participation in management.3) Ethical code & discipline 4) Collective bargaining 5) Standing orders 6)
Machinery for the settlement of industrial disputes.
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 Objectives of Industrial relations- 1) To maintain harmonious relations for higher productivity 2) To

safeguard the interest of Labour as well as management. 3) To maintain industrial democracy 4) To avoid
all conflicts so as to ensure peace by providing better working & living standards to workers 5) To rise
productivity by reducing absenteeism & Labour turnover 6) To bring about government control over
those industrial units which are running on loss 7) To ensure a healthy & balanced social order.
 Approaches of Industrial relations-
1) Psychological approach- In this different perceptions of employees give rise to problems which leads
to strike, lockout, gherao etc. because of low pay, dissatisfaction of work.
2) Sociological approach- Because of difference in individual’s attitudes & behavior creates
problems of conflict & co-operation.

3) Human relations approach- As given by ELTON MAYO, when employees treated as an inanimate
object the conflict arises. Giri approach- given by V V Giri, collective bargaining & mutual negotiations
between management & labour should be used to settle industrial disputes. Giri approach to industrial
relations implies the encouragement of mutual settlement of disputes, collective bargaining &
voluntary arbitration.
4) Gandhian approach- It is based on the fundamental principles of truth, non-violence & non-
possession. It employer follow the principle of trusteeship, there is no scope for conflict of interest
between than & labour. Workers can use Non- Cooperation/Satyagraha to have their grievance
redressal.
 Causes of poor industrial relations- 1) Economic causes 2) Organizational causes 3) Social causes
4) Psychological causes.
 Measures for improving industrial relations- 1) Sound human resource policies 2) Constructive
attitudes (positive) 3) Collective bargaining ( it refers to a process by which employees on the one hand &
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representatives of employees on the other attempt to arrive at agreement covering the conditions
under which employees will contribute & be compensated for their services. 4) Participative
management 5) Responsible unions 6) Employee welfare 7) Grievance procedure

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INDUSTRIAL DISPUTES
 Industrial disputes act 1947
 Industrial disputes means any dispute or difference between employers & employees or
between employers & workmen or
between workmen & workmen’s which is connected with the employment or non- employment or terms
of employment or with the conditions of labour of any person.
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 Industrial disputes is not a personal disputes of any one.

 Industrial disputes taken place in several forms- 1) Strikes- a stopping of work by a body of persons
employed in any industry or refusal of work. Types of strike 1) sit down strike, stay in strike, tools down/
pen down strike, token or protest strike, hunger strike, cat call/ lightning strike, go slow, boycott and
picketing. 2) Gherao- It means encircling the employer or his representative to restrict the movement of
person so as to put pressure for accepting the demands. 3) Picketing- workers are dissuades from
reporting for work by certain persons stationed at gate of factory. 4) Lockout- It means the closing of a
place of business of employment or the suspension of work or the refusal by an employer to continue
to employ any number of persons employed by him
 Causes of industrial disputes- 1) Wages & allowance 2) Bonus 3) Personnel & retrenchment 4) Leave
& hours of work 5) Indiscipline
 Various Methods of Settlement of Disputes are –
1) Conciliation- It is the process by which representatives of workers & employers are brought together
before a third party with a view to persuade them to arrive at an agreement through mutual
discussion between them.
2) Arbitration- It is a process in which a neutral third party listens to the disputing parties, gather
information & then takes a decision which is binding on both the parties. Difference between conciliation
& arbitration as conciliation involves compromise whereas arbitration is quasi- judicial process. The
conciliation simply assists the parties to come to a settlement whereas an arbitrator listens both the
parties and then gives his judgement.
3) Adjudication- It Is the ultimate legal remedy for the settlement of industrial disputes. It means
intervention of a legal authority appointed by the government to make a settlement which is binding
on the parties.
 Trade union is a voluntary organization of workers formed to promote & protect their interests by
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collective actions. Trade unions act 1926.

WORKERS PARTICIPATION IN MANAGEMENT
 It is also known as self- management ( Yugoslavia).

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 It is also known as co-determination ( Germany).

 Participation refers to the mental & emotional involvement of a person in a group situation which
encourages him to contribute to groups goals & share in the responsibility of achieving them. It is a
process by which authority & responsibility of managing industry are shared with workers.
 Workers participation in management based on the theory that a worker invests his labour and
ties his fate to his place of work.
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 Workers participation in management may be formal and informal.

 Workers participation should be distinguishing from collecting bargaining the former is based on
mutual-trust, information sharing & mutual problem solving. While collective bargaining is essential based
on power play pressure tactics & negotiations.
 There can be four levels of participation 1) shop floor 2) plant 3) department 4) corporate
levels.
 Four degrees of participation- 1) communication 2) consultation 3) code-termination 4)
self-management Importance of workers participation in management- 1) Mutual understanding 2)
Higher productivity 3) Industrial harmony 4) Industrial democracy 5) Less resistance to change 6)
Creativity & innovation
 Forms of workers participation in managements are as fallows - 1) Suggestions schemes 2) Works
committee (at shop floor level) 3) JMC (Joint management council at plant level) 4) Workers
directors co-partnership
 Satisfaction is the end feelings of a person after performance.
 Joint Consultation – It is the process whereby employer consults the workers either directly or
through their representatives & seeks their opinion on various issues while retaining to himself the
right of taking final decisions. It is a popular form of labour participation in management. It is a stage
prior to joint decision making. It includes matters not covered in collective bargaining. Workers training,
productivity & quality improvement schemes, grievances, disciplinary problems, safety measures &
incentive schemes can be covered under it.
 Work committee-Deals with matter of day to day functioning at the shop floor level.
 Joint management council- establish in 1958, it consist of equal representatives of management &
workers, not exceeding 12 at the plant level. It includes works of collective bargaining, wages & salary,
grievances are outside of it.
 Shop councils- It includes member less than 12, term is 2years, at plant level. It includes all decisions
shall be on the basis of consensus. Its functions is to improve productivity, health & safety. Meet
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frequently once in a month.

 Joint councils- It includes 500 workers or more, its term 2 years, it has chairman and vice chairman
and meet once in quarterly, its decisions are based on the Consensus. Its functions are those which are not

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solved by the shop council. It is at enterprise level.

WAGE AND SALARY ADMINISTRATION

 Administration of employee compensation is called compensation management or wage &

salary administration.
 It involves formulation & implementation of policies & programmes relating to wages, salaries &
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other forms of employee compensation.

 It includes job evaluation, wage & salary survey, profit sharing & other incentives.
 The basic purpose of wage & salary administration is to establish and maintain an equitable wage &
salary structure & equitable cost structure.
 Base compensation  Supplementary compensation
1) It means wages & salary paid to employees. 1) It means fringe benefits paid in addition to wages &
2) Wages & salary paid in cash. salary.
3) Wages & salaries are paid to compensate 2) Fringe benefits paid in kind.
employees for their services. 3) It is paid to retain employees & to increase their
4) Wages & salary determining on the basis of efficiency.
job evaluation. 4) Fringe benefits depend mainly on company
policies.
 Objectives of wage & salary administration are as follows- 1) To establish a fair & equitable
remuneration 2) To attract competent personnel 3) To retain the present employees 4) To improve
productivity 5) To control cost 6) To establish job sequences lines of promotion wherever applicable. 7) To
improve union management relatives 8) To improve public image of the company
 Moonlighting- moonlighting or double jobbing is the practice when employees take up part time
jobs or business simultaneously with their original jobs.
 ESOP – Employee Stock Option Plans
 Discipline – It means orderliness or the absence of disorder, chaos & confusion in human
behavior & action.
 Grievance – it means any real or imaginary feeling of dissatisfaction & injustice which an employee
has about his employment relationship.
 Human Relations- It is an area of management practice which is concerned with the integration of
people into a work situation in a way that motivates them to work productivity, co-operatively &
economic, psychological & social satisfaction.
STRESS
 It derived from the Latin word stringers which means to draw tight.
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 Stress is different from anxiety which a state of uncertainty. It is also different from
agitation which is physical part of anxiety.
 Stress also differs from frustration which is blocked goal attainment.
 Stress is an internal phenomenon & a mental attitude. Stress is mental, emotional or physical reaction

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resulting from individual response to environmental pressure & similar stumili.

 Hans selye- father of stress.
 Burnout- It is a syndrome wherein a person breaks down physically and emotionally due to
continuous over work a long period of time. Work addicts or work aholic are suspetible to burnout.
 SOME IMPORTANT THEORIES-
Subsistence Theory- David Ricardo
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
 Wage Fund Theory- Adam Smith/ J S Mill
 Surplus Value Theory- Carl Marx
 Residual Theory- Francis A Walker
 Marginal Productivity Theory- Philip Henery, Wicksteed, John Bater & Clark
 Bargaining Theory- John Davidson
 Behaviorial Theory- Mark Simon, Robert Dublin, Eliot Jacques.

MISCELLANEOUS POINTS:-

Human Resources

The total knowledge, skills, creative abilities, talents and aptitudes of an

organisation’s workforce, as well as the value, attitudes and beliefs of individuals
involved

Human Resource Management (HRM)

HRM refers to a set of programmes, functions and activities designed and carried out
in order to maximise both employee as well as organisational effectiveness.

Human Resource Management is a function of guiding human resources into a

dynamic organisation that attains its objectives with a high degree of morale and to
the satisfaction of those concerned.

HRM is that phase of management which deals with the effective control and use of
manpower as distinguished from other sources of power.

The management of human resources is viewed as a system in which participants

seeks to attain both individual and group goals.
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The objective of HRM is to understand what has happened and is happening and to
be prepared for that will happen in the area of working relationships between the
managers and the managed.

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Manpower/Human Resource Planning

It is the process of determining manpower requirements and the means for meeting
those requirements in order to carry out the integrated plan of the organisation.”

Job Analysis
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Job analysis is the process of determining, by observation and study, and reporting
pertinent information relating to the nature of s specific job. It is the determination
of the tasks which comprise the job and of the skills, knowledge, abilities and
responsibilities required of the worker of a successful performance and which
differentiate one job from all others

Job Description

It is an organised, factual statement of the duties and responsibilities of a specific job.

In brief it should tell what is to be done, how it is done and why? It is a standard of
function, in that it defines the appropriate and authorised content of a job.

Job Specification

Job specification or man specification or employee specification is a statement of the

minimum acceptable human qualities necessary to perform a job properly. In
contrast to the job description it is a standard of personnel and designates the
qualities required for acceptable performance.

Job Evaluation

Job evaluation is an attempt to determine and compare demands which the normal
performance of a particular job makes on normal workers without taking into account
the individual abilities on performance of the workers concerned.”

Absenteeism

Absenteeism means the failure of a worker to report for work when he is scheduled
to work.
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Labour Turnover

Labour turnover refers to the rate of change in the workforce of an enterprise during
a given time period.

Recruitment
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Recruitment is the process of searching for prospective employees and stimulating

and encouraging them to apply for jobs in an organisation.

Recruitment Policy

Recruitment policy specifies the objectives of recruitment and provides a framework

for the implementation of the recruitment programme.

Selection

Selection involves picking for hire a subset of workers from the total set of workers
who have applied for the job.

Interview

Interview is a face-to-face, observational and personal appraisal method of evaluating

the applicant where the interviewer who is higher in status is in a dominant role.

Placement

It is a decision to place a selected individual in one job than in another.

Induction

It is the process of inducting a new employee into the new social setting of his work.

Promotion

A promotion takes place when an employee moves to a position higher than the one
formerly occupied.
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Dry Promotion

When there is no increase in the employee’s pay as a result of promotion it is called

as a dry promotion.

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Demotion

It is a downward movement of an employee in the organisational hierarchy with

lower pay, status or responsibilities.

Transfer
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A transfer implies a lateral movement of an employee in the hierarchy of positions

with the same pay and status.

Training and Development

The organised procedure by which people learn knowledge and/or skill for a definite
purpose is training.

Job Rotation

This type of training involves the movement of the trainee from one job to another.

Management Development Programme

It is a systematic process of growth and development by which the managers develop

their abilities to manage.

Career

It is a sequence of separate but related work activities that provides continuity, order
and meaning in a person’s life.

Motivation

It is defined as any idea, need, emotion or organic stage, that prompts a man to an
action.

Job Satisfaction

It refers to the feelings and the emotional aspects of individuals experience towards
his jobs,
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Performance Appraisal

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It is the systematic, periodic and an impartial rating of an employees’ excellence in

matters pertaining to his present job and his potential for a better job.

Management By Objectives (MBO)

It is a process whereby the supervisor and subordinate managers of an organisation

jointly identify its common goals, define each individual’s major areas of responsibility
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in terms of unit and assessing the contributions of each of its members.

Trade Unions

It is a voluntary organisation of workers formed to promote and protect their

interests by collective action.

Collective Bargaining

It refers to a process by which employers on the one hand and representatives on the
other, attempt to arrive at agreements covering the conditions under which
employees will contribute and be compensated for their services.

Workers Participation in Management

It is a process by which authority and responsibility of managing industry are shared

with workers.

Job Design

It is the process of deciding on the contents of a job in terms of its duties and
responsibilities, on the methods to be used in carrying out the job, in terms of
techniques, systems and procedures and on the relationships that should exist
between the job holder and his superiors, subordinates and colleagues.

Important terms in Consumer Behaviour

1. Absolute Threshold: The lowest level at which an individual can experience a

sensation.
2. Acculturation: The learning of a new or foreign (other country’s) culture.
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3. Actual Self-Image: The image that an individual possess as a certain kind of person
with certain characteristic traits, habits, behavior etc.
4. Advertising Wearout: Overexposure to repetitive advertising that causes
individuals to become satiated and their attention and retention to decline.

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5. Advetorials: Print ads which are laid out to resemble editorial material making it
difficult for the readers to distinguish between the two.
6. Affective Component: It is a part of tri-component attitude model which reflect
the consumer’s emotion or feeling with regard to an object or a person or an idea.
7. Affinity Group Marketing: A type of cause-related marketing targeted to members
of a specific group.
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8. Affluent Consumers: The consumers with household incomes which provide them
with a disproportionate large share of all discretionary income.
9. AIOs: These are the psychographic variables that focus on Activities, Interests, and
Opinions often referred to as Lifestyle.
10.Arousal of Motives: The motives which are often aroused on the basis of
physiological, emotional, cognitive or environmental factors.
11.Attitude: It is the learned predisposition to behave in a favourable or unfavourable
with regard to a particular thing.
12.Beliefs: These are the mental or verbal statements that reflect an individual’s
knowledge and assessment about certain things.
13.Benefit Segmentation: A basis of segmentation which is based on the kinds of
benefits that consumers seek for in a product or service.
14.Brand Equity: The value associated with a brand.
15.Brand Loyalty: Consistent preference and/or purchase of the same brand.
16.Brand Personification: Specific “personality-type” traits or attributes ascribed by
consumers for different brands.
17.Cause-related Marketing: A form of corporate promotion in which companies try
to motivate socially-aware consumers to buy their products by promising to
contribute a portion of the sale to a specific cause.
18.Cognitive Component: A part of the tri-component attitude model which
represents the knowledge, perception, and beliefs that a consumer has with
respect to an idea or an object.
19.Cognitive Dissonance: The dissonance or discomfort that consumers experience as
a result of conflicting information.
20.Compliant Individual: The individual who moves towards others and want to be
loved, wanted, and appreciated by others.
21.Conative Component: A part of the tri-component attitude model which reflects a
consumer’s likelihood or tendency to behave in a particular way with regard to an
attitude-object.
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22.Concentrated Marketing: It is targeting a product or service to a single market

segment with a unique marketing mix.
23.Conditioned Learning: It results when a stimulus which elicits a known response
that serves to produce the same response by itself.

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24.Consumer Behaviour: The type of behavior which consumers display in searching

for purchasing, using, evaluating, and disposing of products or services.
25.Consumer Ethnocentrism: A consumer’s predisposition to accept or reject foreign-
made products.
26.Consumer Learning: The process by which consumers acquire the purchase and
consumption knowledge and experience they apply to future related behavour.
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27.Consumer Profile: Socio-economic/Demographic/Psychographic profile of actual

or proposed consumers for a specific product or service.
28.Counter segmentation: It is a segmentation strategy in which a company
combines two or more segments into a single segment to be targeted with an
individually tailored product or promotion campaign.
29.Cross-Cultural Consumer Analysis: Research to determine the extent to which
consumers of two or more nations are similar in respect to specific consumption
behavior.
30.Cues: Stimuli that give direction to consumer motives.
31.Culture: The sum total of learned beliefs, values, and customs which serve to
regulate the consumer behaviour.
32.Demographic Segmentation: The division of a total market into smaller subgroups
on the basis of such characteristics such as age, gender, marital status, education,
occupation and income.
33.Detached Personality: An individual who moves away from others.
34.Differentiated Marketing: Targeting a product or service to two or more
segments, using a specifically tailor-made product, promotion appeal, price etc.
35.Diffusion Process: The process by which the acceptance of an innovation is spread
by communication to members of a social system over a period of time.
36.Ego: The part of personality that serves as the individual’s conscious control. It
functions as an internal monitor that balances the impulsive demands of the id
and the socio-cultural constraints of the superego.
37.Elaboration Likelihood Model (ELM): A theory which suggests that an individual’s
level of involvement during message processing is a critical factor in determining
which route to persuasion is likely to be effective.
38.Evoked Set: The specific brands a consumer considers in making a purchase choice
in a particular product category.
39.Family Life Cycle: Classification of family units into significant groupings like
Bachelorhood, Honeymooners, Parenthood, Postparenthood, and Dissolution.
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40.Geographic Segmentation: It is dividing the market based on geographical

territories.
41.Green Marketing: Marketing activity that involves environmental claims.

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42.Halo Effect: A situation in which the perception of a person on a multitude of

dimensions is based on the evaluation of just one or few dimensions.
43.Ideal Self-Image: It is how individuals like to perceive themselves.
44.Inert Set: Brands that a consumer is indifferent towards because they are
perceived as having no particular advantage.
45.Infomercial: These are thirty minute commercials that appear to the average
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viewer as documentatires and thus command more attentive viewing than

obvious commercials would receive.
46.Instrumental Conditioning: A behavioural theory of learning based on a trial-and-
error process, with habits formed as the result of positive experiences resulting
from certain responses or bahaviours.
47.Just Noticeable Difference: It is the minimal difference which can be detected
between two stimuli.
48.Market Segmentation: Dividing the heterogeneous market into homogeneous
clusters.
49.Motivation: The force which drives an individual for an action.
50.Opinion Leader: A person who informally gives product information and advice to
others.
51.Perception: It is the process by which an individual selects, organizes and
interprets stimuli into meaningful and coherent picture of the world.
52.Positivism: A consumer behaviour approach that regards consumer behaviour
discipline as an applied marketing science. It’s main focus is on consumer decision
making.
53.Post-purchase Dissonance: The cognitive dissonance which occurs after a
consumer has made a purchase commitment.
54.Reference Group: A person or group which serves as a point of comparison for an
individual in the formation of either general or specific values, attitudes, or
behaviour.
55.Social Marketing: The use of marketing concepts and techniques to win adoption
of socially beneficial ideas.
56.Social Self-Image: It is how individuals feel others see them.
57.Stimulus: Any unit of input to any of the senses.
58.Superego: The part of personality that reflects society’s moral and ethical codes of
conduct.
59.Use-related Segmentation: Popular and effective form of segmentation that
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categorizes consumers in terms of product, service, or brand image characteristics

such as usage rate, awareness and degree of brand loyalty.

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60.Use-situation Segmentation: It is segmentation which is based on the idea that

the occasion or situation often determines what consumers will purchase or
consume.
61.Word-of-Mouth Communication: It is informal conversations concerning products
or services.

Important terms in Total Quality Management

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Affinity Diagram: It is a technique of gathering and organizing large number of data or

ideas, opinion and facts relating to a problem or project, and to identify natural
patterns or groupings in the information.

Arrow Diagram: It is a mode of presentation of activity flow, which involves planning

and constructing the essential steps from start to finish of a project or problem
solution.

Appraisal Cost: Cost for evaluation of correctness and conformance of a product or

service or process after the occurrence of the event. This is the cost incurred by a
company to identify the quality conformance of products after they occur. This refers
to activities relating to the check for conformances within the company and before
the products are shipped out.

Audit: It is an examination of records to check their accuracy.

Bar Graph: A graphical means of data presentation by bars or columns.

Benchmarking: The term refers to a special quality improvement technique that seeks
to understand and adopt the “best practice” of others who are world-class in their
fields.

Best Practice: It is adopted in an for achieving the benchmarked level of performance,

after understanding the process of superior performance.

Brainstorming: It is an idea generation technique which encourages a group of people

to meet for discussing a common or broad issue for identifying the course of
approach, route cause, solution or any other pertaining matters or problems.
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Cause-and-Effect Diagram: It is a technique of graphical presentation used to identify

and relate causes and sub-causes with a particular effect or result.

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Continuous Improvement: It is a term adopted by ISO 9000 standards and 2000

standards version, which refers to discontinuous but repetitive activity for
improvements.

Control Charts: It is a graphical representation of the characteristic of a process

around the central line and one or more control limits.
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Cost of Quality: It is the measure of cost incurred for not doing things ‘first time right’
in order to meet the customers’ total requirements. It is the difference between the
actual cost of making and selling the products or services and the cost if there were
no failures during manufacturing or use of the same and no possibility of failure
either.

Creativity and Innovation: Creativity is the ability of a person to discover a new

relationship or ideas that has not existed before, and innovation refers to the new
method or approach by which the new idea can be implemented.

Critical Path Method (CPM): It refers to the measurement of critical path in the arrow
diagram analysis of a project work, where the critical path is the longest path through
the network in terms of time dimension.

Cycle Time: It refers to time performance i.e., time required to fulfill the
commitments or to complete the tasks.

Defect: It refers to any non-conformance of the product or service with that of agreed
parameters or customer requirements. Defect is an attribute, and expressed as
attribute data.

Economic Value Addition (EVA): It is a performance indicator in terms of cost of

capital employed versus the earnings of a company. It includes the interest outgo for
the capital (i.e., the interest that would have been paid had the entire capital been
borrowed from the market at a market rate) and earnings mean net profit after taxes
and other payables, which can be distributed to stakeholders.

Flow Chart: It is a graphical representation, which symbolically shows the sequential

flow of activities in a process that produces an output. Flow charts can be of different
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types, like Process flow chart, Work flow diagram, Resource deployment flow chart
etc.

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Histogram: It is a vertical bar chart that displays the data in an arranged way to
illustrate the frequency distribution of the measured data values.

Inspection: It is a method of examining, and measuring when necessary, for

identification of any defects or short coming of any features or tolerances in a
product.
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ISO 9000: It is a set of quality system standards that define and guide basic elements
of quality systems that companies should use to ensure their products and services
meeting or exceeding, customer expectations. The standards cover the specific
requirements in areas of quality of design, production, installation, testing and
inspection, and services. Standards under ISO-9000 banner call for documentation of
all processes affecting quality and compliance of the documented systems and
procedures.

Just-in-Time: It is a management philosophy applied in production methods and

manufacturing with a view to incorporating systems of producing ‘what is needed
when it is needed’. This approach implies the production of exactly what is needed,
at the time when it is needed, and not maintaining any extra or safety stocks in the
production processes.

Kaizen: It is a Japanese concept that means continuous improvement. Kaizen

philosophy is based on the belief that a great number of small improvements over a
time will lead to substantial cumulative improvement in organisation’s performance.

Non-conformance: Attributes or measured units of data on a given product or part

that do not meet the specification limits.

p-Chart: It is a control chart used to evaluate performance of a produces outcome

based on the fraction or percentage defective in a sample whose size is either
constant or varying.

Pareto Chart: A vertical bar chart that displays the relative importance of categories
of problems under study or the conditions. The items are arranged in descending
order from left to right, and help to separate the vital few important items from the
less important trivial ones. The plot and the concept of identifying vital few gave rise
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to the important statistical distribution rule of 80:20.

P-D-C-A Cycle: This is the cycle of sequential activities of Plan-Do-Check-and Analyse

that are used for problem solving or process improvement. Essence is to plan from

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present data and information about what one needs to do, implementation by doing
the planned activities, analysis of results by study, evaluation and monitoring,
standardization of actions and processes for consistency of results, and then
repeating the cycle for continuous improvement. This is also known as ‘Deming Cycle’
after the name of its enunciator. It is also termed as P-D-S-A i.e., Plan, Do, Study and
Act.
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PERT (Programme Evaluation and Review Technique): This is a time-event network

analysis system in which various events in a project are identified with a planned time
frame for each. These events are shown in the network depicting relationship of each
event with the other events.

Poka-Yoke: It is a mistake-proofing system that uses automatic devices or methods to

avoid the consequences of simple human error. The idea is to avoid repetitive tasks
or actions that depend on memory or vigilance efforts by people, and instead allow
people to apply their mind and creativity to value adding jobs.

Process: This refers to linked activities combining the people, equipment, materials,
methods and environment with the purpose of producing a product or service for
customers within or outside the company. In other words, a process converts the
inputs to acceptable value-added outputs for customers.

Process Owner: A person assigned responsibility for a process because of his or her
capability to lead a team and personal influence to contribute and make decisions or
any one whose performance is measured in terms of success of the process. Process
owners are specially trained and empowered employee of the company.

Productivity: It refers to the output to input ratio within a time period and with due
consideration for quality. The term is widely used in industries in context of getting
higher output for creating profit through productive operations. Productivity is often
taken as the measure of efficiency of the use of resources.

Quality: The totality of features and characteristics of a product or services that bear
on its ability to satisfy the customer needs and expectations.

Quality Assurance: This has been defined by ISO as: the procedure consisting of all
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planned and systematic activities implemented within the quality system, and
demonstrated as needed, to provide adequate confidence that an entity will fulfill
requirements for quality. The quality assurance procedures aim for prevention or
detection of non-conformance at the earliest stages, and as such, involve control of

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quality vendor items, methods and tools planning, in-process control by using simple
statistical tools (control charts), analysis for improvement, and audits of outgoing
products or services.

Quality Control: This refers to methodology to control the quality of outgoing

products as per stipulated specification by means of inspection and sampling
technique. Quality control procedure is primarily concerned with the inspection and
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certification of outgoing quality by checking at specific points within the process.

Quality Council: A senior management team responsible for establishing quality

improvement items, policies and plans in the organisation, and then facilitating the
quality improvement programmes by resource allocations and monitoring.

Quality Circle: It refers to a self-motivated group of workers who choose to work out
solution of common quality problems or an improvement project by regularly
meeting together and sharing responsibility.

Quality Function Deployment (QFD): It is a methodology used to ensure that

customers’ requirements are met throughout the processes of product design,
process design and operation of production systems.

Quality Manual: It is the principal document that describes a company’s quality

policy, quality system, quality commitment, and documentation structure. This is a
relatively short document that affirms the management’s quality commitment, and
functions as the ‘quality system guide’ in the organisation for examining adherence
and conformance to ISO-9000 standard.

Quality Policy: It is a policy statement of an organisation’s commitment to quality by

stating what, why and how it intends to achieve the stated level of quality. It is a
statement that goes into the design of quality system for customer satisfaction.

Quality Procedure: It is functional document under ISO-9000 system that set forth
the policy, responsibility and obligation for quality related tasks that affect quality
performance within the quality system.

QS-9000: This is a ‘Quality System Requirement’ system defining the fundamentals of

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a quality system that must be adhered to ensure defect prevention and the reduction
of variations and waste in the supply chain of internal and external suppliers of
production and service parts and materials. It emphasizes on defect prevention and
continuous improvement.

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R Chart: A control chart that plots the range of sample data values as a function of
time, sequence or lot number.

Re-engineering: It is a fundamental rethinking and radical redesign

of business processes in order to achieve dramatic improvement in areas of critical
performance, such as quality, cost, service and efficiency.
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Restructuring: It refers to the reorientation an dredesign of an organisation’s work

structure from function based to process based, running across other functions.

Run Chart: It is a graphical plot of a measurable characteristic of a process versus the

time.

Six Sigma: It is a quality matrix that counts the number of defects per million
opportunities (DPMO) at six ‘Sigma levels’.

Statistical Process Control (SPC): It is a method of measuring the variability of a

process by using control charts, and determining the capability of the process to
produce a particular part.

Statistical Quality Control (SQC): It is a method of measuring and controlling the

process outputs in terms of the specification by adopting statistical techniques, such
as sampling and sampling error measurement, run chart, calibrations of equipment
and measuring gauges, statistical analysis of results, cause-and-effect studies etc.

Standards: It is an agreed document that includes the stated and implied

requirements and expectations of customers, which should be implemented and
adhered to in practice for performance.

Standardisation: It refers to the process of setting or adopting standards for meeting

the requirements of consumers.

Stakeholeders: They are individuals or parties who have some interest or stake in the
well-being or performance of a company. They can be in the form of customers,
employees, suppliers, shareholders, society etc.

Steering Committee: It is a management team (mostly drawn from middle or

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senior management) assigned with the responsibility of guiding a task and deploying
measures for achieving a set objective.

Supplier: They are the source of supply of materials, goods or services to a company.

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Supply Chain Management: It refers to the process management where suppliers,

sub-contractors and the customer company are linked up in the chain of activities
that relate to production, value-addition and delivery of goods and services with a
view to satisfying the customers’ needs.

Total Quality Management (TQM): It is an integrated system approach of customer-

focused management where all employees are drawn into the process of continuous
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improvement an dcustomer satisfaction by redesigning the processes and integrating

the processes and activities into a chain of quality delivery processes, including the
supply chain and internal customer chain, in order to achieve
superior business performance.

Tree Diagram: It is a management tool used for analysis and planning where issues,
activities or ideas are systematically broken down until an actionable solution
emerges from the analysis.

Value Analysis: This refers to a step in product design for customers where function
of every component of a product is analysed to determine how it might be improved
in the most economical way.

Value chain: It refers to a series of activities or processes that are designed and
managed in an organisation in order to add value to the product or service at each
stage so that the sum total of result help the company to earn better margin.

World class: This term is used in terms of describing the quality standard of a product
or service as the best in its class, considering the global availability.

X-bar Chart: This is a variable data control chart that plots the mean of data values as
a function of lot number or time or sequence.

X-R chart: A pair of charts used to plot individual data values, x1 and the range
between data values R. It is also known as individual or moving average control chart.

Zero-Defects: This refers to a concept of preventing the occurrence of defects to a

very low level, approaching to zero level.

OTHER IMPORTANT POINTS:-

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Attitude: The cluster of beliefs, feelings and behavioural intentions towards an

object.

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Behaviour Modification: A theory in behavioural science that explains learning in

terms of the antecedents and consequences of behavior.

Behavioural Audit: A diagnosis of cultural relations between companies prior to a

merger and determination of the extent to which cultural clashes are likely to occur.

Brainstorming: A freewheeling face-to-face meeting where team members are not

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allowed to criticize but are encouraged to speak freely in order to generate as many
ideas as possible for building on the ideas of others.

Change agent: Anyone who possesses enough knowledge and power outside the
group by pooling the resources and power of its members.

Cognitive Dissonance: A psychological tension that occurs when people perceive an

inconsistency between their beliefs, feelings and behavior.

Conflict: The process in which one party perceives that its interests are being
opposed or negatively affected by another party.

Emotional Intelligence: The ability to perceive and express emotion, assimilate

emotion in thought, understand and reason with emotion, and regulate emotion in
oneself and others.

Emotions: Psychological episodes toward an object, person, or an event that create

a state of readiness.

Employability: An employment relationship in which people perform a variety of

work activities (rather than holding specific jobs) and are expected to continuously
learn skills that will keep them employed.

Employee Assistance Programmes (EAPs): Counselling services that help employees

overcome personal or organizational stressors and adopt more effective coping
mechanisms.

Employee Involvement: The degree to which employees influence how their work is
organized and carried out.
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Employee Stock Option Plan (ESOP): A reward system that encourages employees to
buy shares of an organization.

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Empowerment: A psychological concept in which people experience more self-

determination, meaning, competence, and impact regarding their role in the
organization.

Extroversion: A “Big Five” personality dimension that characterizes people who are
outgoing, talkative, sociable, and assertive.
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Goals: The ultimate objective that employees try to accomplish in an organization.

Goal Setting: The process of motivating employees and clarifying their role
perceptions by establishing performance objectives.

Grapevine: An unstructured and informal communication found in an organization.

Group: two or more people with a unifying relationship.

Impression Management: Practice of actively shaping one’s public image.

Informal Groups: Two or more people who form a unifying relationship based on
personal rather than organizational goals.

Introversion: A “Big Five” personality dimension that characterizes people who are
quiet, shy and cautious.

Intuition: the ability to know when a problem or opportunity exists and select the
best course of action without conscious reasoning.

Johari Window: the model of personal and interpersonal understanding that

encourages disclosure and feedback to increase the open area and reduce the blind,
hidden, and unknown areas of oneself.

Knowledge Management: Any structured activity that improves an organisation’s

capacity to acquire, share, and use knowledge in ways that improve its survival and
success.

Learning: A relatively permanent change in behavior that occurs as a result of a

person’s interaction with the environment.
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Locus of Control: A personality trait referring to the extent to which people believe
events are within their control.

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Machiavellian Values: the belief that deceit is a natural and acceptable way to
influence others.

Management by Objectives (MBO): A participative goal-setting process in which

organizational objectives are cascaded down to individual employees.

Management By Walking Around (MBWA): A communication practice in which

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executives get out of their offices and learn from others in the organization through
face-to-face interaction.

Mental Imagery: Mentally practicing a task and visualizing its successful completion.

Motivation: The force operating within an individual that affect his or her direction,
intensity and persistence of voluntary behavior.

Myers-Briggs Type Indicator (MBTI): A personality inventory designed to identify

individual’s basic preferences information.

Need for Achievement : A learned need in which people want to accomplish

reasonably through their own efforts.

Need for Affiliation: A learned need in which people seek approval/conformation

from others for their wishes and expectations.

Need for Power : A learned need in which people want to control over other others.

Need: Deficiencies that energize or trigger behavior.

Negotiation: Two or more conflicting parties attempt to resolve their divergent

goals by redefining the terms of their interdependence.

Organisational Behaviour: The study of what people think, feel, and do in an

organisation.

Organisational Culture: The basic pattern of shared assumptions, values and beliefs
governing the way employees within an organisation think about and act on
problems and opportunities.
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Organisational Design: The process of creating and modifying organisationa

structure.

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Organisational Politics: Behaviours that people perceive as self-serving tactics for

personal gain at the expense of others in an organisation.

Organisational Structure: The division of employees and the pattern of co-

ordination, communication, work flow, and forma power that direct an
organisation’s activities.
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Organisation: Groups of people who work interdependently toward attainment of

common objectives.

Perception: The process of receiving information about and making sense of the
world around us.

Personality: The relatively stable pattern of behaviours and consistent states that
explain a person’s behavioural tendencies.

Positivism: A view held in quantitative research in which reality exists independent

of perceptions and interpretations of people.

Power: The capacity of a person, team, or organisation to influence others.

Process Consultation: Helping an organisation to solve its problems on its own by

making it aware of organizational processes, the consequences of those processes,
and the means by which they can be changed.

Punishment: A means of decreasing the frequency or future probability of a

behavior through the introduction of a consequence.

Referent Power: The capacity to influence others based on the identification and
respect they have for the power holder.

Refreezing: The latter part of the change process in which systems and conditions
are introduced that reinforces and maintains the desired behavior.

Role Ambiguity: A lack of clarity and predictability of the outcomes of one’s

behavior.
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Role Conflict: Incompatibility of expectations associated with a person’s role.

Role Perception: A person’s beliefs about the specific task assigned to him or her,
their relative importance, and the preferred behavior to accomplish those tasks.

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Self-Efficacy: A person’s belief that an individual has the ability, motivation, and
resources to complete a task successfully.

Stakeholer: They include the shareholders, customers, suppliers, Government and

other groups with a vested interest in the organisation.

Stereotyping: The process of assigning traits to people based on their membership

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in a social category.

Stress: An individual’s adaptive response to a situation that is perceived as

challenging or threatening to the person’s well-being.

Team Building: Any formal activity intended to improve the development and
functioning of a team.

Utilitarianism: The moral principle stating that decision makers should seek the
greatest good for the greatest number of people when choosing among
alternatives.

Valence: The anticipated satisfaction or dissatisfaction that an individual feels

toward an outcome.

Values: Stable, long-lasting beliefs about what is important in a variety of situations,

which guide our decisions and actions.

Workaholic: A person who is highly involved in work, feels compelled to work, and
has a low enjoyment of work.

Workplace Bullying: Offensive, intimidating, or humiliating behavior that degrades,

ridicules, or insults another person at work.

OTHER MOST IMPORTANT POINTS-

Communication: It is the process by which information is transmitted between

individuals and/or organisations so that an understanding takes place.
Internal Communication: It is the communication which takes place within an
organisation.
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External Communication: It is the communication which takes place between an

organisation and outside agencies like Govt., distributors, retailers, customers etc.

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Written Communication: It includes the message communicated through letters,

circulars, memos, telegrams, reports minutes, forms, questionnaires etc.

Oral Communication: It includes the face-to-face conversation, conversation that

takes place through telephone, radio broadcasts, interviews, group discussions,
meetings, conferences and seminars.
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Visual Communication: It encompasses the gestures and facial expressions, tables

and charts, graphs, diagrams, posters etc.

Audio-Visual Communication: It encompasses television and cinema films.

Computer-based Communication: It includes the message sent through e-mails,

voice mails, mobile communications etc.

Downward Communication: It flows from a superior to a subordinate. It includes,

orders, individual instruction, policy statements, circulars etc.

Upward Communication: It flows from a subordinate to a superior. It includes

providing feedback, constructing suggestions etc.

Horizontal Communication: It is the communication which takes place between

departments or people belonging to the same level in an organisation.

Grapevine: It is an informal channel that operates in an organisation. It follows no

set lines, nor any definite rules, but spreads like grapevine in any direction,
anywhere, and spreads fast.

Single Strand grapevine communication: It involves passing of information through

a long line of persons to the ultimate recipient.

Gossip: Here, an individual actively seeks and tells everyone. It operates like a
wheel.

Probability grapevine communication: It is the chain in a random process in which

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an individual transmits the information to others in accordance with the laws of

probability and then these others tell still others in a similar manner. The chain
may also be called random chain.

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Cluster grapevine communication: Here, an individual tells selected persons who

may in turn relay the information to other selected individuals. Most of the
information communication follows this chain.

Business Letter/ Correspondence: It is the formal communication that takes place

between organisations or between an organisation with its customers or between
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and organisation and its stakeholders.

Meeting: The formal or informal assembly of individuals for discussion is referred

to as a Meeting.

Minutes of Meeting: The written recording of an official proceeding is referred to

as Minutes of Meeting
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UNIT-7

MARKETING
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MARKETING INTRODUCTION
 Market- A market consist of all the potential customers sharing a particular need or want who might
be willing and able to engage in exchange to satisfy that need or want.
 Potential customers are those we say who has the ability to pay and willingness to buy.
 Deprivation – someone not having enough things necessary for life.
 Needs, wants, Demand. Need are feelings of deprivation, the basic necessities of life e. g food,
shelter, cloth. Wants arises when need get satisfied and wants are backed by purchasing power.
Demands are wants of some products and services and backed by ability to pay and willingness to buy.
 Purchasing power – ability to pay and willingness to buy
 Products (goods, services, ideas)
 Product a bundle of utility. Anything that can be offered to customer for satisfaction of their
wants.
 Customer satisfaction is the main motive of Marketing.
 Value, cost, satisfaction – Value means that the Customer’s estimate of the products overall
capacity to satisfy their wants. When the cost is minimum and the benefits are more we may say that it
create value of that product and satisfaction both (cost < benefits)
 Exchange process is the essence of marketing because without exchange there will be no
marketing.
 Marketing creates four utilities – time, place, form, possession utility.
 It is marketing which has created yesterday’s luxuries into today’s necessities.
 Different functions of marketing includes buying , assembling , selling and dividing , transportation ,
storage and warehousing , financing , risk taking , standardization , grading , branding , labelling , packaging
, advertising , sales promotions, personal selling, publicity and market information.
 There is a difference between buying and assembling. As buying involves transfer of ownership of
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goods and assembling means collection of goods purchased from different sources.
 Caveat emptor – let the buyer beware
 Caveat vendor – let the seller beware

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 A prospects is a person who is identified by the marketer that they are willing to buy and able to
pay for the products.
 Nature of marketing includes as it is consumer oriented , process , dynamic( can change) pervasive( at
all level of management) science as well art , system , goal oriented , human activity , universal
activity, socio economic activity.
 Scanning of internal environment reveals strength and weakness whereas scanning of external
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environment reveals opportunities and threat.

 SWOT- Strength Weakness Opportunities Threat ( In planning)
 Marketing includes both profit as well as non -profit organizations as example of nonprofit
organizations is social marketing like family planning , education, communal harmony and national
integration.
 Standardization of product is considered as ethical basis of marketing.
 Core of marketing is product/services.
 Marketing is that economic process by which goods and services exchange between buyers and
sellers and their values are determined in terms of money.
 Demand = Ability to pay + willingness to buy
 Relationship marketing – building long term satisfying relationships
 Merchandising function – product planning.
 4 p’s – product, place, promotion, price (given by Mc Carthy)
 4 C’s – customer , channel , competitors , characteristics
 Marketing is surrounded by customer needs.
 Process of marketing – identification of customer needs- probable features of the product-
portable form of product- modification in the product- final product
 Marketing myopia concept given by Theodore Levitt.
 Philip Kotler given the concept of Marketing Mix
 Philip Kotler has given the 7’s concept (product, price, place, promotion, people , physical
evidence(packaging) , process)
 3 p’s given by Broom Bitwler ( people, physical evidence, process)
 Mega marketing concept- Philip Kotler
 Business aims at profit .To realize profit, a sale has to be made. To make the sale, a customer has to
be created. To create a customer, he must be satisfied. To satisfy the customers, his needs have to be
met. To meet the customer needs, marketing is essential. Marketing is said to be the eyes and ears of
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business because it keeps the business in close contact with its environment and informs of events that
can influence its operations.

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EVOLUTION OF MARKETING CONCEPT

Traditional ideas of marketing is that the goods are available at any places where they were needed. But
now the ideas shifted from exchange to customer satisfactions. Traditional concepts are replaced by
modern concepts of Marketing.
Steps from where marketing started-(evolution stages)-
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1) Self -sufficient stage – Basically Nomads people started agriculture and they produce only what they
want to consume. Marketing is totally absent.
2) Exchange oriented stage – barter system started as exchange of goods in place of goods when surplus
productions arises. Market come in existence.
3) Production oriented exchange – Products of high quality and reasonable in price. More focus on
production rather than consumption. (Make what you know how to make)
4) Sales oriented stage – (get rid of what you have) focus on hard core selling only rather than
customer satisfactions.

5) Marketing oriented stage- (have what you can get rid of) here the aim of marketing is to know and
understands the customers so well that product and services fits him and sells itself.
6) Consumer oriented stage – (have what you can get rid of with responsibility) customer
satisfactions

7) Management oriented stage

MODERN CONCEPTS OF MARKETING

1) Production concept – Products that are widely available and of low cost.( Technology )

2) Product concept – Products that are of various quality and features. This concept create (Marketing
Myopia given by Theodre levitt)
3) Selling concept - Hardcore selling only( know customer so well that the product fits himself and sell)
4) Marketing concept – design product according to the needs of customers. Customer satisfactions.
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5) Societal concepts – Produce those products which are safe for the society.

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SOME OF THE MATCH (same answers).

1) Effective distribution – production concept

2) Large scale selling & promotional effort – selling concept

3) Produce what consumers want – marketing concept

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4) Product improvement – product concept

5) Improve societal wellbeing – societal concept

Societal marketing – Marketing concept that based on human service and serve the ecological needs.
(Social and ethical both) Integrated Marketing – All marketing activities are co-ordinate to achieve
the desired results.
De-marketing – A situation which may come about as a result of temporary shortages occasioned by
short term excess demand for a company’s product. Management of excess of demand or reducing
the demand to match the supply.
Remarketing – New uses of users for an existing product. It creates new satisfaction for the customers.
Over marketing – Increased sales while neglecting quality control, production efficiency and cash
flow management.
Meta Marketing- Given by Eugene J Kelly. It focus on all scientific, social, ethical and managerial
experiences of marketing. Example - family planning or non- business org like temple NGOs etc. and
develops a long term relationship with the clients, based on the interrelationships between mental
and physical process to supplement the facts. Meta means beyond.
Basic difference between Marketing and selling
Marketing Selling
1) Focus on consumer needs 1) Focus on sellers needs
2) Customer enjoys supreme importance 2) Products enjoy supreme importance
3) Match products with the market 3) Hardcore selling
4) Long term goals 4) Immediate sales gain
5) Consumers needs in to product 5) Products into cash
6) Caveat vendor( let the seller beware) 6) Caveat emptor ( let the buyer beware)
7) Profit through customer satisfaction 7) Profits through sales volume as focus on sales
only
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. MARKETING ENVIRONMENT

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 According to Philip Kotler Marketing Environment refers to external factors that affect the
company’s ability to develop and maintain successful transactions and relationships with its target
customers.
 Marketing environment divided in to two parts –
1) Internal environment (controllable)
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2) External environment (uncontrollable) it divides into Micro and Macro.

 Internal environment which is controllable includes all 7ps such as product, price, place, promotion,
physical distribution/packaging, process, people, mission/objectives, human resources and
shareholders.
 External environment includes Micro and Macro. Micro includes suppliers, market intermediaries,
customers, competitors and public. Macro includes technology, economic, legal, political, socio-
cultural, demographic, Competitors.
 Demographic includes size and growth of population, composition in terms of age, sex, education,
income, ethnic background, birth, marriage, and death- rate, racial.
 Economic includes nature of economic system, structural anatomy of economy, factor endowment,
economic plans and policies, markets.
 Socio-cultural- caste structure, customs and traditions, social institutions, beliefs and values
etc.
 Political-legal includes political system and structure, stability f government, laws, judiciary,
foreign policy.
 Technology includes science and technology, research and development, inventions,
information technology.
 Physical /natural includes natural resources, environmental concerns, ecology, Pollution-
control.
 Psychographic includes personality and standard of living.
 Environmental scanning is a process of collecting information about the forces in the marketing
environment. Scanning involves observation, perusal of secondary sources of information such as
business, trade & government publications and marketing research effort.
 Customer delight – when marketers able to know stated, unstated secret and real weeds and
present the product to the customers and customers become more satisfied and happy or we may say
beyond expectations when customers get the things is known as customer delight.
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 Marketing environment also includes economic and non- economic environment

 Economic environment includes economic system (capitalist, socialism, mixed economy) structures,
quality of economic system, economic development, fiscal, industrial, foreign trade policy, factor

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endowment and international economic relations.

Non-economic system includes all the parts of Macro environment such as demographic, socio-cultural,
legal, political, educational & cultural practices both interact with one another
CONSUMER BEHAVIOR
 The fact of buying changes the dynamics of the relationships. The buyer views the sales as a favor
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conferred on the seller and in effect debits the seller accounts. A healthy relationships requires a constant
and conscious fight against the forces of decline. One of the surest signs of bad relationships is the action
of complains. The customer is either not being candid or not being contacted. Probable both.
 Ostrowsmith has defined Consumer behavior on an actions of consumers in the market place and
the underline motives for those actions.
 The study of consumer behavior is the study of how individuals make decisions to spend their
available resources on consumption related items. It includes the study of what they buy, how they
buy, where they buy, why they buy.
 Buying behavior is the decision process and acts of people involved in buying and using
products.
 Consumers decisions behavior includes-
1) Routine Response behavior- It is usually found in the case of frequently purchased and low cost unit
items. Decision effort needed is only minimum.
2) Limited decision making- In this case of purchase made by the consumers less frequently. Costs are
relative high. Example buying of television sets. A moderate time for gathering & deliberation.
3) Extensive decision making- It required when consumer wants to purchase unfamiliar products which
is totally new, having high unit value & bought prefer once in life. Spends much time, high cost
example car.
 Hedonistic – when the purchase is capable of providing a high degree of pleasure,
involvement is high.
 Factors affecting consumers buying behavior are as follows=
1) Personal factors such as demographic, life styles and situation

2) Social factors such as roles and family, consumer socialization – The process through which a person
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acquires the knowledge and skills to functions as a consumer is known as consumer socialization.
Reference group, opinion leader, social classes, cultural & sub- cultures.
3) Psychological factors such as perception, motives- that influence where a person buys products on a

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regular basis are known as patronage motives. Learning, attitudes, personality and self -concept.
 Consumer buying decisions process – the process through which consumers proceed while making
their buying decisions is known as the consumer buying decisions process. It includes stimulus> problem
awareness> information search> evaluation alternatives> purchase decisions> post purchase
behavior.
 Those brand which initially comes to mind when considering purchase are called evoked set.
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 Post purchase behavior- satisfaction or dissatisfaction shortly after purchasing expensive product a
buyer doubts whether he made the right decisions. This is called cognitive dissonance.
 Buying motives of consumers – A buying motive means what induces a customer to buy a product.
There are two types of motive 1) internal motive 2) external motive.
 Internal buying motives are inherent in the minds of consumers. They arise from the basic needs like
hunger, safety, comfort, pleasure. These are rational or emotional.
 External buying motives- It is those which a customer learn or acquires from his environment
example status and cultures.
 Rational motive – Rational buying motives are those which are based on logical reasoning and
considerations of economic consequences. These includes cost, durability & dependability of
product.
 Emotional motives- These motives are based on personal feelings. These motive includes ego,
prestige, love & affection, status, pride.
 Product motives- this explains why people buying certain products. Product motive results directly
from the needs of the customers.
 Impulsive customers are those who buy things without any thinking he market & pick the
product.
 Primary motive- these motives arise directly from customer needs & wants. It includes health,
beauty, knowledge, relaxation & recognition
 Secondary or selective buying motive- It induce consumers to buy certain kinds of products. These
include desire for convenience, dependability, durability, economy, versatility.
 Patronage motive- this cause customers to buy products from a particular manufacturers
or retailer. Important patronage motive are those concern with fashion, exclusiveness, dependable,
after sale service, convenience of location, quality, price, reliability of seller.
 Loyal customers buys a product from the same locations.
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MARKETING MIX
 The idea of Marketing Mix was conceived by Prof Neil h Borden of the Harvard business
school.
 According to Stanton Marketing mix is the term used to describe the combination of the four inputs

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which constitute the core of company’s marketing system, the product, the price structure, the
promotional activities and the distribution system.
 Mc Carthy givens the concept of 4ps.
 Philip Kotler has given the marketing mix.
 Philip Kotler has given 7ps
 Broom Bitwler has given 3ps.
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 Marketing mix is a dynamic concept as it changes according to the environment.

 Elements of Marketing Mix includes- 1) Product 2) Price 3) Place 4) Promotion 5) People 6)
Physical evidence 7) Process
 Factors determining Marketing Mix includes- 1) Nature of the product
2) Stage of the product life cycle 3) Degree of competition 4) Efficiency of
channel 5) Availability of funds.

MARKET SEGMENTATION/TARGETING AND POSITIONING

 Market segmentation is a process of taking the total heterogeneous market for a
product and dividing it in to several sub markets or segments, each of which tends to be
homogenous in all significant aspects. It is the process of dividing the potential market into distinct
subgroups of consumers with common needs and characteristics. Market segments are large identifiable
groups. It is possible that a market creates a niche.
 Niche is a narrowly defined group of customers that have a distinct and complain set of needs.
 Process of dividing a market into segments is called market segmentation.
 Segmentation is much more than chopping up a market into one or more divisions.
 Bases or methods of market segmentation- 1) Geographic- region, urban, suburban, rural, market
density, climate, terrain, city size, country size, state size. 2) Demographic- age, gender, race, ethnicity,
income, education, occupation, family size, family life cycle, religion, social class, nationality, marital
status. 3) Psychographic- personality, motivation, lifestyles, perception and standard of living. 4)
Behavioristic – volume usage, end use, benefit expectations, brand loyalty, price sensitivity, user status,
user rate, readiness stage, purchase occasion. 5) Socio- economic segmentation- social-class, working
class, middle income group, ability to buy.
 Value based- the marketing concept prescribes that segmentation should be the outcome of a
match between the product features and customer needs. The marketers should really be segmenting
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their customers so as to isolate those who contribute most of their profit.

 Product segmentation- when the segmentation of markets is done on the basis of product
characteristics that are capable of satisfying certain special needs of customers, such a method is
known as product segmentation.

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 Where the products involved show great differences this method is called rational approach.
 Requirements Of Effective Market Segmentation-
1) Substantiality 2) Measurability 3) Accessibility 4) Represent ability 5) Nature of demand 6) Reponses
rates Levels of segmentation/ market segmentation strategies
1) Undifferentiated marketing (mass marketing)- when organization do not permit the division of
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market into segments, they conceive of the total market concept. Substitutes are not available fully
standardized products. In this firm adopt mass marketing & mass advertising methods. Example coco
cola.
2) Differentiated marketing- It is a market coverage strategy in which the company goes for proper
market segmentation as depicted by its analysis of the total market the company therefore goes for a
several products or several segments approach which cause for preparing different marketing mixes for
each of the market segments. Differentiated marketing is sales oriented it should be borne in mind that
it is costly affair for the organizations.
3) Concentrated marketing- It is a market coverage strategy in which company follows one
product one segment principle, the company tries to positions its products in the middle of the segment
to attract maximum client ( this strategy can also help the small company to stand against the large
corporations because the small company can create niche in its one products one segment approach by
providing maximum varieties
4) Local Market Concept- The producers has no option but to concentrate on particular localities only
(transport & communication developed)
5) Mass Market Concept- In a developed economy where transport & communication systems are
comparatively developed. It includes all persons who could be reached by transportation facilities & the
mass media. Homogenous market (single product/ single market) (short gun or market aggregation)
6) Segmented Market Concept- In this product preferences are great making segmentations of
market deeper. In this product preferences are great making segmentations of market deeper. In this
variables of shampoo suitable for day, for oily & for normally hour. (One market different products)
7) Global Market Concept – This concept is made possible by the development of international
transportation & communication system & liberalization policies adopted by many countries new.
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8) Single Segment Concentration- the marketers refers higher returns & therefore it is possible that the
competitors might be attracted to find their place in the segment (e.g. Reebok)
9) Selective Segment Specialization- this is also known as multi stage coverage because different

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segments are sort to be captured by the company. (E.g. Bata)

10) Market segmentation – one market different products

11) Product specialization – different products one market

12) Full coverage- All product, all markets, it is difficult to serve all segments of the market only big
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companies can go for full coverage.

 Micro marketing is the practice of tailoring products & marketing program to suit the tastes of
specific individuals and locations.
 Mass customization is the ability of a company to prepare on a mass basis individually designed
products, services, programs & communication to meet each customers requirement e.g. dell,
Levis.
 A target market is defined as a set of buyers sharing common needs or characteristics that the
company decides to serve.
 Develop measure of segment attractiveness.
 Market positioning means setting the competitive positioning for product with specific
marketing mix.
 PRODUCT-A product is defined as bundles of utility consisting of various features and
accompanying services is called a product.
 The term product does not mean only the physical product but the total product including brand,
package, labels, status of manufactures & services offered to the customers.
 Theodore Levitt statement that people do not buy products they buy the expectations of benefits. It
is the synthesis of what the seller intends & the buyer perceives.
 Levels of products are as follows-
1) Core products – It means the fundamental benefits or service which the customers is buying. Eg rest
and sleep is the core benefit in case of hotel.
2) Basic products- It means the physical dimension of a product. In case of a hotel room bed, bathroom,
towels, desk, dresser & closet constitute the basic product.
3) Expected product- It means a set of attributes & conditions that buyer normally expect when they
buy the product. For eg a hotel customer expects a clean bed, fresh towels, working lamp & a quiet
room.
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4) Augmented product- It means something beyond the customer expectations. A remote control Tv,
fresh flowers, fine dining & room service are parts of augmented product in case of hotel room.
5) Potential product- The last level of the products is the potential part i.e. all the unexpected change in

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the technology, attributes, features, styles, color, grade, quality etc. that might change the structure &
character of industry. (Unexpected changes both in tangible & intangible)
 A policy taken in regard to the development of a new product or for retaining an existing product in
the market is known as product policy.
 Product Policy Includes Both New Products And Old Products – 1) Product mix 2) Product line 3)
Product standardization 4) Product identification (brand) 5) Product style 6) Product packaging
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PRODUCT MIX
 Product mix or product portfolio is the combination of all products offered for sale by a
company.
 Product Mix Is Of Four Dimensional— 1) Product Line- It refers to a group of products that are
closely related because they satisfy a class of needs are used together, are sold to the same customer
groups are marketed through the same type of outlets or fall within given price range. 2) Product
Width- The width of a product mix of a firm is determined by the number of different products line
offered by a firm. 3) Product Depth- The depth of a product line depends upon the number of product
items offered in a line. 4) Product Consistency – The considerations in developing a marketing strategies
are wide & vary consistently refer to how closely related the product lines are in there end us, product
on requirement & distribution channel.
 Product Item- It refers to a specific model, brand or size of a product that a company sells. E.g.
Videocon refrigerator.
 Product Modification- It is the process by which the existing products are modified to suit the
changing demand on account of fashion change. (Maturity stage)
 Product Elimination- There are some products which cannot be improved or modified to suit the
market needs. The profitable alternative would be to withdraw the product. The process of withdraw is
technically known as product elimination or simplification.
PRODUCT LINE MODIFICATION/ALTERATION
 Product line contraction- This is also known as contraction of product mix. It is a method by which a
fat & long product line is thinned out. It is also termed as simplification
 Product Line Expansion- It referred to expand breadth & depth of its product line. The expansion is
undertaken by increasing the lines or items of products. It is also referred to as diversification.
 Diversifications- It is a product which may be entirely distinct & different from the existing products.
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Eg wholeseller dealing in engineering goods starts selling simultaneously confectionary items.

 Change styles and models of existing products
 Quality variations- produce different qualities of a particular product.
 Trading up- The process of introducing a higher quality products by a manufacturer whose low quality

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productsare famous& higher quality products with a higher price too.

 Trading down- It happens when a manufacturer of high quality products starts selling a low quality
productswithalowprice.
PRODUCT STANDARDIZATION
 Standardization includes the establishment of standard, the sorting & grading of products to
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conform to these standards, replacing, breaking up larger quantities into smaller units of desirable
size & product inspection.
 Standardization of goods, facilitates the goods because customer knows that the goods are of certain
standard. They can purchase the goods of that standard which satisfy their requirement for instance
manufactures product with ISI mark are very popular because of their quality standard or quality
assurance.
 Grading- It is great help to the producer or manufactures, it enables them to higher process for
higher products or higher grade of product. Grading helps in directing the goods of different quality
towards the market suitable.
 Different marks and certifications are as follows-
1) ISI Mark (Indian standard institutes) It is a certification mark for industrial products in India. It is
developed by BIS (Bureau of Indian Standard) 1986.
2) FPO mark (Food processing order) It is a certification mark mandatory on all processed fruits products
sold such as packaged fruit beverages, fruit jams, crushes and squash, pickles, dehydrated fruit
products& fruits extracts. Under food safety standard act of 2006. Also known as food product
ordinance.
3) AG Mark- It is a certification mark employed on agriculture products in India approved by directorate
of marketing & inspection. The AG MARK is legally enforced in India by the Agricultural produce (grading
and marking) act of 1937(amended in 1986). It cover 205 commodities pulses, cereals, oils, fruits &
vegetables, vermicelli
4) ECO MRAK- It is a certification mark issued by BIS to products to set a aimed at the least impact
on the Ecosystem (1991)

5) Standard Mark- It has been developed for about 1250 products including agriculture, implements,
baby food, electrical goods, food stuff, drugs, cosmetics, utensils, textiles, furniture, sports goods,
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paints , carpets & detergents.

6) Pac Mark- It will cover building materials, product & components which are out of the ambit of
ISI certification.

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7) Non-polluting vehicle – It is a mandatory certification mark required on all new motor vehicle
sold in India (validity 1 year)

8) BIS hallmark- It is for gold & silver certifying to the purity of metal.

9) India organic- It is a certification mark for organically formed food products manufactured in India,
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certifies that an organic food product conforms to the national standards for organic product
established in 2000.
TYPES OF PRODUCTS
 Non- durable goods- These goods are tangible goods that are consumed with one or few uses
e.g. sweets (one time use)
 Durable goods- These products are tangible which remain in use months after months, years & years.
E.g. fridge, washing machine.
 Services – These are activities or benefits that provide satisfaction to the consumer’s
 Consumers goods are as follows-
1) Convenience goods- Easy & quickly to buy. These includes items which the consumers buys
frequently with minimum shopping efforts eg grocery, toiletries.
2) Shopping goods- Comparisons includes customer involvement furniture, Jewellery. These includes
items which the consumers selects & buy after making comparisons of substitutes on such criteria as
quality price style & suitability.
3) Speciality goods – The consumer have to make a special purchasing effort to purchase this speciality
goods. Items like which possess unique features or have a number of brand names or both. (eg coin
collection) (personal interest )
4) Unsought goods- They are the products which do not fall in any of the above category but are
important for the customer eg solar cooker, BMW, solar buses, insurance. (selling concept)
 Producers or Industrial goods-
1) Raw Material – They are those industrial goods which will become part of another physical product
and which have not been processed except for their physical handling (e.g. egg, fruits, cotton,
wheat, pulses)
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2) Fabricating material- These are partial or complete items which become part of the final products.
They have already been processed to some extent e.g. pig iron going in to steel, yarn being move
into cloth, leather to shoes.

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3) Accessories equipment- includes industrial goods usually less expensive & having shorter life than
installations. They are required for the manufactures of fixed product though they do not form part of
finish products e.g. hand tools, portable drills, lubricants.
4) Operating suppliers- They are short life & low priced items usually purchase with minimum of efforts
they are basically convenience goods of industries e.g. pen, pencils, paper, and screw.
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 Product planning consists of activities which enables producers to determine what should
constitute a company line of product.
 Product positioning- It means to the placement of the production such a way that the customer is
able to recognize the utility or the purpose for which they are buying.
 Product differentiation- Making ones product different in some manner from those of the
competitors no matter how the small differentiations may be.
 Market aggregation- A single product item or limited product line has only one market. It is assumed
that we have only one demand curve for the product. Market aggregation is the standardization of
marketing policy.
PACKAGING, BRANDIND AND AFTER SALE SERVICE
 Packaging is rapping, compressing, filling or creating of goods for the purpose of protection of goods
and there convenient handling.
 Legal dimension of packaging- government has laid down specific packaging material for
certain products, consumer’s protection, transportation of hazardous cargo. The most pervasive
among these are the regulation relating to the information a manufacture is obliged to provide in the
package itself on the product. (Labelling)(Price, weight, expiry date, manufacturing date, contents)

LABELLING
 Labelling means putting identification marks on the package the label is an important feature of a
product. It is that part of product which contains information about the producer of the product ( it
is a part of packaging)
 A good label helps a potential buyer to make his decision by providing relevant and correct
information.
 A part from the information which must be statutory given the label should provide.
 It includes the followings- 1) Picture of the product 2) Description of raw product 3) Direction for
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use 4) Possible adverse effect 5) Brand name 6) Statutory warning 7) Date of manufacturing &
expiry

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BRANDING
 It is the process of stamping a product with some identify name or mark of combination or both.
Business firms generally use 3 types of branding.
 It includes 1) symbol and mark 2) special names 3) name of the product.
 Types of branding such as individual branding and umbrella branding.
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TRADE MARK
 It is a legal term it refers to a brand which is registered with the government under the trade &
merchandises mark act 1958.
 According to sec 2 (1)(5) of the trade & merchandise mark act 1958 includes a register trade mark or a
mark. A mark has been defined to include a device, brand, heading, label, ticket, name signature, word,
logo, letter or numerical or any combination thereof.
 Product mix is also known as product assortment.
 All trademarks are brand but a brand can be as a trademark only when it is legally protected and has
been appropriated by one seller.
 When a brand is registered it becomes trademark and such trademark is shown by displaying
the letter ®
AFTER SALE SERVICE
 Purpose of after sale service are as follows- 1) Warranty 2) Repair 3) Service warranty execution 4)
Customer dissonance
 The goal of any business unit is to have constant inflow of consumer on return basis after
the purchase of the product, the buyer commits to one alternative self - introspection & doubt or
anxiety may generate post purchase dissonance. Thus dissonance is natural consequence of purchase
because the purchaser gives up the alternative features of the rejected alternatives.
PRODUCT DEVELOPMENT
 Product development includes a number of decisions namely what to manufacture or buy or how to
have its packaging, how to fix its price & how to sell it.
 New product development consist of creation of new ideas, with evaluation in terms of sales
potential and profitability, production facilities, resources available, designing & production testing
& marketing of the product
 Stages in new product development includes 1) Generation of product ideas/ Ideas
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generation 2) Screening of Ideas 3) Commercial feasibility or business analysis (idea finally selected) 4)
Product development ( idea on paper, product on hand) 5) Test marketing (pilot study) (post
launching) 6) Launching of the product.

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PRODUCT LIFE CYCLE (PLC)

 The product life cycle is generally term as product or market life cycle because it is related to a
particular market. The product life cycle concept indicates as to what can be expected in the market for a
new product at various stages i.e introduction, growth, maturity, decline, abandonment of product.
 Stages in the product life cycle are as follows-
1) INTRODUCTION STAGE- Under this stage competition is almost non-existence, prices are
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relatively high, markets are limited and the product innovation is not known much. Growth in sales
volume is at a lower rate because of lack of knowledge on the part of customers, difficulties in making a
product available to the customer, to introduce the product successfully the following strategies may be
adopted- advertisements & publicity, attractive gifts given to customer, selective distribution & attractive
discounts to dealer, higher prices of the product to earn a greater profit during a initial stages. This is
called as a skimming pricing policy.
2) GROWTH STAGE- The demands expands rapidly, prices are low, sale gets increase, profit increase.
Followings strategies adopted in this are product is heavily advertise, new version of the product Is
introduced, channels of distribution are strengthen so that the product is easily available wherever
required, brand image of the product is created through promotional activities, the price of the product
is competitive whereas greater emphasis on customer service.
3) MATURITY STAGE- the product enters in to maturity stage as competition intensity further and
market gets stabilize, profit at apex, sales at high, competition high. Strategies are product may be
differentiated from the competitive products & brand image may be emphasis more, warranty period
may be extended, reusable packaging may be use, new markets may be develop, new uses of the product
may be develop.
4) DECLINE STAGE- this stage is characterized by either the product gradual displacement by some
new products or change in consumer buying behavior. The sales fall down sharply and the expenditure
on promotion should be cut down. The decline may be rapid with the product soon passing out of
market or slow if new uses of the product are found. To avoid sharp decline in sales following strategies
are used new features may be added to the product and its packaging may be made more attractive,
economy packs or models may be introduce to revive the market , the promotion of the product should
be selected to reduce distribution cost.
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5) ABANDONMENT OF PRODUCT- The demands of the people change and new innovations comes to
the market to takes place of the abandonment product.
 Laggards are consumers who are bounded by traditions (did not accept innovations quickly)
 Complex pricing decisions are taken in maturity stage.

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PRICING
 Price is the only element in the marketing mix that generates revenue.
 Demand ceiling of price
 Cost floor price.
 This chapter is already mentioned in ECONOMICS part .please read it from there.
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PROMOTIONS
 Promotion is a process of communication with potential buyers involving information persuasion &
influence. It includes all types of personal or impersonal communication with customers and
middlemen.
 Elements of communications are as follows- sender> message> encoding> channel> receiver>
decoding> feedback
 Promotion mix includes 1) Advertising 2) Publicity 3) Public relations 4) Personal selling 5)
Sales promotion
 Advertising- paid form, mass communication, impersonal, identified sponsor, less expensive,
feedback slow, long term. It is only the medium through which consumers could know the various uses of
the product, public mode of communication and pervasive (repetition)
 Personal selling- also known as salesmanship, it does a complete selling job, personal selling is like
a hunter who shoots the particular prey while advertising is like a fishermen who casts his net on to water
in the hope that some fish will bite it, personal face to face, interpersonal communication, spoken words,
personal appeal, expensive most, immediate feedback, long plus short term both.
 Sales promotions- direct to customer to buy, interpersonal or mass communication, immediate
sales, increase sales, short term, free samples, premium offer, price reductions.
 Publicity- it is both positive and negative, short term , news and media, mostly not controlled,
inexpensive method. It is more powerful than advertising & sales promotion.
 Expensive- personal selling, can be expensive- sales promotion, less expensive advertising,
inexpensive- publicity.
 Publicity refers to the generations of news about a person, product, service or organizations that
appears in broadcast or print media.
 Public relations means the management function which evaluates public attitudes, identifies the
policies and procedures of an organization with the public interest and executes a programme of action.
It is credibility, low cost, image building, positive, long term and controlled.
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 Hierarchy of effects includes awareness> knowledge> liking> preferences> conviction>

purchase Kinds of promotion includes informative promotion, persuasive promotion, reminder
promotion, buyer behavior modification.
 Approaches of promotion 1) AIDA concept- attention, interest, desire & action also known as three

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stages approach. Cognitive, affective, conative. 2) Hierarchy of effects- awareness> knowledge>

liking> preference> conviction> purchase.
 Two promotional strategies are push strategy and pull strategy:-
 Pull strategy – firm adopting this spend more on advertising and sales promotion. This effort pull the
customers towards manufactures, basically in consumer goods, high brand loyalty, end users, fast.
 Push strategy- It emphasis on personal selling. It would tend to push the product through
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middlemen. Low brand loyalty, basically in industrial goods, slow.

ADVERTISEMENT BUDGET
Advertisement budget- it includes 1) Market share approach 2) Arbitrary allocation 3) Percentage of
sales method 4) Tasks & objectives method 5) Competitive comparison method 6) Funds available
method 7) Incremental method 8) Fixed sum per unit method
Evaluating media alternatives 1) Cost per contact (cpm- cost per million) also called milline rate 2)
Duplication 3) Market selectivity Media scheduling Determining size & timing of advertising messages
Message decisions Message effectiveness 1) pre - test 2) protest Keying advertisement follow up
system.
DISTRIBUTION
 A distribution channel consist of set of people firms involved in the transfer of the title to a product
as a product moves to or from producer & the final user of the product as well as mercantile agents and
merchant middlemen engaged in the transfer of title of goods & services.
 Three types of flow 1) Product flow (downward from producer to consumer) 2) Cash flow (upward
from consumers to producers) 3) Marketing information flow both the sides.
 Types of distributions channels for consumer goods and industrial goods.
 For consumer goods there are five types of channel of distributions- 1) Producer-consumers 2)
Producer-retailer- consumers 3) Producer- wholesaler- retailers- consumers 4) Producer- agent-
retailer- consumers 5) Producer- agent- wholesaler- retailer – consumers
 For industrial goods there are four types 1) Producer- industrial- user 2) Producer- industrial-
distributor-user 3) Producer- agent- user 4) Producer- agent- industrial – distribution-user
 Direct selling- channel/ zero level channel- door to door sales person, retail outlets by
manufactures, catalog selling, tele- marketing, online marketing or internet/ web marketing.
 Manufactures to customers- This is a shortest & simplest channel, direct sale of goods &
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services, no middlemen or intermediary. Wholesaling- It includes all activities involved in selling of

goods or services for those who buy for re-sell and business uses. Wholesalers excludes manufactures and
farmers because they are engaged primarily in production and as well as it excludes retailers. The

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middlemen who are engaged in wholesaling are known as wholesalers.

Types of middlemen are--

1) Mercantile agents – they are also known as agent middlemen or functional middlemen. It includes
commission agent, factor, auctioneer, broker.
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2) Merchant middlemen- they are also known as merchants, are the dealers in goods & services who
purchase & sell in their own name for a margin of profit. They assume title of ownership to the goods in all
cases though physical possession of the goods may not take place in all the cases. Marketing logistics-
planning, implementing & controlling the physical flows of materials, final goods and related information
from point of origin to pint of consumption to meet customer’s requirement of profit. It means getting
the right product in the right quantity to the right customer at the right place in the right time
RECENT TRENDS IN MARKETING
 Social marketing- According to Philip Kotler social marketing is the design, implementation and
control of program seeking to increase the acceptability of a social idea cause or practice among a target
group. Non- profit organizations, charitable donations. The success of social marketing cannot be
measured in financial terms. Number of clients served, quality of service, benefits provided are some
criteria that can be used to judge efficiency of social marketing.
 Direct marketing- It is an interactive marketing system that uses one or more advertising media to
effect a measurable response and transaction at any location one to one marketing, use of mails,
telephone, fax, email. Direct marketing is used for both consumer marketing & business to
business marketing.

 Face-to-face selling also called direct selling or door to door selling mainly in industrial, insurance &
stock brokers.
 Direct mail marketing (mail send offer on address) it is also known as direct response marketing.
 Catalogue Marketing- Under this form of direct marketing, a company mails one or more product
catalogues to selected persons who have a high likelihood of placing an order.
 Telemarketing- It is the performance of marketing related activity by telephone. ADRMPS
(Automatic dialing & recorded message players). Teleshopping- It means shopping through internet. The
buyer places the purchase order through telephone or website of the seller by mail or the sales
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representative goods are deliver at door mainly at FMCG.

 Automated vending machine – These are coin operated machines which automatically vend (sell)
merchandise without the aid of any sales assistants. ATMs (Automated teller machine).

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 Kiosk marketing- These are customer order placing machines called Kisoks in contrast to vending
machines which dispense actual products in airports, stores etc.
 Television home shopping- In this directs marketing products are presented to television viewers
who buy them by calling a toll free number and paying with credits cards. Clothing, housewares,
electronics.
 Online marketing- online marketing may be defined as the process of building and maintaining
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customer relationships through online activities to facilitate the exchange of ideas, products & services
that satisfy the goals of both the seller & buyer. It is also known as internet marketing & web
marketing.
 Relationship marketing- according to Peter F Drucker the basic purpose of a business is to create
customers & retain them. It is the process of building long term trusting win relationship with customers,
distributors, dealers & suppliers. It requires mutual trust and rapport between business & its customers.
Outcome of relationship marketing is the building of a unique company asset called a marketing
network. Long term & trusting relationships with the conscious aim to develop & manage long term
& trusting relationships with customers, distributors, suppliers.
 CRM customer relationship management- It is the process of building & maintaining profitable
relationships with customers by delivering superior customer value & customer satisfaction. If a seller
loose an entire stream of purchase of a life time of patronage it is called customer life time value. A
customer delights creates an emotion relationship with a product or service.
 Green marketing- It means the development, pricing, promotion & distribution of products that do
not harm the environment. It is also known as environmental marketing & ecological marketing. It
involves the study of positive & negative aspects of marketing activities on pollution, energy depletion
& non-energy depletion.
 Marketing ethics- Marketing ethics may be defined as principles that define acceptable conduct in
marketing. It is necessary to codify ethical standards into meaningful policies so as to spell out what
is and is not acceptable behavior.
 Database marketing- It is the process of building, maintaining & using customer database for the
purpose of contacting & transacts. A customer database is an organized collection of comprehensive data
about individual customers or prospects that is current, acceptable & actionable for marketing
purposes such as lead generations like hotels, banks and airlines.
>Customer delights means doing something that feels special to customer exceeding his/her expectations.
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To please the customers, continuous improvement is mandatory.

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UNIT-8
INTERNATIONAL BUSSINESS
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IMF (INTERNATIONAL MONETARY FUND)

>IMF was established with IBRD (INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT)
also known as WORLD BANK at the conference of 44 Nations Held At Bretton Woods New
Hemisphere USA July 1944.
> IMF came into force on 27th December 1945.
> Member countries is 188 last south Sudan has joined it.
> India is a founder member of IMF.
> Headquarter is at Washington DC.
> Managing director is ___________________________
> IMF is controlled and managed by a Board of director’s.
> Each governor has got the right of 250 votes on the basis of the membership and one additional vote for
each SDR 100000 of quotas. SDR ( special drawing rights)
> Voting rights depends on the quantum of quota of a particularly country
> Till 1971 amount of quotas & assistance provided were denominated in US dollar but since Dec 1971 all
quotas & transactions of IMF are expressed in SDR ( special drawing rights) which is also known as
paper gold
> Since 1st January 2011 the value of SDR is being determined by the basket of 4 currencies- 1) Euro- 34%
2) Japanese yen- 11% 3) Pound sterling- 11% 4) US Dollar- 44%
> IMF financial year is from 1st May to 30th April.
> Various facilities like extended fund facility, standby facility, contingent credit lines,
compensatory facility.
> Poor countries helped by poverty reduction and growth facility.
> India’s 8th place in IMF general quota
> India to be the 8th largest shareholders in IMF
> India was the founder member of IMF.
> The finance minister is the ex-officio governor in IMF board of governors
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> India participates in FTP (Financial transactional plan) of the IMF 2002
> ESAF (ENHANCED STRUCTURAL ADJUSTMENT FACILITY) was established in 1987 to help low
income and debt burden countries

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> Main objectives of IMF-

1) To promote international monetary co-operation.
2) To ensure balanced international trade.
3) To ensure exchange rate stability.
4) To eliminate & minimize exchange restrictions by promoting the system of multilateral payments
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5) To grant economic assistance to member countries for elimination the adverse imbalance in BOP
(Balance of Payment).
6) To minimize imbalances in quantum & duration of International trade.
> IMF was established to provide short term assistance to correct the balance of payment
disequilibrium
> IMF fund regarded as guardian of good conduct in area of balance of payment
> IMF controlled and managed by board of governors, executive board, managing director, IMF
secretariat, Interim committee, development committee.
IBRD (INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT) OR WORLD BANK
>IBRD and its associates institutions as a group are known as World Bank.
> In 1945 it was realized to concentrate on reconstructing the war affected economies
> IBRD was established on 5th December 1945 with IMF on the basis of the recommendations of the
Bretton Wood Conference. That is the reason why IMF & IBRD are called Bretton wood twins.
> IBRD started functioning in June 1946.
> World Bank and IMF are complementary institutions.
> Aims to reduce poverty in middle Income & credit worthy poorer countries by promoting
sustainable development.
> The World Bank group today consist of five closely associated institutions propitiating the role of
development in the member nations in different areas. These five are:-
1) IBRD (International Bank for Reconstructions and Development).

2) IDA (International Development Association).

3) IFC (International Finance Corporations).

4) MIGA (Multilateral Investment Guarantee Agency).

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5) ICSID (International Center for Settlement of Investment Disputes).

6) BIPA (Bilateral Investment Protection & Promotion Agreement).

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> India is a member of four constituents of the world bank group i.e IBRD, IFC, IDA & MIGA
> Objective of World Bank are as follows-
1) To provide long run capital to member countries for economic reconstruction & development (for
rehabilitate war ruined economies % peace requirement).
2) For assuring balance of payment equilibrium & balanced development of International
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trade.

3) To promote capital Investment.

4) To provide guarantee for loans granted to small & large units and other projects member
countries.

5) To ensure the implementation of development project so as to bring about a smooth transference

from a war time to peace economy.
>Difference between IMF and IBRD are world bank provides long term loans for promoting balanced
economic development, while IMF provides short term loans to member countries for eliminating
BOP disequilibrium
> The eminent world economist George Schultz had suggested in American economic association
conference in Jan 1995 for the merger of IMF & world bank
> Every country of the IMF automatically becomes the member of World Bank.
> If a country leaving the membership of IMF can continue its membership with world bank if 75%
members of their banks give their vote in its favor
>Similarities Between IMF & WORLD BANK are as follows-
1) Owned & directed by the government of member nations .
2) Almost every country on earth is a member of both Institutions.
3) Both concern themselves with economic issues.
4) Both focus on broadening & strengthening the economies of their member nations.
5) Hold joint annual meeting.
6) Headquarter is at Washington DC .
7) Share joint task forces sessions & research efforts .
8) India is a founder member of IBRD .
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9) The voting rights of member countries is determined on the basis of member country’s
share the total Capital of the Banks.
>Each member has 250 votes plus one additional vote for each 100,000 shares of the capital stock
held.

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>World bank also provides technical services to the member countries for this, bank has established the
Economic Development Institute & staff college in Washington
> In 1958 bank played an important role in establishing India Aid club for providing special economic
assistance to India now its called India Development Forum.
> India borrow from IBRD & IDA.
> PESTEL- Political, economic, socio-cultural, technological, environment & legal
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> CAGE- Cultural, administrative, geographic & Economic

> Organization structure are Board of governors, executive directors, president act as a chairman of
executive directors
> World bank provides 30% of total loans to power sector, 30 % to transport sector and remaining 40% to
agriculture, fisheries, mining, forestry, Industrial sector, technical assistance, population control,
tourism, urbanization drainage etc.

ADB (ASIAN DEVELOPMENT BANK)

>It was established in Dec 1966 on the recommendations of ECAFE (European Commission For
Asia & Far East).
> Aim of this bank is to accelerate economic & social development in Asia & pacific region.
>Started its functions on 1st Jan 1967 Headquarter is at Manila Philippines.
> Georgia is the 67th and newest member having joined ADB effective feb2, 2007.
> Asian development Bank constituted Asian development fund in 1974 which provides loans to Asian
countries on concessional interests rate.
> OCR- ordinary capital resources.
> ADB aid to India for Infrastructure, solar power development through PPP (Public private
partnership).
> ADB is a multilateral development financial institutions.
IFC (INTERNATIONAL FINANCIAL CORPORATIONS)
>It was established in July 1956.
> Main objectives were:- 1) To provide loan to private sector without any government guarantee 2) To
co-ordinate capital & management 3) T induce capitalist countries to invest in developing
countries.
MIGA (MULTILATERAL INVESTMENT GUARANTEE AGENCY)
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>It was established on 1st April 1988

> Its mission is to promote FDI (foreign direct investment) in to developing countries to help support
economic growth, reduce poverty and improve people lives.

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ICSID (INTERNATIONAL CENTER FOR SETTLEMENT OF INVESTMENT DISPUTES)

>It was established on 18th March 1965
> Came into force on 14th Oct 1966
> The primary purpose is to provide facilities for conciliation & arbitration of international
Investment disputes
> ICSID is considered to be the leading international arbitration institution devoted to investor state
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dispute settlement
SAARC (SOUTH EAST ASIAN ASSOCIATION OF REGIONAL CO-OPERATION)
>India , Maldives, Pakistan, Bangladesh, Sri-lanka, Bhutan, Nepal and Afghanistan constituted an
organization known as SAARC
> On the recommendations of Dhaka conference on 7th /8th Dec 1985.
> Headquarter has been established at Kathmandu, Nepal.
> Idea of SAARC mooted in 1979 by Zia-Ur-Rahman the then president of Bangladesh.
> Objectives of SAARC are as follows-
1) To promote the welfare of the peoples of south Asia and to improve their quality of life

2) To accelerate economic growth social progress and cultural development in the region & to provide
all individuals the opportunity to live in dignity& to realize their full potential
3) To promote & strengthen collective self- reliance, among the countries of south Asia

4) To contribute to mutual trust, understanding & appreciation of Another’s problem

5) To promote active collaboration and mutual assistance in the economic, social, cultural,
technical & scientific fields

6) To strengthen co-operation with other developing countries

7) To strengthen co-operative among themselves in international forums on matters of

common interests

8) To co-operate with International& regional organization with similar aims & purposes
>16th SAARC summit Thimpu Bhutan 2010- Thimpu silver jubilee declaration towards a green &
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happy south Asia.

> Organizational structure are summit meetings of the heads of the state or governor, council of
ministers/ foreign ministers, standing committee, technical committee, action committee

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> 17th SAARC summit held in Audacity Maldives 2011 Nov.

> 18th SAARC summit held in Kathmandu Nov 2014 the theme of 18th SAARC summit was deeper
integration for peace & prosperity, focused on enhancing connectivity between the member states for
easier transit transport across the region.
> 19th SAARC summit was held in Islamabad Pakistan in 2016.
> SAARC important years are –
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1) 1990- year for girls.

2) 1991- year for house.

3) 1992- year for environment.

4) 1993- year for handicap.

5) 1995- year for poverty removal.

6) 1996- year for literacy.

7) 1991-2000- decades for girl.

8) 2005- year of south Asia tourism.

9) 2008- year of good governance.

 SAARC AGRICULTURAL CENTRE- DHAKA BANGLADESH.

 SAARC DEVELOPMENT FUND- THIMPU BHUTAN.
 SAARC ENERGY CENTRE- ISLAMABAD PAKISTAN.
 SAARC TUBERCULOSIS & HIV CENTRE- KATHMANDU NEPAL.
 SAARC DISASTER MANAGEMENT- GHANDINAGAR INDIA.
 South Asia Satellite was launched on 5th may, India’s priceless gift to
its neighbours (exculding Pakistan) as part of the “Sabka saath, sabka
vikas” concept.

ASEAN (ASSOCITAION OF SOUTH EAST ASIAN NATIONS)

>Indonesia, Philippines, Malaysia, Singapore and Thailand constituted this association on 8th
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August 1967.
> The object of ASEAN is to promote economic co-operation in South East Asia & also to ensure
economic stability in the region.

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> Headquarter is at Jakarta.

> 10 member countries.
> ASEAN summit motto- one vision, one identity, one community.
> 13th summit of ASEAN 2007 theme One ASEAN at the heart of the dynamic Asia.
> 23rd July 1996 ASEAN gave advisory status to India.
> Sign blueprint for the proposed ASEAN economic community that will take effect in 2015.
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> ASEAN recent summit- 25th summit at Nay Pyi Taw Myanmar Nov 2014, 24th summit at Nay Pyi Taw
Myanmar may 2014, 23rd summit at Brunei Oct 2013, 22nd summit at Brunei April 2013, 21st summit
Phnom Penh Cambodia Nov 2012, 20th summit at Phnom Penh Cambodia April 2012.
> 1st summit at Bali , Indonesia Feb 1976.
NAFTA (NORTH AMERICA FREE TRADE AREA)
> On 12th August 1992 a trilateral agreement between USA, Canada, Mexico took place which declared
North American region as Free trade Area.
> It came in to force on 1st Jan 1994.
> It was constituted to meet the challenges of EEC (European Economic Community) and Japanese
economic policies.
> Rule of origin was developed, which implied that the economic resources of the countries in the
political region should be utilized for economic development of people belonging to that country
only.
> NAFTA is a free trade area among the United States of America, Canada & Mexico.
> This is the largest and most important trading bloc of the world.
> In 1989 NAFTA agreement between Canada & USA.
> NAAEC- North America agreements on environment co-operation.
> NAALC- North America agreements on labor co-operation.
SAFTA (SOUTH ASIAN FREE TRADE AGREEMENT)
>12TH summit of SAARC Islamabad 2004 gave rise to SAFTA
> It came into force 1st Jan 2006 replacing SAPTA (South Asian Preferential Trade Agreement) which was
operative among SAARC countries in 7th summit Dhaka 1993 , operative since Dec 1995.
> SAFTA Presupposes abolition of all kinds of trade & tariffs restrictions.
EFTA (EUROPEAN FREE TRADE AGREEMENT)
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> It was established at Stockholm on 3rd may 1960.

> It was established with a view to curtails custom duties & other tariffs among member countries.
> Headquarter is at Geneva.

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IDA (INTERNATIONAL DEVELOPMENT ASSOCIATION)

>IDA is an associate institution of World Bank known as soft loan window of World Bank.
> It was established on 24th Sep 1960.
> IDA provides loan to the member countries and no interest is charged on these long term loans.
> These soft loans are provided to the poor countries of the world.
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IFAD (INTERNATIONA FUNDS FOR AGRICULTURE DEVELOPMENT)

>Established in 1977.
> India is a member country.
URUGUAY ROUND & DUNKEL PROPOSAL
> The 8th round of GATT Popularly known as Uruguay round.
> Established in 1986.
> Mr. Arthur Dunkel , director general of GATT compiled a very detailed document popularly known as
dunkel proposal( 15th Dec 1993, signed 15th April 1994)
> Uruguay round contained the mandate to have negotiations in 15 areas:-
Part 1)
1) Tariffs 2) Non tariffs 3) Tropical products 4) National resource based products 5) Textiles & clothing
6) Agriculture 7) GATT articles 8) Safeguards 9) Multilateral trade agreement & arrangements 10)
Subsidies 11) Dispute settlements 12) TRIPS & TRIMS 13) GATT function
Part 2
1) Trade in services 2) Market access 3) Agriculture 4) Textiles 5) TRIMS ( TRADE RELATED INVESTMENT
MEASURES) 6) TRIPS (TRADE RELATED INTELLECTUAL PROPERTY RIGHTS) 7) Institutional matters
BENELX
>Belgium, Netherland & Luxemburg.
> Established 1958.
> Headquarter is at Brussels, Belgium.
> To promote mutual commercial co-operation among three member countries.
GATT (GENERAL AGREEMENT ON TRADE & TARIFFS).
>8th round of GATT known as Uruguay round which gave birth to World Trade Organization.
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> On 30th Oct 1947, 23 countries at Geneva signed an agreement related to tariffs imposed on trade. This
agreement is known as General Agreement on trade & tariffs.
> Came in to force on 1st Jan 1948.
> Headquarter is at Geneva.

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> On 12th Dec 1995, GATT was abolished and replaced by World Trade Organization which came
into existence on 1st Jan 1995.
> Objectives- To provide equal opportunities to all countries in international market for trading
purpose without any favor.
> GATT also introduced MFN (Most Favored Nations Clause) according to which every members country
was considered as MFN country.
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> 5th round of GATT- Dillion Round (Venue- Geneva).

> 6th round of GATT- kenedy Round (Venue- Geneva).
> 7th round of GATT- Tokyo round (Venue- Geneva).
> 8th round of GATT- Uruguay round Venue- Beginning in Urugary & closing in Genava).

The objectives of GATT are as follows:

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1. To encourage full employment and large and steadily growing volume of real
income and effective demand.
2. To improve the world production and exchange of goods.
3. To ensure the full use of world resources.
4. To ensure a steady improvement in the living standards of people in member
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countries.
5. To settle the disputes through consultation within the framework of GATT.
Dunkel Proposals:
The 8th round GATT popularly known as Uruguay round was started in September 1986.
The negotiations were expected to be concluded in 4 years but on account of differences
among participating countries on certain critical areas, agreement could not be reached.
To remove this deadlock Mr. Arthur Dunkel, Director General of GATT, compiled a very
detailed document, popularly known as Dunkel Proposals. This proposal culminated into
the Final Act on December 15, 1993. India signed this proposal on April 15, 1994. All 124
members the countries signed on this agreement.
Defects of GATT:
The major defects of GATT are as follows:
1. No Enforcement Authority:
The GATT has attempted to prescribe an international code of conduct in the sphere of
trade. But there was no enforcement authority to oversee the compliance of GATT
regulations by contracting parties and to settle their trade disputes.
2. Problems in the Formulation of General Rules:
The members of GATT are much diversify in nature, they had varied in economic and
political motives and they were also at different stages of development. These reasons
created difficulty in framing and implementing uniform general rules of conduct
concerning trade, tariffs and payment.
3. Less Benefits for the LDC’s:
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The most of the members of GATT were in the category of the LDC’s. The GATT had
provided less benefit to these countries. At present, there are more restrictive trade
arrangements in the world. The Commodity-to-Commodity based approach has proved to
be detrimental to the interests of LDC’s.
This approach creates difficulty in their future planning of production and exports. The
GATT also not given any compensation to the less developed countries on account of
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damage to their economies caused by the actions of developed countries.

4. Quantitative Trade Restrictions:
The GATT had certainly ensured the sealing down of tariff structure but the quantitative
trade restrictions remained for a long time outside the GATT ambit. Consequently, the
developed countries had used with impunity the quantitative trade restrictions such, as
import quotas, export subsidies, voluntary export restraints, health and safety regulation
etc.
Even though the 1993, agreement of GATT disapproved the adoption of quantitative trade
restrictions and the substitution of tariffs in their place, it did not prohibit the contracting
parties from taking recourse to them.
Difference Between WTO and GATT!
The short answer is no. The WTO is the GATT plus a lot more. There have been eight
rounds of trade negotiations since 1947. The first five rounds were of relatively short
duration and dealt mainly with tariff reductions. The sixth, the Kermedy Round (1963-67),
achieved deeper and wider tariff cuts, especially in industrial tariffs, and brought
developing country concerns to the fore.
The seventh, the Tokyo Round, which lasted six years (1973 – 1979), cut tariffs
substantially but also introduced a series of codes on non-tariff barriers (NTBs). The WTO
was the result of the eighth round of negotiations, known as the Uruguay Round (1986-
93).
The main differences between the GATT and the WTO are described by the WTO as
follows:
i. The GATT was provisional. Its contracting parties never ratified the General Agreement,
and it contained no provisions for the creation of an organisation.
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ii. The WTO and its agreements are permanent. As an international organisation, the WTO
has a sound legal basis because all members have ratified the WTO Agreements, and the
agreements themselves describe how the WTO is to function.

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iii. The WTO has “members.” GATT had “contracting parties,” underscoring the fact that
officially the GATT was a legal text.
iv. The GATT dealt with trade in goods. The WTO deals with trade in services and
intellectual property as well.
v. The WTO dispute settlement system is faster and more automatic than the old GATT
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system. Its rulings cannot be blocked.

vii. The WTO has introduced a trade policy review mechanism that increases the
transparency of members’ trade policies and practices.
UNCTAD- UNITED NATIONS CONFERENCE ON TRADE & DEVELOPMENT
>Established on 1964.
> Headquarter is at Geneva.
> Allec Irwin present chairman.
> UNCTAD has its session after every 4 years.
> To look after all trade and development
EUROPEAN UNION
ECSC- EUROPEAN COAL AND STEEL COMMUNITY
>It was established on 10th Aug 1952.
> On the basis of Paris Agreement made on 18th April 1951
> Aim if this community was to improve employment and better living conditions in member countries by
ensuring co-operative attitude for coal & steel trading EUROPEAN UNION.
> Treaty of Rome gave birth to European Union in 1957
> European economic community & European common market both are same
> Inner six countries (France, Federal Republic of Germany, Italy, Belgium, Netherlands and Luxemburg)
formed into European Economic community by the Treaty of Rome 1957.
> Came into force on 1st Jan 1958.
> Its headquarter is at Brussels Belgium.
> The aim of European Economic Community was to ensure complete free trade among member
countries.
> After joining Croatia on 1st July 2013, the membership of European Union became 28.
> It is the largest commercial community of the world
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> CAP- Common Agriculture Policy.

> CFP- Common Fisheries Policy.
> RDP- Regional development policy to promote regional development of member countries by reducing
regional disparities by developing rapidly the backward region.

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> European Investment Bank- 1958

> On 1st Jan 1999 one of the largest steps towards European Unification took place with the introduction
of the Euro as the official currency
> Euro Bank notes & coins 1st Jan 2002.
> Euro 3- It is related to pollution environment.
> ECB- European central bank 1st Jan 1998.
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> The treaty of Maastricht in 1993 stands out as an important moment, it’s when the real economic
union was created.
> Croatia recent member, but Iceland, Macedonia, turkey for next membership.
> EU countries signed the Treaty of Lisbon, it is designed to make the EU more democratic, efficient &
transparent & to tackle global challenges, such as climate change, security & sustainable
development.
> EEA- European economic area on 1st Jan 1994.
> European governance are as follows- 1) European council 2) European commission 3) European
parliament 4) Council of European union 5) Court of justice
> Biggest advantage of EU membership is the monetary union.
> Euro has become the second largest reserve currency behind the US dollar.
> Europa- official website of EU.
> The Europe 2020 strategy put forth by the European commission sets out a vision of the EU’“ social
market economy for the 21st century. It shows how the EU can came out stronger from this crisis & how
it can be turned into a smart, sustainable & inclusive economy delivering high levels of
employment, productivity & social 11 cohesion. It calls for stronger economic governance in
order to deliver rapid & lasting results.

APEC- ASIA PACIFIC ECONOMIC CO-OPERATION

>Founded in Nov 1989.
> Institutionalized in 1992 June.
> It’s a commercial group like NAFTA EU.
> It was constituted on the initiative of Australian Prime minister Mr. Bob Hawk who called APEC as voice
for the Asia pacific in world affairs
ACU- ASIAN CLEARING UNION
>It was established in 1974 with a view to provide the clearing facilities in current international
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transactions among Asian countries.

Headquarter is in Tehran (Iran)

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ASEM- ASIA EUROPE MEETING 1996 MERCOSUR-

It is a trading bloc of Latin America, established on 1st Jan 1995. Pan American Nations- 34 countries of
north- south and middle America , which was known as Pan American Region also declared to make a free
trade area in the western hemisphere by 2005 AD . US president has called it historical event.
IORARC-INDIAN OCEAN RIM ASSOCIATION FOR REGIONAL CO-OPERATION --- 1997
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FAO- FOOD AGRICULTURE ORGANISATION

>It was established on 16th oct 1945
>Headquarter is at Rome (Italy)
> It organize world food summit
OPEC- ORGANIZATION OF PETROLEUM EXPORTING COUNTRIES
>Founded in Baghdad
> Estb. Sept 1960
> To control the production & price of petroleum so as to safeguard the interest of oil exporting
countries.
> Headquarter is at Vienna (Austria) India is not a member of G-7/G-8 India is a member of G-5/G-
20/G-15/G-24
OECD- ORGANIZATION FOR ECONOMIC CO-OPERATION & DEVELOPMENT
>Earlier it was organization of European economic co-operation & development.
> Headquarter is in Paris (France).
> Welfare of economies .
BRICS- BRAZIL RUSSIA INDIA CHINA AND SOUTH AFRICA
>With a view to strengthen banking c-operation
> 16th May 2008 established.
> 6th BRICS Summit was held at Fortaleza Brazil 2014, it marked it first full BRICS summit. Inauguration of
New Development Bank and KV KAMNATH going to be a chairman of it will be opened at Shanghai.
> 7th BRICS summit will be going to host in July 2015 in Russia
INTERNATIONAL LIQUIDITY
>It is also known as international reserve
> It includes- 1) Bullion 2) International borrowings 3) Commercial credit operations 4) Hard currencies 5)
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Foreign securities 6) SDRs 7) Gold 8) Foreign exchange surplus 9) Private holdings 10) Borrowed
funds

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THERORIES OF TRADE
1) Mercantilism- one of the oldest trade theories. This theory stated that a country’s wealth was
determined by the amount of its gold & silver holdings. Mercantilist believed that a country should
increase its holdings of gold& silver by promoting exports & discouraging imports.
2) Absolute Advantage Theory-
>1776 by Adam smith
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> Wealth of nation’s

> Absolute advantage is there where country produces goods with less labour cost.
> It focused on the ability of a country to produce a good more efficiently than another nation
> He stated that trade should flow naturally according to market forces
> If A country could produce a good cheap or faster/ or both than country B, then country A had the
advantage and could focus on specializing on producing that good.
3) Comparative Advantage theory-
>1817 by David Ricardo.
> A person or country will specialize in doing what they do relatively better He talked about
opportunity cost i.e the next best forgone cost.
> A country has comparative advantage in producing a good if the opportunity cost of producing that
goods is lower at home than in the other country
> Ricardo has uses the main differences with Adam smith is in technological difference.
4) Hechscher Ohlin theorem/ two factor/ factor proportion theory/ factor endowment
theory
>Hechscher Ohlin Samuelsson theory states that if country like India is abundant in labor then India
would mainly specialize in labor intensive goods that would form a large share of its export basket. In the
same vein India would import capital intensive goods from countries that are capital abundant.
> Difference Between Ricardo & Hecksher Ohlin:-
 RICARDO  HECKSHER-OHLIN
1) Difference in technology in comparative advantage 1) He talks about same technology
2) One factor of production ( labor) 2) Two factor production ( capital & labor)
3) No factor mobility 3) Factor mobility ( free between industries)
4) It talks about opportunity cost & comparative 4) It talks about resource endowment & factor
advantage intensity

> According to H-O Model trades take place in a gainful manner with important effects
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upon prices, wages & rents (factor prices)

> H-O theorem states that a capital abundant country will export the capital intensive goods while the
labor abundant country will export the labor intensive goods.
> The ration of aggregate endowment of capital to the aggregate endowment of labor is used to define

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relative factor abundance between countries.

> We can say that US is a capital abundant relative to India & India is a labor abundant relative to
US.
> One of the most notable empirical critiques of H-O theorem is well known as the Leontief
paradox
> Loentief in his study 1953, states that despite the USA was a capital abundant country , it was exporting
importantly labor intensive products which is against as according to H-O theorem. It depicts the
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situation of factor intensity model

> Because whatever labor it was exported it was more skilled one labor.
BALANCE OF PAYMENT
>Balance of payment is a double entry system of record of all economic transactions between the
residents of a country and the rest of the world carried out in a specific period of time.
> Balance of trade takes into account only the transactions arising out of the export and import of visible
items. It does not take into account the exchange of invisible items like services of banking sector,
insurance sector, transport sector, tourism industry, interest payments and receipts and dividend
payments.
> Balance of trade is a narrow term whereas balance of payment is a wider term includes both
visible & invisible items.
> Components of Balance of Payment are as follows- 1) Current account ( it includes both visible and
invisible items) 2) Capital account ( private capital, banking capital, official capital) 3) Unilateral
payment account ( when there is a single sided transactions) 4) Official settlement account.
> Export= import = 0 then we said that it is balanced equilibrium
> Balancing items include official reserve, error omission, statistical error
> Balance of payment = balance of current account + balance of capital account
> Causes of disequilibrium of balance of payment- when the demand for and supply of foreign currency of
a country are equal , it is viewed that the balance of payments of that country is in equilibrium
position
> Some countries enjoys a surplus position( supply of foreign currency is more than that of the demand for
foreign currency. Both the surplus and deficit positions represent the disequilibrium in balance of
payments
> Causes are 1) Economic factors- development disequilibrium , cyclical disequilibrium, secular
disequilibrium, structural disequilibrium 2) Political factors like internal disturbances and war 3) Social
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factors like the additions and drops of different cultures.

METHODS OF CORRECTION OF DISEQUILIBRIUM
 If BOP disequilibrium is due to surplus balance, the country enjoys the positions as it

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would be most desirable but the countries worry when their balance of payment show deficit. In
case of disequilibrium due to deficit, the countries take measures to eliminate deficit.
1) Automatic Corrections- devaluation of domestic currency in terms of foreign currency then export
will be cheaper and import will be costlier.
2) Deliberate Measures – these measures are taken by the government to control deficit BOP, it includes
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monetary measures and trade measures. Monetary measures include reduction in money supply,
devaluation of money and exchange control. Trade measures include export promotion measures
and import substitutions measures
3) Miscellaneous measures includes loan in foreign currency, attracting foreign investments, attracting
NRI deposits, development of tourisms. These measures help in reduction of imports & enhancing
export thus contributes for the reduction of deficit BOP.
 There are several measures to control or manage BOP crisis-
1) Import control.
2) Export promotion.
3) Attraction of NRI deposits, loans & advances.
4) Liberalized exchange rate of Management.
5) Unified exchange rate .
6) Current account convertibility- under this system exchange rate was unified & transactions on current
account were freed from exchange control in March 1993.
7) Liberalized export policy 8) Development of import substitution and to reduce import burden.
WTO (WORLD TRADE ORGANIZATION)

> 8TH round of Uruguay ( 1986-1993) gave birth to world trade organization.
> Members of GATT signed on an agreement of Uruguay round on 15th April 1994 in Morocco for
establishing a new organization named WTO
> WTO was officially constituted on January 1st 1995 which took place of GATT as an effective
formal organizations.
> On 12th Dec 1995 GATT was abolished and replaced by World Trade Organization which
came into existence on 1st Jan 1995.
> Its headquarter is at Geneva
> WTO is a permanent organization which has been established on the basis of an international treaty
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approved by participating countries

> WTO is not an agency of UNO
> WTO has a general council for its administration which includes one permanent representative of each

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member nation. Generally it has one meeting per month which is held at Geneva
> The highest authority of policy is WTO ministerial conference which is held after every 2 years.
> India is founder member of both GATT & WTO
> WTO has recent 160th member countries .latest Yemen country has joined it in 9th ministerial
conference at Bali 2013
> 161st member country which will join WTO will be Seychelles on 26th April 2015 at 10th ministerial
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conference which will be going to held at Nairobi, Kenya Dec 2015

> WTO is designed to play the role of watchdog in the spheres of trade in goods, trade in services, foreign
investment, intellectual property rights.
> The basic purpose of WTO is to promote international trade among member countries without
any discrimination
> There are number of important committees for administration of WTO, out of which two committee
play the pivotal roles in WTO : -
1) DSB – (Disputes Settlement Body)- it considers the complains of member countries against violation of
rules by any member country. This body appoints a group of experts to investigate into such complains.
This body meets twice a month for such cases.
2) TPRB- (Trade Policy Review Body)- it review the trade policy of member countries. The trade policy of
all big trade powers of the world are reviewed after every 2 years. All the members of WTO are the
members of TPRB.
3) Other important bodies of WTO are council for trade in goods, council for trade in services, council
for trade related aspects of intellectual property rights.
> Objectives of WTO are as follows-
1) To improve standard of living of people in the member countries.

2) To ensure full employment and broad increase in effective demand.

3) To enlarge production and trade of goods.

4) To enlarge production and trade in services.

5) To ensure optimum utilization of world resources.

6) To accept the concept of sustainable development.
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7) To protect the environment.

>Functions of WTO : -

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1) To provide facilities for implementation administration and operation of multilateral and

bilateral agreements of the world trade.
2) To provide a platform to member countries to decide future strategies related to trade & tariff.
3) To administer the rules and processes related to dispute settlement.
4) To implement rules and provisions related to trade policy review mechanism.
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5) To assist IMF & IBRD for establishing coherence in universal economic policy determination.
6) To ensure optimum use of world resources.
>Organization structure of WTO are 1) Ministerial conference 2) General councils 3) Councils 4)
Committees & management bodies
> WTO agreement includes- 1) Agreement on agriculture 2) Agreement in trade & textiles 3) Agreement
on market access 4) TRIMS (Trade related investment measures) 5) TRIPS (Trade related intellectual
property rights) 6) Services and disputes settlement body
>The highest decision making body of the WTO is the ministerial conference which has to meet at
least every 2 years
> Ministerial conference can take decisions on all matters under any of the multilateral trade
agreements
> Ministerial conferences are as follows-
1) 1st ministerial conference – held at Singapore in 1996, main focus on International labor organization
(ILO), Competition in international trade of textiles and information technology, issue related to
investment solved under TRIMS.
2) 2ND Ministerial conference – held at Geneva in 1998, to focus full and Faithfull implementation of
existing multilateral agreements.
3) 3rd ministerial conference – held at Seatal, America in 2000, this meeting was failure as the
developing nations protested against the lack of transparency and imposition of the view of rich
countries on the poor countries in negotiations and slogan rises that WTO is wrong trade organizations
as it exploits the developing countries for the benefit of advanced countries under the slogan of
globalization
4) 4th ministerial conference – held at Doha, Qatar in 2001. Doha ministerial declaration calls for
negotiations on the issues such as reductions in industrial tariffs, phasing out of agriculture export
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subsidies, promoting trade in services and provide special treatment to developed countries
5) 5th ministerial conference – held at Cancum, Mexico in 2003, it was failure as the developing nations
jointly opposed the high agriculture subsidies in the USA and EU. Two issues are there 1) agriculture

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subsidies (financial assistance) and Singapore issues

6) 6th ministerial conference – held at Hong-kong in 2005, it focus on Doha Development agenda which
includes negotiations on agriculture and non -agriculture market access, reductions in tariffs on
thousands of products and on farm subsidies, negotiations in services.
7) 7TH ministerial conference – held at Geneva in 2009, the general theme of the conference. The WTO is
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the multilateral trading system and the current global environment.it was a failure conference.
8) 8th ministerial conference – held at Geneva in 2011, it covers three topics 1) importance of
multilateral trading systems & the WTO 2) Trade & development 3) The Doha Development Agenda
negotiations. Easter package in 2011, Pascal Lamy the director general of WTO said that the biggest
stumbling block was what is called NAMA (NON- AGRICULTURE MARKET ACCESS)
9) 9TH Ministerial conference- held at Bali, Indonesia in 2013, Bali package, accepted Yemen as a new
member. The round is historic because WTO reached its first ever global trade reform deal approved by
160 ministers after 12 years of negotiations. The deal seeks to lower barriers to trade worldwide through
a global trade facilitation agreement (FTA) that seeks to reduce red tape, cut cost & improve
efficiencies by taking measures such as digitization of procedure. Azevedo was elected to
succeed Pascal Lamy.
10) 10th ministerial conference – will be held at Nairobi, Kenya in Dec 2015.
> DFQF- Duty free quota free
> LDC plus Package were trade facilitation and the export competition pillar of the agriculture
negotiations
> India trade policy review carried out every four Years
> SPS- Sanitary phyto-sanitary
> TBT- technical barrier to trade The subsidies provided by the government to the agricultural sector is
termed by the WTO as Aggregate Measures of support (AMS)
> AMS is calculated in terms of product & input subsidies.
> The WTO argues that the product subsidies (non- product) like credit, fertilizers, irrigation and power
will cut the production cost of farming and will give undue advantage to such countries in their access to
the world market such subsidies are called to cause distortions to the world trade.
> Such subsidies are not permitted in one sense as they have a minimum permissible limit de minimis
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under the provisions which is 5% and 10% of their total agricultural output in the case of
developed and developing countries.
> Agriculture subsidies in WTO is identified by Boxes such as green box, amber box, red box, blue
box and S&D Boxes

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> Amber box- all subsidies which are supposed to distort production & trade fall into the Amber box i.e all
agricultural subsidies except those which fall into the blue & green boxes. These include government
policies of minimum support prices. Reduction 5% to 10 %
> Blue box- this is the amber box with conditions. The conditions are designed to reduce distortions. Any
subsidy that would normally be in the amber box is placed in the blue box if it requires farmers to go for a
certain production level. These subsidies are nothing but certain direct payments made to farmers by
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government in the form of assistance Programme to encourage agriculture rural development. At

present there are no limit on spending on the blue box subsidies.
> Green box- The agriculture subsidies which cause minimal or no distortions to trade are put under the
green box. This is a very wide box and includes all government subsidies like public storage for food
security, pest and disease control, research and extension and some direct payments to farmers that do
not stimulate production like restructuring of agriculture, environmental protection, regional
development, crop and income insurance. The green box subsidies are allowed without limits provided
they comply with the policy specific criteria. It means this box is exempt from the calculations under
subsidies under the WTO provisions because the subsidies under it are not meant to promote
production thus do not distort trade. That is why this box is called production neutral box.
> S & D box- The social and Development box allows the developing countries for some subsidies to the
agriculture sector under certain conditions. These conditions revolve around human development issues
such as poverty, minimum social welfare, health 20 support etc., specially for the segment of population
living below poverty line. Developing countries provide subsidies of less than 5% of their total
agriculture output.
> The SWISS formula was proposed by Switzerland in the Tokyo round negotiations of GATT 1973-
1979
CONVERTIBILITY OF RUPEES
>It means it can be freely converted into any other currency
> Government of India announced partial convertibility of the rupee from 1st March 1992 in order to
integrate the Indian economy with the rest of the world.
> Under partial convertibility 40% of earnings were convertible in rupees at officially determined
exchange rate& 60% at the market determined exchange rate.
> On 19th August RBI declared Indian rupee has been made fully convertible in current account
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transactions related to goods & services.

> Convertibility on current account is defined as the freedom to buy or sell foreign exchange
> Capital account convertibility refers to the removal of the restrictions in payments relating to the capital
transactions like inflow& outflow of short term& long term capital

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> Government not announcing convertibility on capital account because the crisis in south east Asian
nations, brazil & Mexico made the Indian government to shelves the proposal in cold storage
> Government on 1st March 1993 introduced a fully unified market determined exchange rate.
Unification of exchange rate and floating of rupee was started in 1993- 1994.
> Full convertibility of rupee in the current account is one of the measures taken by government for
improving Balance of Payment.
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> Tarapore reports on full convertibility of capital account

> Convertibility of money implies such a system in which country currency becomes convertible in foreign
exchange & vice versa. Since August 19, 1994 Indian rupee has been made fully convertible in current
account transactions related to goods and services.
GDR (GLOBAL DEPOSITORY RECEIPT).
>Global depository receipt is a certificate issued by a depository bank, which purchase shares of foreign
companies and deposits it on the account.
> It represents ownership of an underlying numbers of shares.
> Normally 1 GDR= 10 shares but not always
> It is a negotiable instrument which is denominated in some freely convertible currency
> It is a negotiable certificate denominated in US dollars which represents non US company’s
publicity traded local equaity.
> EDR- European depository receipt.
FIIs (FOREIGN INSTITUTIONALINVESTORS)
>These are the foreign institutions like pension fund, mutual funds, investment trusts and portfolio
managers
> According to the regulations issued by the government of India foreign institutional investors ( FIIs) , non
-Resident Indians( NRIs), persons of Indian origin ( PIOs) are allowed to invest in the primary & secondary
capital markets in India through portfolio Investment scheme.
> The ceiling for overall investment for FIIs is 24% of the paid up capital of the Indian company & 10%
/24% for NRIs/ PIOs. The limit is 20% of paid up capital in case of public sector banks.
> Government of India issued the regulations on foreign Institutional Investors on 14th Nov 1995.
ADR (AMERICAN DEPOSITORY RECEIPT)
>An American depository receipt is a negotiable security represents securities of a non US company that
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trade in the US financial market. Securities of a foreign company that are represented by an ADR are
called American depository shares.
> First ADR was introduced by JP Morgan in 1927 for the British retailer Selfridges.

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EXIM BANK (EXPORT IMPORT BANK OF INDIA)

>It was established under the EXIM act 1981 and on 1st Jan 1982 as a statutory corporation wholly owned
by the central government.
> It grants loans in India & outside for the purpose of exports & imports, refinances loans of banks and
other notified financial situations for purposes of International trade, rediscount exports bill for
banks etc.
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> It is also a coordinating agency in the field of international finance and it undertakes development of
merchant banks activities in relation to export oriented industries.
DUMPING- It means selling of goods at higher price in domestic country & selling at low price in
foreign countries

EXIM POLICY (EXPORT IMPORT POLICY).

It is prepared and announced by the central government (Ministry of commerce). India’s export import
policy is also known as foreign trade policy in general aims at developing export potential, improving
export performance, encouraging foreign trade and creating favorable balance of payment position. The
commerce Minister V.P Singh has announced the EXIM policy on 12th April 1985. Initially it was
introduced only for 3 years. It is also known as trade policy.
FOREIGN TRADE POLICY 2015-2020
>It was declare on 1st April 2015 at Vigyan Bhawan
> Department of commerce , government of India under the Ministry of commerce& Industry.
> Highlights are:-
1) Export from India schemes- MEIS (Mercandise exports from India schemes) SEIS (Service exports
from India scheme).
2) SFIS (Served from India scheme) is replaced by SEIS (SERVICE EXPORT India scheme).
3) CECAs- comprehensive economic co-operation agreements.
4) CEPAs- comprehensive economic partnership agreement.
5) EUC- End user certificate.
6) Boost to Make in India .
7) DEOP- Defence export offset policy.
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8) DGFT- Directorate general of foreign trade.

9) SCOMET – special chemicals organisms materials equipments & technologies ( 12 month to 24
months now)
> EPCG- Export promotion capital goods authorization holders shall be required to maintain records

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for a period of 24 years only

> EODC- Export obligation discharge certificate
> NEE- Net foreign exchange earning
> Time period for LOP letter of permission for EOU/EHTP/STP/BTP revised for 2 years to enable the unit
to construct the plant and machinery.
> DFTP- Duty free tariff preference
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> CQCTD- Committee on quality complaints& trade disputes.

> Vishakhapatnam and Bhimavaram added as towns of export excellence
> MEIS (Merchandise export from India schemes has replaced 5 different schemes:- 1) Focus product
scheme 2) Market linked focus product scheme 3) Focus market scheme 4) Agri infrastructure incentive
scrip 5) VKGUY- vihesh krishi & gram uduog yojana.
MNCs- MULTINATIONAL COMPANIES.
>A Company which extends its activities in more than one country and which provides productive&
service facilities outside its mother country is known as Multinational company or corporation.
> Categories are 1) Ethnocentric (policy based on home market) 2) Polycentric (based on different
countries) 3) Geocentric (takes the whole world as common) 4) Regiocentric (takes region wise)
> Domestic company> international company> multinational company> global company>
transnational company

MISCELLANEOUS
> PPP- purchasing power parity it is in essence, an economic theory that adjusts the exchange rate
between countries to ensure that a goods is purchased for the same price in the same currency.
> Balance of payment of a country on current account is equal to balance of payment minus capital
flows.
> A currency crisis is when, serious doubt exists as to whether a country’s central
bank has sufficient foreign exchange reserves to maintain the country’s fixed
exchange rate. The crisis is often accompanied by a speculative attack in the foreign
exchange market. A currency crisis results from chronic balance of payments deficits,
and thus is also called a balance of payments crisis. Often such a crisis culminates in
a devaluation of the currency.

OTHER IMPORTANT POINTS-

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Self- sufficiency is the ability to provide for all of your basic needs, such as clothing,
food, shelter, and water, without relying on anyone else.

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Capital-intensive -Industries based on primary resources. A large investment of

money in machinery
Labour-intensive
Require a large number of skilled workers.
Semi-maufacturerd
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Intermediate goods or producer goods or semi-finished products are goods , such as

partly finished goods, used as inputs in the production of other goods including final
goods.
End product
that which is produced as the final result of an activity or process, especially the
finished article in a manufacturing process.
Primary Industries
Also called extractive industries , take raw materials from nature, process them
slightly, and sell them to other businesses that use them to make other products or to
provide services.
Manufacturing Industries
Include both the processing and fabrication sectors.
Service Industries
Provide intangibles that people need or want, such as cleaning, accommodation,
entertainment, or transportation.
They are also activities that are often performed by experts who can do untrained
people can't do.
Consulting services
One of the fastest growing sectors of service industries.
Tariffs
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A tax imposed by the local government on goods and services going into a country
Currency exchange rate
The rate given by one country for another country's currency

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World Trade Organization (WTO)

Deals with the global rules of trade between nations. Formerly known as the General
Agreement on Tariffs and Trade(GATT)
Protectionism
Using tariffs and duties to impede imports of foreign goods to protect domestic goods
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.
Interdependence
The reliance of two or more groups on the actions of one another to fulfill needs
Trade shows/ Trade fairs
Allow a potential purchaser to communicate with suppliers.
Public-sector investments
Involve putting money in state - or government owned assets - i.e.:part-ownership of
state-owned oil and gas entities or of telecommunication companies around the
world.
Private-sector investments
Can be held in a variety of publicity held companies (those with shares traded on a
stock market) or privately owned companies, or through the creation of new
companies of either type
Foreign direct investments
Usually occurs when a company in one country wishes to expand into another country
. This can be done through either establishing a subsidiary operation or setting up a
joint venture.
Portfolio investments
An investor buys a share of a foreign company but has no controlling interest and
little say in how the company is run . The investor only wants to earn a share of the
foreign company's profit.
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Outsourcing
Obtaining something by contracting it from another source.

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Labour turnover rate

The frequency with which a worker leaves one job for another .
Organization for Economic Cooperation and Development (OECD)
Is an intergovernmental economic organisation with 35 member countries, founded
in 1960 to stimulate economic progress and world trade.
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Business climate
A measure of the ease with which companies can run their businesses .
Capital
The money or other assets that are available for investment purposes .
Competitive advantage
Is achieved when companies and countries outperform their competitors around then
world by improved oil superior goods (better pricing, higher quality , better services,
uniqueness , or profits.
Gross domestic product (GDP)
Is the total value of all goods and services produced in a country during a specific
period.
Economic utility
Is a product's ability to satisfy the needs and wants of then customers.
Opportunity cost
The value of the highest value forgone.
Comparative advantage
It can specialize in what it does well and at a reasonable cost .
Absolute advantage
If a country can produce the good at lower cost or with a higher rate of productivity.
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Standard of living

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Is the way people live as measured by the kinds and quality of goods and services they
can afford .
Knowledge economy
Refers to the increased reliance of business, labour, and government on knowledge,
information, and ideas - and information technology to put them to practical use.
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Intellectual capital
Is the sum of knowledge, information, intellectual property, talent, and experience
within a country or an organization.
Innovation
Constant improvements in the way businesses adopt new processes and adapt to new
markets.
Taxation
The method used to generate the finances required to run the country.
Rationalization
Is the process used by an organization or company to change its organization
structure, its product line , or its production process to become more efficient,
productive , and competitive
Economies of scale
Refer to the tendency of the cost per item to go down when items are bought or
produced in a large quantities.
Developed nations
Tend to have high standard of living an produce a sophisticated range of products
such a computers and auto mobiles.
Developing nations
AKA newly industrialized economies (NIEs), such as Vietnam and China, have made
the transition to more sophisticated manufacturing.
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Less-developed nations

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These largely agricultural-based countries have a tendency to experience political and

military instability more often.
Total quality control (TQM)
Is a method of managing organizations with a commitment to continuously improve
the products, processes , and the work habits of employees.
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Market-driven organization
Are those respond to market needs by providing customers with high quality goods
and services that are low in cost and available when required.
International Organization of Standardization (ISO)
Develop and publish International Standards.
Transparency
Anon sharing of information within an organization or company.
Inventions
Are totally new products that are based on a creative ideas.
Manufacturing
The way something is being made.
Distribution
Transportation of products and business papers.
Inventory Control
A system by which individual entries were recorded and kept up to date.
Just in time (JIT)
Is an inventory control system that schedules products (i.e., raw materials, parts,
partial assemblies, and merchandise) to arrive as they are needed for manufacturing
or for supply to customers.
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Big box retailers / category killers

Are stores that specialize in providing an overwhelming variety of one category of
merchandise, such as books or hardware.

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Data mining
Is a way of connecting specific customer characteristics to their purchases. Effective
data-mining technology can fairly accurately predict when a customer will run out of
food .
Auto Pact
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To protect automotive industry in Canada and to open up freeze trade with the
United States, both government signed the Canada-United States
AutomotiveProducts Agreement in 1965.
Telecommunication
Is communication over a distance, for example, by telephone , internet , radio, or
television.
Strategies
Provides information on copyrights, patents, licenses, trademarks , starting a business
, financing , and exporting , and research about markets , suppliers , and customers .
DFAIT
Provides trade data , country profiles , and market studies by sector or by country . It
gives information about Team India and other businesses development missions.
Patent
Is a grant of property rights by law to give exclusive rights to the inventor and to
protect the rights of the inventor and prevent others from making, using , or selling
the invention.
Copyright
Is a form of legal protection provided to the authors of original works, including
literary, dramatic, musical , artistic , and certain other intellectual works, such a
software programs.
Licensing
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Patent or copyright owners allow other organizations (individuals, governments , or

companies) to use their idea or invention for a fee or royalty.
Joint venture

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Is an agreement between two or more companies or organizations to share assets

and control of a new business for mutual gain.
The World Bank Group
Owned by more than 184 member countries, is one of the world's largest sources of
financial and consulting assistance from developing countries.
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Information technology
is the machinery of the information industry and consists of satellite and cellular
communication companies , research firms, data processing software designers,
information managers, anyone else whose man job consist of getting, transmitting ,
processing , interpreting, or organizing data.
Kanban
a Japanese philosophy focused on eliminating waste.
Franchise
is a type of a business in which a company authorizes a group or an individual to sell
its goods and services.
Strategic alliance
two or more firms cooperate to co-develop, co-produce, co-market their products.
Globalization
to the growth and spread of interactive international economies and businesses
around the world.
Multinational company (MNC)
AKA transnational company , is a business enterprise that products business in several
countries. They operates worldwide on a borderless basis while still observing
national regulations and policies in the countries where they operate.
Ethnocentric MNC
Operates internationally, in much the same way as it does at home. It usually has tight
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control over its foreign operations from head office.

Polycentric MNC

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Understands the market differences from country to country and gives its foreign
operations greater autonomy .
Geocentric MNC
Takes a multinational approach, and seeks total integration its global operations.
Separate international Divisions
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International staff are isolated and function separately from then company .
Functional Divisions
The company maintains separate departments in sales, accounting, logistics and
research and development, with one or more individuals in each department
responsible for handling international activities.
Product Divisions
International and domestic activities are separated by product groupings.
Trading blocs
countries agree to support mutual economic growth by opening their markets to
cross-border trade and business development.
Reciprocity
according to the terns mutually agreed upon by countries.
Bilateral trade
trade between two countries
Multilateral trade
Trade among more than two countries
North American Free Trade Agreement
created a free trade zone consisting of Canada , Mexico , and the US
The European Union (EU)
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is a political and economic alliance in Europe consisting of 15t countries, formerly

known as the European Community.

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Asia-Pacific Economic Cooperation (APEC)

is a forum for ministers and senior government officials of countries bordering the
Pacific Ocean to discuss regional policy .
Agreement on Internal Trade (AIT)
Attempts to harmonize regulations and standards from province to province in areas
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such as transportation and consumer protection.

Duty free-zone
bring goods into the country without paying duty or tax
G20
an international forum of finance ministers and central bank governors
World Economic Forum (WEF)
is an independent not for profit foundation, committed to raising the level of
corporate citizenship in its member countries.
Organization for Economic Cooperation and Development (OECD)
Is a multinational organization of developed countries and developing countries that
helps formulate social, economic, trade, development, education, and scientific
policies.
International Chamber of Commerce (ICC)
is a world business organization that promotes an open international trade and
investment system and market economy.
International Monetary Fund (IMF)
is a multi governmental organization that focuses on international monetary
cooperation and stability in foreign exchange.
The Forum for International Trade Training
is an organization that prepares training programs and services to educate businesses
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and individuals in ways of competing successfully in international trade .

Export Source

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is a partnership of federal and provincial governments and other organizations that

provides information and services for individuals and companies interested in
international business.
Idea Creation
New knowledge forms around basic discoveries, extensions of existing understanding
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, or spontaneous creativity made possible by individual ingenuity and communication

with others.
Initial Experimentation
Ideas are initially tested in concept by discussions with others, referrals to customers,
clients, or technical experts , and/or in the form of prototypes or samples.
Feasibility Determination
Practicality and financial value are examined in formal feasibility studies, which
identify potential costs and benefits as well as potential markets or applications.
Final Application
A new product is finally commercialized or put on sale in the open market , or a new
process is implemented as a part of normal operating routines.
Chief executive officiers
are the most senior managers in the company . They are responsible for the
company's attainment of business goals, performance, financial results , general
conduct, and financial return to shareholders.
Mission Statement
should answer the question "where are we going?". It should describe a company's
mission satisfy consumer needs and wants with innovative process and products.
Request for proposal (RFP)
outlines the cost and time guidelines for ten work to be done or the services to be
provided.
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Deliverables
refers to the solutions , services, or end products developed .
Entrepreneur

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the person who organizes, manages, and assumes the risk of starting and running a
business.
Trend
a general direction or movement off the marketplace that is occurring now or s
expected to occur in the immediate future
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Life cycle
method to identify whether a trend is rising or descending. It includes four stages ,
embryo, growth, maturity and death.
Sunrise opportunity
emerging trends and businesses
Sunset opportunity
in decline or at the end of their life cycle
Expatriate
someone who lives and works in a foreign country for an extended period.
Hyper-competition
This disruption of existing markets by flexible, creative, and fast-moving firms .
Technological convergence
enables companies in the telecommunications, consumer electronics , software,
computer, and entertainment industries enter each other's market.
Monoculture
when the world appears to be merging and forming a single culture, a society that has
a lack of diversity in values and beliefs.
Demographic profile
The income, gender and age population of your target market .
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Global brands / brand building

Product brand names and logos represent "global banners" that are instantly
recognized by millions of consumers.

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Creativity
the use of imagination and technical know-how to solve a problem.
Vision
prospects for business
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Business lead
usually shows the direction of the market and where people spend their money and
time.
Landed cost
the cost of a product after all transportation, handling, currency exchange rates and
import charges have been added.
Hard currency
it is widely accepted on the foreign currency exchange market and can be easily
converted to another currency
Soft currency
refers to those that fluctuate in value and are not considered stable.
Buy forward
when a business purchases the foreign currency required for an order tag the time
the order is placed
Letter of credit
assures a company that the business has enough money on deposit in a bank to
complete the payment.
Issuing bank
where you apply for a letter of credit in the full amount of the invoice.
Advising bank
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informs the seller that the letter of credit has arrived.

Boycott

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organized campaigns to refuse purchasing a company's or a country's products

Standards
agreements to be used as guidelines
Local market research
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investigation into consumer preferences in a specific region

Labeling requirements
rules governing one aspects of product packaging
Culture
is a reflection of the values and beliefs of a community or a nation.
Customs
are the ways in which cultural behaviours are performed .
Cultural determinants
three things that shape a country's culture : geography, history and religion.
Negotiating styles
the way people negotiate business relationships
Silent language
Non-verbal communication such as body language , personal distances between
people , appearance , the use of colours, and modes of greetings .
Protocol
rules of correct or appreciate behaviour to follow when meeting with officials or
business people in another region.
Cultural imperialism
the imposing of cultural values by one group on another group
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Political risk
refers to political decisions, conditions, events , or activities in a country that affect
business climate.

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Economic imperialism
the exploitation of developing countries by more developed countries
Ownership risk
when operation are threatened by government takeover or expropriation, owners
may lose their offshore property.
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Operation risk
government policies of the host country may impede business operations such as
finance, marketing, or production
Transfer risk
Government policy may adversely affect currency exchange rates .
Repatriation of earnings
when a company creates wealth in another country, it ay be forced to return a
considerable amount to that country's government .
Economic systems
include all the factors of production and the rules and regulations involving
production and consumption of goods and services.
Market economy
individual companies and consumers make the decisions about how , what and for
whom goods and services are produced.
Centrally planned (command) economy
the government regulates the amount , distribution, and the price of goods and services
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UNIT-9
FINANCIAL MANAGEMENT
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INTRODUCTION
>The term financial management can be defined as the management of flow of funds and it deals with the
financial decision making.
> The objective of maximization of shareholders wealth has been taken as the primary goal of financial
decision making and maximization of profit is the second main objective of financial management.
> A firm wishes to maximize the profits may opt to pay no dividend and to reinvest the retained earnings
whereas a firm that wishes to maximize the shareholders wealth may pay regular dividend.
> Capital budgeting related to fixed assets.
> Working capital management related to current assets.
> The dividend decisions is almost regular decision in the sense that it is taken whenever the firm wants to
distribute interim dividend, final dividend or bonus to shareholders.
> Shareholders interest put on high priority and public interest get last priority.
> Three decisions are taken 1) financial decisions 2) investment decisions 3) dividend decisions.
LEVERAGES
> Leverages related to tangible assets.
> Relationship between two interrelated variables.
> Leverage = % change in dependent variables/ % change in independent variables.
> Functional relationships Sales revenue (-) variable cost = contribution Contribution- fixed cost = EBIT
(Earnings before interest and tax) EBIT- Interest= profit before tax Profit before tax- tax= profit after
tax (EPS)
> Relationship between sales revenue and EBIT is known as operating leverage.
> Relationship between EBIT and EPS is known as financial leverage.
> Relationship between sales revenue and EPS is known as combined leverage.
> The maximization of shareholders wealth requires the maximization of market price of the
share by maximizing the EPS.
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OPERATING LEVERAGE
>The relationship between the sales revenue and EBIT.
> Operating leverage= % change in EBIT/% change in sales revenue

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> For every increase or decrease in sales level, there will be more than proportionate increase or decrease
in the level of EBIT. This is due to the existence of FIXED COST.
> If no fixed cost then increase or decrease in EBIT was direct and proportion to increase or
decrease in sales level. OL=1
> OL=1.5 Degree of operating leverage. Increase or decrease in sales will affect more increase or
decrease in EBIT.
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> If fixed cost> variable cost= greater would be the DOL (Degree of operating leverage)
> DOL/OL= Contribution/EBIT
> If no fixed cost then no operating leverage.
> A firm should avoid high DOL.
FINANCIAL LEVERAGE
> It measures the relationship between EBIT and EPS.
> Financial leverage= %change in EPS/% change in EBIT
> EBIT is dependent variable in operating leverage and was determined by sales level. In case of financial
leverage, EBIT is an independent variable and is determining the level of EPS that is why EBIT
is called a linking point in the leverage study .
> Financial leverage may be defined as % increase in EPS divided by % increase in EBIT. Emerge as a result
of fixed financial charges (interest and dividend)
> Higher the level of fixed financial charge higher would be the financial leverage.
> Financial leverage= EBIT/EBIT- interest
> Financial leverage= EBIT/PBT (profit before tax)
> Financial leverage= EBIT/PBT-PD/(1-t) (pd- dividend, t= tax)
> DFL (Degree of financial leverage)= EBIT/EBIT-interest = 200/0= undefined, it is also called financial break-
even level i.e the level of EBIT is just sufficient to cover the fixed financial charges only and there is no
earnings available to the shareholders and hence no EPS (Earning per share)
> ROI (Return on Investment)= cost of debt
> ROI< cost of debt = unfavorable financial leverage.
> ROI> cost of debt= favorable or trade on equity
> OL= leverage of the first order or first stage leverage.
> FL= leverage of the second order or second stage leverage.
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COMBINED LEVERAGE
> Operating leverage looks after business risks complexion
> Financial leverage looks after financial risk complexion

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> Combined leverage looks after overall risks.

> Effects of change in sales level on EPS is known as combined leverage.
> Combined leverage= EPS/ sales revenue
> Combined leverage= %change in EPS /% change in sales revenue
> Combined leverage= contribution/PBT
CAPITAL STRUCTURE
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>Capital structure refers to firm cost of capital.

> Those who believe such a capital structure exists are supporters of Traditional approach.
> Those who believe capital structure does not exists are supporters of M&M approach.
> The value of the firm depends upon the earnings of the firms and the earnings of the firms depends
upon the investment decisions of the firm.
> It states that relationship between leverage, value of the firm and overall cost of capital of the
firm.
Capital structure theories are –
1) Capital structure exists – Net Income Approach (NI)

2) Capital structure does not exists- Net operating Income Approach (NOI)

3) Pragmatic approach- traditional

4) Justification to Net Operating income approach – Modigilini Miller Model. (M& M)

(Capital structure does not exists.

 Certain assumptions are there 1) Two sources of funds- debt & equity 2) No corporate and
personal tax 3) All profit distributed as there is no retained earnings.
1) NET INCOME APPROACH
> Suggested by Durand.
> It states a relationship between leverage, cost of capital and value of the firm.
> Relationship between capital structure and value of the firm.
> It states that value of the firm increases by increasing more debt proportion or leverage
& overall cost of capital will decrease.
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> More & more debt or leverage> increase value of the firm> decrease overall cost of capital of the
firm (WACC)
> Assumptions are cost of debt Kd and cost of equity Ke are constant. Kd=Ke=k
> Use of more and more debt financing in the capital structure does not affect the risks perception

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of the investors.
> Approach suggests that higher the degree of leverage, better it is as the value of the firm would be
higher. A firm can increase its value just by increasing the debt proportion in capital structure.
> Value of the firm= value of equity+ value of debt
2) NET OPERATING INCOME APPROACH
>Opposite to NI approach.
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> Market value of the firm depends on the operating profit or EBIT and overall cost of capital
(WACC)
> Financing mix or capital structure is irrelevant and does not affect the value of the firm.
> Assumptions are cost of debt and overall cost of capital are constant. Kd= Ko=K
> As the debt proportion or the financial leverage increases the risk of the shareholders also increases and
the cost of equity Ke also increases so value of the firm remain the same.
> NOI consider Ko to be constant & there is no optimal capital structure rather every capital structure is
good as any other & every capital structure is optimal one.
> Value of equity= value of the firm- value of debt
3) TRADITIONAL APPROACH
>It said that both NI approach and NOI approach is unrealistic.
> It takes a mid- way between the NI approach (value of the firm increase by increasing debt) and NOI
approach (value of the firm remain the constant)
> As per this a firm should make a judicious use of both debt & equity to achieve a capital structure which
may be called the optimal capital structure.
> WACC will be minimum & value of the firm will be maximum.
> It states that value of the firm increases with increase in financial leverage but up to a certain limit only.
Beyond this limit the increase in financial leverage will increase its WACC and value of the firm will
decline.
> Assumptions are cost of debt Kd and cost of equity Ke is constant, Kd=Ke=K
> he use of the leverage beyond a point will have the effect of increase in the overall cost of capital of
firm& thus result in decrease in the value of the firm.
> Judicious use of both debt and equity.

4) MODIGLIANI AND MILLER APPROACH

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>Relationship between leverage, cost of capital and value of the firm.

> Capital structure has no effect on the value of the firm.
> Financial leverage does not matter and cost of capital & value of the firm is independent.

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> Nothing may be called optimal capital structure.

> Restate NOI approach & added it to the behavioral justification for their model.
> Assumptions are market are perfect, securities are infinitely divisible, investors are rational, no tax,
personal leverage and corporate leverage are perfect substitute.
> It argues that if two firms are alike in all respects except that they differ in respect of their financing
pattern and their market value, then the investors will develop a tendency to sell the shares of the over -
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valued firm and to buy the shares of the under- valued firm. Buying and selling pressures will continue
till the two firms have same market value.
> It follows the arbitrage process- It refers to taking to understanding by a person of two related actions r
steps simultaneously in order to derive some benefit e.g buying by speculator in one market and selling
the same at the same time in some other market. The arbitrage process has been used by MM to testify
their hypothesis of financial leverage, cost of capital & value of the firm.
DIVIDEND POLICY
>Dividend refers to that portion of profit (after tax) which is distributed among the
owners/shareholders of the firm.
> Profit which is not distributed is known as retained earnings.
> Dividend relates to equity shareholders because preference shareholders have a fixed rate.
> Three decisions are there 1) dividend decisions 2) investment decisions 3) financing decisions
> Profit must be distributed either in the form of cash dividends to shareholders or in the form of stock
dividends also known as bonus share.
> Dividend pay- earn goodwill
> Ploughing back of dividend- loose goodwill Dividend payout ratio is that portion of profit which
is to be distributed.
> Relationship between dividend policy & market value of the share.
> The dividend policy has been a controversial issue among the financial managers and often
referred to as dividend puzzle.
> Irrelevant theories are residual theory of dividend and Modigliani miller approach.
> If dividend paid it reduces the uncertainty of the investors.
> If dividend not paid then uncertainty of share will increase.
> Dividend policy affect on the market value of share & value of the firm.
1) WALTE‘͛S MODEL (RELEVANT)
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>Given by Prof James E walter

> Assumptions are 1) all investments decisions financed through retained earnings. 2) rate of return and
cost of capital (ke) are constant. 3) firm has infinite life.

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> Dividend policy depend on r and ke

> If r>ke (growth firm) the firm should have zero payout and reinvest the entire profits to earn more
than investors.
> If r<ke (normal firm) firm should have 100% payout ratio and let the shareholders reinvest their dividend
income to earn higher return.
> If r= ke (normal firm) the return to firm from reinvesting the retained earnings will be just equal to the
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earnings available to the shareholders on their investment of dividend income.

> In short cut when r>ke, zero payout ratio and 100% retention, when r<ke 100% payout and zero
retention i.e P=D/Ke + (r/ke) (E- D)/Ke
2) GORDON’S MODEL (RELEVANT).
>Assumptions are 1) growth rate of firm ‘g’ = product of retention ratio ‘b’ and rate of return ‘r’ so, g = br
2) cost of capital ke=>g( growth)
> Direct relationship between dividend policy and market value of the share.
> Investors values current dividends more highly than an unexpected future capital gain.
> Bird in hand argument of this model suggest that the dividend policy is relevant as the investors prefer
current dividend as against future uncertain capital gain.
> P= E(1-b)/ke-br
3 RESIDUAL THEORY (IRRELEVANT))
 Only when the firm has some residual earnings after the financing of new investments it referred to
as residual theory of dividend.
4) MODIGILANI MILLER APPROACH
> They argued that the market price of a share is affected by the earnings of the firm and is not influenced
by the pattern of income distribution.
> The dividend policy is immaterial and is of no consequences to the value of the firm. What matters on
the other hand is the investment decisions which determine the earnings of the firm and firm thus
affect the value of the firm.
> Assumptions 1) rational investors 2) no transportation & flotation cost
> They showed the arbitrage process to show that division of profit between dividend & retained
earnings.
> A firm will finance these either by Ploughing back profits or if pays dividends then will raise an equal
amount of new share capital externally by selling new shares.
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> Po=1/(1+ke)*(D1+P1)
5) TRADITIONAL APPROACH (IRRELEVANT)
>B Graham & DL Dodd

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> Relationship between dividend & stock

> Stock + then dividend will rise
> Stock – then dividend will fall
> P=m(D+E)/3
COST OF CAPITAL
>The minimum required rate of return that the corporation must earn in order to satisfy the overall rate
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of return required by its investors is called corporations cost of capital.

> Discount rates has been denoted as cutoff rate, minimum required rate of return, rate of interest, target
rate. This discount rate is known as cost of capital.
> Two applications of cost of capital are:
1) In capital budgeting it is used to discount the future cash flows to obtain their present values.
2) It is also used in optimization of financial plan or capital structure of a firm.
> Cost of capital is the minimum required rate of return, a project must in order to cover the cost of
raisings funds being used by the firm in financing of the proposal.
> The concept of cost of capital is consistent with the goal of maximization of shareholders wealth.
> Factors affecting cost of capital are:
1) Risk free interest rate/risk free rate of return.
2) Real interest rate.
3) Purchasing power risk premium.
4) Pure interest rate (govt.)
> Discount rate has been denoted as cut off rate, minimum required rate of return, rate of interest, target
rate these all discount rate is known as cost of capital.
> Explicit cost- explicit cost of capital of a particular source may be defined in terms of the interest or
dividend that the firm has to pay to the suppliers of the firm e.g firm has to pay interest on capital,
dividend of a fixed rate on preference share capital.
> Implicit cost – It does not involve any payment or flow i.e retained earnings of the firm. The profit
earned by the firm but not distributed among the equity shareholders are ploughed back & reinvested
within the firm. Implicit cost is the opportunity cost of investors.
> Except retained earnings all other source of funds have explicit cost of funds.
> Sources of long term finance-
1) Debt- Redeemable debentures and irredeemable debentures
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1. Redeemable debentures Kd= I+(1-t)+(RV-NP)/n/RV+NP/2, I = Interest, t= tax, RV= redeemed value, NP= net
proceeds, NP= (FV+PM-D-FC) FV= fixed value, pm= premium, d= discount, fc= fixed cost.

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2. Irredeemable debentures Kd= I+(1-t)/NP EQUITY 1) Redeemable preference shares= Kp= PD+RV-
NP/n/RV+NP/2 2) Irredeemable preference shares= Kp= PD/NP, PD= preference dividend.
CAPITAL BUDGETING
>Capital budgeting decisions are related to the allocation of funds to different long term assets.
> It denotes a decisions situation where the lump sum funds are invested in the initial stages of a projects
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and the returns are expected over a long period.

> The basic objective of financial management is to maximize the wealth of the shareholders, therefore
the objective of capital budgeting is to select those long term investment projects that are expected to
make maximum contribution to the wealth of the shareholders in the long run.
> Features of the capital budgeting are as follows- 1) Long term effects 2) Large commitment of funds 3)
Irreversible decisions, cannot be revert back.
> The situation where the firm is not able to finance all the profitable investment opportunities
is known as capital rationing.
> The capital rationing implies that the firm is unable or unwilling to procure the additional funds needed
to undertake all the capital budgeting proposals before it.
> Any decisions that requires the use of resources is a capital budgeting decisions.
> Mostly capital budgeting decisions are irreversible decisions that cannot be revert back.
> Replacement decisions – when the economic life over.
> Modernization decisions- when technology outdated.
> Replacement and modernization decisions are called cost reduction decisions
> Expansion and diversification decisions are called revenue increasing decisions.
> Mutually Exclusive decisions- Two or more alternative proposals are said to be mutually exclusive when
acceptance of one alternative result in rejection of all other proposals.
> In a simple language capita Rationing is the scarcity of capital fund.
Original or initial cash outflows- the initial cash outflows is needed to get project operational. In most of
the capital budgeting proposals, the initial cost of the project i.e. the initial investment cost is the cash
flow occurring in the initial stages of the projects Since the investment cost occurs in the beginning
of the project. It reflects the cash spent to acquire the asset.
> Sunk cost- It is that cost which the firm has already incurred and thus has no effect on the present
or future decisions.
> Opportunity cost- the next best foregone cost.
> Subsequent Inflows & outflows- original investment cost or the initial cash outflow of the proposal is
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expected to generate a series of cash inflows in the form of cash profits contributed by the projects. Cash
inflows mat vary or same in year annually, half yearly, biannually. Cash inflows generated during the
life of the project is called operating cash flows.

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> All these cash inflows& outflows are to be considered for the capital budgeting decisions.
> Terminal cash inflows- The cash inflows for the last year will also include the terminal cash
inflow.
> There are two techniques of cash flows- 1) Traditional or non-discounted method or ignore time value
2) Modern or discounted or time adjusted techniques.
> Traditional method includes two method-
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1) Pay- back period

2) Accounting rate of return or Average rate of return.

PAY-BACK PERIOD
>Basic elements are the net investment, operating cash flows, economic life.
> Pay-back period is the number of years required for the proposals cumulative cash inflows to be
equal to its cash outflows.
> Pay-back period is the length of time required to recover the initial cost of the project.
> When annual inflows are equal then, cash outflow/cash inflow.
> When annual cash inflows are unequal then, we calculate cumulative cash inflows.
> When pay-back period >targeted period= reject
> When pay-back period<targeted period= accept
> Shortest payback period will be first in the priority.
> Payback period is useful in liquidity problems, small firm, recover initial amount.

ACCOUNTING RATE OF RETURN/AVERAGE RATE OF RETURN

>It is based on the return on investment or rate of return.
> When equal profit then, annual profit (after tax)/average investment in the project*100.
> When unequal profit then, average annual profit (after tax)/average investment in the
project*100
> If the ARR is more than the pre-specified rate of return then project is likely to be accepted.
> ARR can be used to rank various mutually exclusive projects.
> The project with the highest ARR will have the top priority
> ARR is based on accounting profit , it does not help in understanding the contribution of the proposal
towards maximization of the wealth of the shareholders.
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MODERN OR DISCOUNTED METHHODS NET PRESENT VALUE (NPV)

> The sum of the present values of all the cash inflows less than the sum of present values of all the cash
outflows associated with a proposal.

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> NPV may be defined as the sum of the present values of cash inflows less than the initial
investment.
> Net present value= excess of present value of inflows- present value of outflows.
> Accept the proposal when NPV is positive.
> Reject the proposal when NPV is negative.
> NPV is therefore is the change expected in the wealth of the shareholders as a result of the
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acceptance of a particular proposal.

> In case of ranking of mutually exclusive proposals, the proposal with the highest positive NPV is given
the top priority and the proposals with the lowest positive NPV is assigned the lowest priority.
> The NPV (negative) should out-rightly be rejected as these entail decrease in the wealth of the
shareholders.
> If NPV in the proposal = 0, firm may be indifferent between acceptance & rejection of the
proposals.
> Properties of NPV are as follows- 1) NPVs are additive 2) Intermediate cash flows are reinvested at
discount rate 3) The NPV calculations allow for the expected change in the discount rate. 4) The
central goal of the capital budgeting is to find out the proposals whose inflows have greater values
than outflows. The NPV as a technique of evaluation of capital budgeting proposals helps a finance
manager in achieving this objective. When NPV is positive there is a potential for returns in
excess of the minimum required return.
> When NPV is negative the minimum return and the capital recovery both cannot be achieved
> When NPV is close to or approximately zero the minimum required return is just met.
> Value of the firm= total NPV of existing projects+ total NPV of the proposals.
PROFITABLITY INDEX
>It is defined as the benefits (in present value) per rupees invested in the proposal.
> It is also known as benefit cost ratio or present value index.
> It is based upon the basic concept of discounting the future cash flows and is ascertained by comparing
the present value of the future cash inflows with present value of future cash outflows.
> Profitability Index = total present value of cash inflows/total present value of cash outflows.
> Accept the project if PI >1
> Reject the project if PI<1
> PI=1, then the firm may be indifferent because the present value of inflows is expected to be just equal
to the present value of outflows.
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> In case of ranking of mutually exclusive proposals, the proposals with the highest positive PI will be given
top priority while the proposal with the lowest PI will be assigned lowest priority.
- PI>1 for that project which has positive NPV – Acceptable project.

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- PI <1 negative NPV – reject project.

> PI= 1 , NPV= 0
> PI is also known as – 1) Benefit cost ratio 2) Profit investment ratio 3) Value investment ratio 4)
Present value index
> PI= present value of future cash inflow/initial investment
TERMINAL VALUE
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>The terminal value technique is based on the assumption that all future cash inflows are reinvested
elsewhere at the then prevailing rate of interest until the end of the economic life of the project.
> Accept the proposal if the present value of the total compounded value of all the cash inflows is greater
than the present value of the cash outflows.
> In case of ranking of mutually exclusive proposals, the proposals with highest net present
value is assigned top priority.
DISCOUNTED PAYBACK PERIOD
>Original payback method+ discounted cash flow techniques
> In this method the cash flow of the project are discounted to find their present values.
> A project is acceptable if its discounted payback is less than target payback period.

INTERNAL RATE OF RETURN (IRR)

>It is the discount rate which produces a zero NPV i.e the IRR is the discount rate which will equate the
present value of cash inflows with the present value of cash outflows. (Inflows= outflows)
> The rate of discount so calculated which equates the present value of future cash inflows with the
present value of outflows is known as IRR.
> IRR is also known as 1) Economic rate of return 2) Discounted cash flow rate of return 3) Effective
interest rate 4) Yield on Investment
- IRR > Cost of capital= accept
- IRR< cost of capital= reject
WORKING CAPITAL MANAGEMENT
>Working capital management is defined as the excess of current assets over the current liabilities.
> It is that portion of assets of a business which is used frequently in current operations or day to
day operations.
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> Working capital management refers to the management of the working capital or to be more precise
the management of current assets.
> Current assets are cash & bank balance, inventories, sundry debtors, bills receivables and short

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term investment.
> As we must say working capital refers to current assets which may be defined as those which are
convertible into cash or equivalents within a period of one year or those which are required to meet
day to day operations.
> Fixed assets affects the long term profitability of the firm while the current assets affect the short
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term liquidity position Financial managers spend a large chunk of their time managing the current assets
because level of these assets changes quickly and a lack of attention paid to them may result in
appreciably lower profit for the firm.
> Firm must have adequate working capital.
>Types of working capital are as follows-
1) Gross working capital (GWC)- The gross working capital refers to the firm investment in all the current
assets taken together. The total of investment in all the individual current assets is the gross
working capital.
2) Net working capital (NWC)- The term net working capital may be defined as the excess of total current
assets over total current liabilities. Current liabilities refer to those liabilities which are payable
within one year.
> If the total current assets are more than total current liabilities then the difference is known as
positive net working capital.
> If total current liabilities exceeds the total current assets the difference is known as negative net
working capital.
3) Permanent working capital- permanent working capital is the minimum amount of investment
required to be made in current assets at all times to carry on the day to day operation of firms business.
This minimum level of currents assets has been given the name of core current assets by Tandon
committee. It is also called fixed working capital because it is required in the same way as fixed assets.
4) Temporary working capital- temporary working capital is also known as variable working capital or
fluctuating working capital. The firm’s working capital requirement vary depending upon the seasonal
and cyclical changes in demands for a firm product. The extra working capital required as per the
changing production and sales levels of a firm is known as temporary working capital.
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> Working capital is required because of existence of operating cycle

> Lengthier the operating cycle more would be the need of working capital.
> Operating cycle- The time gap between acquisitions of resources and collection of cash from customers.
It is a time gap between the happening of the first event and the happening of the last event.

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> The permanent working capital once decided and arranged may not require regular attention or
management as such. But care must be taken of the temporary working capital. The firm must be able to
arrange additional working capital immediately whenever need arises. The temporary working capital
is needed to meet the temporary liquidity requirements only.
> Difference between permanent working capital and temporary working capital is that permanent
working capital is constant increasing regularly while the temporary working capital is fluctuating
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from time to time.

> Sources of funds are long term sources, short term sources and transactions sources.
> A financial manager has to decide keeping in view the firms requirement as to how much working
capital is to be financed by long term sources and how much from short term sources. This decisions is
also known as deciding the financing mix of working capital.
> Permanent working capital is also known as fixed assets and long term sources
> Temporary working capital is known as current assets and short term sources.
> There are different approaches to take this decisions relating to financing mix of the working
capital are as follows-
1) Hedging approach also known as matching approach- The hedging approach to working capital
financing is based upon the concept of bifurcation of total working capital needs into permanent
working capital and temporary working capital. As the name itself suggests the life duration of current
assets and maturity period of the sources of funds are matched. The general rule that the length of the
finance should be match with the life duration of the assets i.e fixed assets finance by long term sources,
so permanent working capital needs are financed by long term sources. On the other hand the temporary
working capital needs are financed by short term sources or fluctuating or variable or temporary are
financed by short term. It creates a balance between short term and long term.
2) Conservatism approach- Under this approach the finance manager does not want to undertake risk.
As a result all the working capital needs are primarily financed by long term sources and the use of short
term sources may be restricted to unexpected and emergency situation only. The working capital policy
of a firm is called a conservatism policy when all or most of the working capital needs are met by the long
term sources and thus the firm avoids the risk of insolvency. The larger the portion of long term sources
used for financing the working capital the more conservative is said to be the working capital policy
of the firm.
3) Aggressive policy – A working capital policy is called aggressive approach policy if the firm decides
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to finance a part of the permanent working capital by short term source so, the short term financing
under aggressive policy is more than the short term financing under the hedging approach. The
aggressive policy seeks to minimize excess liquidity while meeting the short term requirements. The firm

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may accept even greater risk of insolvency in order to save cost of long term financing and thus in order to
earn greater return.
> Inventory conversion period- It is the average length of time required to produce and sell the
product.
> Receivables conversion period- It is the average length of time required to convert the firms
receivables into cash.
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> Accounts payable period is also called payables deferral period.

> Cash conversion period- It is the length of time between the firm actual cash expenditure and its own
cash receipt. The cash conversion cycle is the average length of time a rupee is tied up in current
assets.
Several models have been for optimum cash balance are as follows-
1) Baumol’s model- According to this model a company will sell securities and realizes cash and this cash
is used to make payments. As the cash comes down and reaches a point the finance manager replenish its
cash balance by selling marketable securities available with it and the pattern continues. Each time the
firm transacts in this way, it bears transactions costs so it will like to transact as occasionally as possibly.
This could be done by maintaining a higher level involving a high holding cost. Thus the firm has to deal
with the holding cost as well as transaction cost.
2) Baumol’s cut off model- The total cost associated with cash management has two elements 1) cost of
conversion of marketable securities into cash 2) opportunity cash. The firm has to incur holding cost of
cash if it keeps cash balances with themselves in the form of opportunity cost. The firm also has to incur
transactions costs for converting marketable securities into cash. But both the above cost will vary
inversely if holding cost is higher transactions cost will be lesser. In case of lesser holding cost transaction
cost will be higher.
3) Miller model- talked about arbitrage process.
Motives for holding cash are as follows-
1) Transactions motive- The necessity of keeping minimum cash balance to meet payment obligations
arising out of expected transactions is known as transactions motive for holding cash.
2) Precautionary motive- The necessity of keeping cash balance to meet any emergency situation or
unpredictable obligation is known as precautionary motive for holding cash.
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3) Speculative motive- The firms desire to keep some cash balance to capitalize an opportunity of
making an unexpected profit is known as speculative motive.
4) Compensation motive- Commercial banks require that in every current account, there should always

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be a minimum cash balance. This minimum cash balance may vary from 5000 Rs to 10000 Rs. This amount
remains as a permanent balance with the bank so long as the current account is operative. This minimum
balance must be maintained by firm & this provides the compensation motive for holding cash.
INVENTORY MANAGEMENT
>Inventories are assets of the firm.
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> How much inventories be maintained by firm- the firm must have an optimal level of inventories.
> Maintaining the level of inventories is like maintaining the level of water in a bath with an open
drain.
> The basic financial problem is to determine the proper level of investment in the inventories and to
decide how much inventory must be acquired during each period to maintain that level.
> Objectives of Inventories are maximum satisfaction to customer, minimum investment in inventory,
achieving low cost plan operation, and high satisfaction – low investment.
> Inventories are called current assets.
> The purpose of holding inventory is to achieve efficiency through cost reduction and increased
sales volume.
> Three motives are there for holding the inventories are :-
1) Transaction motive .
2) Precautionary motive .
3) Speculation motive.
Costs of maintaining Inventories are:
1) Material cost- It is the costs of purchasing the goods & related costs, transportation &
handling costs
2) Ordering cost – The expenses incurred to place orders with suppliers and replenish the inventory of
raw materials are called ordering cost.
3) Carrying cost- cost incurred for maintaining the inventory in warehouse is called carrying cost.

4) Shortage costs or stock out cost- these are the costs associated with either a delay in meeting the
demand or inability to meet the demand at all due to shortage of stock also called hidden cost.
 Inventory management techniques are as under-
1) ABC analysis- Always best control. It is based on the propositions that 1) managerial time and
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efforts are scare and limited.

2) Some items of inventory are more important than others

 Items of high value require maximum attention while items of low value do not require same degree

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of control. The firm has to be selective in its approach to control its investment in various items of
inventories. Such an approach is known as selective inventory control. ABC system belongs to
selective inventory control.
 ABC analysis classifies all the inventory items in an organization into three categories-
1) Items are of high value but small in number, all items require strict control.
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2) Items of moderate value and size which require reasonable attention of management.

3) Items represent relatively small value items of simple control.

EOQ (ECONOMIC ORDER QUANITITY)

 It refers to the optimal order size that will result in the lowest ordering and carrying cost for an item
of inventory based on its expected cycle.
 Assumptions are:
1) Constant or uniform demand.
2) Known demand or usage .
3) Constant per unit price .
4) Constant carrying cost.
5) Constant ordering cost.
 Inventories can be replenished immediately as the stock level reaches exactly equal to zero
constantly there is no shortage of inventory.
 EOQ= √2AO/C,A= Annual cost, O= Ordering cost, C=Carrying cost per unit.
RECEIVABLES MANAGEMENT
 Amounts due from customers, when goods are sold on credit are called trade credit.
 Management of accounts receivables may be defined as the process of making decision relating to
the investment of funds in receivables which will result in maximizing the overall return on the
investment of the firm.
 The receivables emerge whenever goods are sold on credit and payment is deferred by
customers.
 Receivables are created when a firm sells goods or services to its customers and accepts, instead of
the immediate cash payment, the promise to pay within the specified period.
 Higher credit sales at more liberal terms will no doubt increase the profit of the firm but
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simultaneously also increases the risk of bad debts as well as result in more and more funds blocking in
the receivables. So a careful analysis of various aspects of the credit policy is required. This is what
known as receivables management.

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 Receivables may be defined as collection of steps and procedure required to properly weight the cost
and benefits attached with the credit policies.
 Cost associated with maintaining receivables:
1) Cost of financing/ capital cost- The credit sales delays the time of sales realization and therefore the
time gap between incurring the cost and the sales realization is extended. This results in blocking of funds
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for a longer period. The firm on the other hand, has to arrange funds to meet its own obligation towards
payment to the supplier, employees. These funds are to be procured at one implicit or explicit cost.
This is known as the cost of financing the receivables. 2) Administrative cost- when a firm sells goods on
credit it has incur two types of administrative costs 1) credit investigation & supervision cost
2) Collection cost.
3) Delinquency cost- if there is a delay in payment by customer the firm may have to incur cost on
reminder, phone calls, postage, legal notices etc. moreover there is always an opportunity cost of the
fund tied up in the receivables due to delay in payment.
4) Bad debt or default cost- when the firm is unable to recover the amount due from its customers, its
results in bad debts. When a firm relaxes its credit policy selling to customers with relatively low credit
rating occurs. In this process a firm may make credit sales to its customers who do not pay at all.
 If it’s taking strict credit policy then following things will happen- sales reduce, reduce bad debts,
reduce delinquency cost, reduce collection cost, and reduce opportunity cost but increase liquidity
of the firm.
 If it takes liberal policy towards credit policy then following things will happen increase sales,
increase bad debts, increase delinquency cost, increase collection cost, increase opportunity cost,
increase profit, increase potential cost and decrease in liquidity of firm.
 Objectives of receivables cost- 1) To generate sales 2) To maximize profit 3) To reduce bad
debts
 A period of NET 30 days means maximum time to pay the amount is 30 days.
 2/10 net of 30 means- maximum period is of 30 days but if customers pay in 10 days he will get
a discount of 2%.
 Trade credit is spontaneous type of finance.
 The receivables management must be attempted by adopting a systematic approach and
considering the following aspects-
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1) Credit policy – The credit policy may be defined as the set of parameters and principles that govern the
extension of credit to the customers.
The following are the four varieties of credit policy variables are- 1) Credit standard 2) Credit period 3)

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Cash discount 4) Collection programmed.

 Credit standard- when a firm sells on credit it takes a risk about the paying capacity of the
customers. Therefore to be on a safer side, it must set credit standard which should be applied in
selecting customers for credit sales. The problem is to balance the benefits of additional sales
against the cost of increasing bad debts.
 Credit period- It refers to the length of the time over which the customers are allowed to delay the
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payment or to make the payment. Credit policy generally varies from 30 days to 60 days. Customary
practices are important factor in deciding the credit period.
 Cash discounts have implications on sales volume, average collection period, investment in
receivables, incidence of bad debts & profits
 Objectives of collection policy are as follows- 1) To achieve timely payment in receivables 2) Releasing
funds locked in receivables 3) Minimizing the incidence of bad debts.
Collection Programmed- monitoring the receivables, to remind the customer about due date, online
interaction with customer about due date; initiating legal action, it shall not lead to bad relationship
with the customers.
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UNIT-10
FINANCE
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MONEY MARKET AND CAPITAL MARKET

 Money Market is the market deals in short term funds i.e. in funds with maturity period of up
to one year.
 The RBI is the major constituent of money market which comes within the direct purview of
RBI regulations.
 Capital market is the market which deals with long term funds i.e. maturity period above 1
year.
 Primary market deals in the new financial claims or new securities known as new issue
market.
 Secondary market deals in securities already issued or existing or outstanding e.g. stock market.
It is second hand market.
 It was the Chakravarthy committee which for the first time underlined the need of an organized
money market in the country and the vahul committee laid the blue print for its development.
 Money market has two segments 1) unorganized market 2) organized market.
 Unorganized money market divided in to three different categories- 1) Unregulated non- bank
financial intermediaries – in the form of chit funds and nidhis. 2) Indigenous bankers like Guajarati shroffs,
Multan or shikarpuri shroffs, Marwari kayas, chettiars. 3) Money lenders
 There are 8 organized instruments of the money market they are-
1) Treasury bills- this instrument of the money market got organized in 1986. Used by central
government to fulfill its short term liquidity requirement up to the period of 364 days. Five types of
treasury bills are 14 day (intermediate), 14 day (Actionable) 91days, 182 days, 364 days.
2) CD (Certificate of deposits) 1989

3) CP (Commercial paper) 1990

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4) CB )Commercial bill) 1990

5) CMM (Call money market) also known as overnight borrowing market or money at call.

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6) Money market mutual fund (MF) 1992 to provide short term investment opportunity to Individuals.
Since March 2000 MFs, have been brought under the preview of SEBI.
7) Repo and Reverse repo rate – repo is also known as rate of repurchase. Repo rate introduced in Dec
1992, Reverse repo rate in Nov 1996. Accepting the recommendations of Urjit Patel committee the RBI in
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April 2014 (while announcing the first Bi-monthly credit & monetary policy 2014-2015) announced to
introduce the term repo and reverse repo.
8) CMB (cash management Bill) 2000

CREDIT RATING
 It is defined as an act of assigning values to credit instruments by estimating or assessing the solvency
i.e. the ability of the borrower to repay debt, and expressing them through pre-determined
symbols.
 Credit rating is done by specialized, expert, reputed & accredited institutions.
 Debt instruments
 It began in 1988 in India by the ICICI and UTI jointly.
 Fixed deposit most important instruments
 The concept was first introduced by John Moody in the USA in 1909.
 The major credit ratings agency are as follows-
1) CRISIL (Credit rating Information of India Ltd)

2) ICRA (Investment Information and credit Rating agency of India Ltd) 1991

3) CARE (Credit analyses and Research Ltd) 1993 by IDBI

4) ONICRA (Onida Individual Credit Rating Agency of India Ltd) 1995

5) SMERA (Small and medium enterprises rating agency) Sep 2005

 To maintain a database on the credit records of individuals the credit information bureau of India
limited (CIBIL) was set up in May 2004 which makes credit Information available to banks and financial
institutions about prospective individual borrowers.
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MINIMUM RESERVE SYSTEM

 The RBI is required to maintain a reserve equivalent of Rs 200 cores in gold and foreign currency with

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itself, of which Rs 115 cores should be in gold. This is being followed since 1957 and is known as the
Minimum Reserve system (MRS)
STOCK MONEY
 On the recommendations of the second working group on Money Supply (SWG) in 1977, RBI has
been publishing four monetary aggregates (components of money) - M1, M2, M3, M4.
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 Now the RBI has started publishing a set of new monetary aggregates following the
recommendations of the working group on money supply: Analytics and Methodology of compilation
(chairman Y V Reddy) which submitted its report in June 1998.
 New money aggregates are as follows-
1) Reserve Money (Mo) = Currency in circulation+ bankers deposits with the RBI+ other deposits with RBI.
2) Narrow Money (M1) = Currency with the public + demand deposits with the banking system + other
deposits with the RBI.
3) M2= M1+ Savings deposits of post office savings Banks. 4) Broad Money (M3) = M1+ Time deposits with
the banking system. 5) M4= M3 + All deposits with post office savings banks (excluding national
savings certificates)
 Now the new monetary aggregates are:
1) NM1 (Narrow money) = currency with the public+ demand deposits with the banking system
+other deposits with the RBI.

2) NM2= NM1 + short term time deposits of residents (including the contractual maturity of one
year)

3) NM3 (Broad Money)= NM2+ long term time deposits of residents + call/ term funding from
financial institutions.
 Liquidity aggregates are as follows-
1) L1= NM3+ all deposits with the post office savings banks ( excluding national savings certificate)

2) L2= L1+ Term deposits with term lending Institutions and refinancing Institutions (FIs) + Term
borrowing by FIs + certificates of deposits issued by FIs 3) L3= L2+ Public deposits of non-banking
financial companies.
 The gross amount of the following six segments of money at any point of time is known as Reserve
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Money (RM)-
1) RBIs net credit to the government
2) RBIs net credit to the banks

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3) RBIs net credit to the commercial banks

4) Net forex reserve with the RBI
5) Governments currency liabilities to the public
6) Net non-monetary liabilities of the RBI

CREDIT COUNSELLING
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 Advising borrowers to overcome their debt burden and improve money management skills is
credit counseling.
 The first such well known agency was created in the USA when credit granters created National
Foundation for credit counseling (NFCC) in 1951.
 There are six major SCRAs (sovereign credit rating agencies):
1) Fitch ratings

2) Moody’s Investors service

3) Standard & poor’s Dominion Bond Rating services (DBRS)

4) Japanese credit rating agency (JCRA)

5) Rating and Investment Information Inc Tokyo (R&I)

NON PERFORMING ASSETS

 Non-performing assets are bad debts of banks/financial institutions defined as follows:
1) Interest or installment or principal remains overdue for a period of more than 180 days in respect of
term loan.
2) Interest and /or installment or principal remains overdue for two harvest seasons but for a period
not exceeding two and a half years in the case of agricultural loans.
 The three types of NPAs are
1) Sub-standard – remaining NPAs for less than or equal to 18 months

2) Doubtful- remaining NPAs for more than 18 months

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3) Loss assets- where the loss has been identified by the bank or internal/ external auditors or the RBI
inspection but the amounts have not been written off.
 Banks to carve out a special category of assets termed special mention accounts (SMAs) in which

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early signs of stress are visible.

 If a borrower’s interest or principal payments are overdue by more than 60 days, a joint lender’s
forum to be formed by the bankers for early resolution of stress.
SECURITY MARKET IN INDIA
 Primary market deals in the new financial claims or new securities known as new issue
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market.
 Secondary market deals in securities already issued or existing or outstanding. It’s a second hand
market e.g. stock exchange.
 World’s first stock exchanges was established in Antwerp, Belgium (then part of the Netherland) in
1631, the London stock exchange opened in 1773 and then Philadelphia stock exchange opened in
1790.
 The first stock exchange in India, the Bombay Stock Exchange known as The Native Share and stock
Brokers Association was set up in 1870.
 Presently there is a total number of 26 stock exchange operating in India. 7 at the national and
19 at the regional.
NSE (NATIONAL STOCK EXCHANGE).
 It was set up in 1992 and became operationalized in 1994.
 Fully automated, electronic screen based trading system.
 Two segment 1) WDMS (Wholesale debt market segment) 2) CMS (capital market segment)
 RBI identified NSEI as the only conduct for interbank security deals.
 DOTS (Delhi online trading system 1996)
 MIBOR- Mumbai interbank offer rate
 MIBID – Mumbai Inter- bank bid rate
 Chandrasekhar committee for transfer of shares.
OTCEI (Over the counter Exchange of India Ltd).
 Over the counter exchange of India Ltd was set up in 1989, it could commence trading only in
1992.
 India’s first fully computerized stock exchange.
 Screen based automated Ringless trading system.
 Head office is at Mumbai.
 T+3 settlement
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 Roll over concept- it means that all trading done on any day is settled on the same day itself.
 Mangelam committee and Dave committee.

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ISE (Interconnected Stock Exchange).

 The interconnected stock Exchange of India is basically a single floor of India’s 15 regional stock
exchanges (RSEs) set up in 1998.
It is a web based exchange. BSE (Bombay Stock Exchange).
 It is the apex stock exchange of India
 Oldest & recognized permanently and 5th world largest stock exchange.
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 It was established in 1875

 BOLT- Bombay online trading system 19th Jan 1995.
 Mumbai the real hub or heart of the securities industry in India.
 BSE Tasis shariah 5 Index 2010.
 Launched Index based circuit breaker system 2011 Jan.
 BOLT replaced open out-cry system May 1995.

SEBI (Securities exchange board of India).

 It was established on 12th April 1988 as non -statutory body.
 Set up on 21st Feb 1992
 Head office is at Mumbai
 Under the overall control of Ministry of Finance
 Regional office at Calcutta, Chennai and Delhi.
 Aim- to protect the interests of investors in securities and to promote the development of & to
regulate the securities market & for matters connected there with or incidental thereto.
 Securities law amendment ordinance on 25th Jan 1995
 Securities contracts (regulation) amendment bill 2005
 ABS- Asset backed securities
 RMBS- residential mortgage backed securities
 SEBI insider trading regulation 1992
 SOR- smart order routing. It is a mobile trading.
NASDAQ
 The National Association of security Dealers Automated Quotation (NASDAQ) is US stock exchange
based in New York which specializes in the high-tech companies share.
 A similar Techmark exists in London too.
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MCX-SX
 A new stock market established on 1st Feb 2013
 3rd online trading stock exchange after BSE & NSE

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NSDL (National securities depository limited).

 8th Nov 1996.
 Paperless trading
 CDSL- central depository services of India Ltd 1998
FMC (Forward Market Commission).
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 The forward market commission is a statutory body set up under the Forward market contracts
(regulation) act 1952.
 It functions under the administrative control of the Department of consumer Affairs, Ministry of
Consumer Affairs, Food & public Distribution.
 Headquarter is at Mumbai with one regional office at Kolkata
 To ensure financial integrity, market integrity and protection and promotion of the interests of the
consumers/ non -members.
FACTORING
 Seller sale on credit known as trade credit and gives time to buyer to make payment known as credit
period, payment known as trade receivables from seller side & trade payables from buyer side.
 The effort of sellers is always to collect receivables as quickly as possible to reduce the collection
period to the minimum.
 The sellers may make their own internal arrangements to collect receivables or they may hand over
this job to a specialized collection agency such an agency is known as factor.
 A factor thus a financial institution which manages the collection of accounts receivables of the
companies on their behalf and bears the credit risk associated with those accounts.
 Factoring means selling with or without recourse the receivables by the firm to a factor.
 First factoring companies SBI commercial & factoring services Ltd 26th Feb 1991.
VENTURE CAPITAL FUND
 Established in 1987
 Venture capital Industry or venture capital market
 Sponsored by financial Institutions
 It is a type of financial Intermediary.
 It belongs to high risks, high profitability, high and new technology and young, first generation,
small entrepreneurs.
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 Venture capital is a high risk high return business.

 It is a long term fund in equity or semi equity form to finance high tech projects involving high risk &
yet having strong potential of high profitability.
 It is a long term Investment; funds are usually expected to be tied up for 3 to 10 years.

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 Citigroup most active investors.

 ICICI ventures, Goldman Sachs, hellion ventures.
 TDICI- Technology development & Information Company.
 RCTFC- Risk capital & technology Finance Corporation Ltd 12 Jan 1988.
 ANZ Grindlays bank has set up India’s first private sector venture capital fund namely, India
Investment Fund (IIF)
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LEASE FINANCE
 A lease is a financing device.
 It is a form of financing employed to acquire the use of assets.
 Through lease, firms can acquire the economic use of assets for a stated period of time
without owing it.
 Two party are there 1) leasee 2) leassor
 Two types 1) operating lease 2) financial or capital lease
 Operating lease is short term and can be cancelled.
 Financial or capital lease is non-cancelled; contract to pay a certain amount to that period.
MUTUAL FUNDS
 A mutual fund is a pure intermediary which performs basic functions of buying and selling securities
on behalf of its unit holders, which the latter also can perform but not as easily, conveniently,
economically & profitability.
 Evidenced by unit certificates.
 Unlike shareholders in a company the shareholders in a MF do not have any voting rights.
 Functions- It provides investors of small & moderate means the opportunity that is enjoyed by large,
rich investors namely to realize high & secure rate of return on their savings.
 High return low risks
 Open ended scheme- when the units are sold and redeemed every day or continuously on an all
going basis as there is no locking period.
 Close ended scheme- when the issue is open for subscriptions in a fixed time. Lock in period is
3/5 years.
MICRO FINANCE
 For channelizing credit for poverty alleviation directly & effectively.
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 The self -help group (SHG) banks linkage programmed is the major programme.
 SHG linkage programme has grown in India to help the poor people & make the people self -
dependent.
 NABARD has play a significant role to increase this activity

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 It plays an important role in financial inclusion & inclusive growth.

 SHIP= self- help promoting institutions.
 No frills- zero balance account
 KYC- know your customer
 GCC- general credit card
 BC- Business correspondent
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 USB- Ultra small branches

FINANCIAL INCLUSION
 It implies delivery of financial services at an affordable cost to the vast sections of
disadvantaged & low income groups.
 Availability of banking & payment services to the entire population without discrimination is the
prime objective of the public policy.
DERIVATIVES AND OPTIONS
 Derivatives are contracts which are written between two parties whose value is derived from the
value of underlying widely held and easily marketable assets such as agricultural and other physical
commodities or currencies or short term and long term financial instruments or intangible things like
commodities price index, equity price index or bond price index.
 Derivatives are also known as deferred delivery or deferred payment.
 Types of derivatives are as follows- 1) Future 2) Options 3) Swap 4) Warrant & convertibles 5)
Credit derivatives
 Future contract are transferable specific delivery forward contracts. They are agreement between
two counterparties that fix the terms of an exchange or that lock in the price today of an exchange which
will take place between them at some future date.
 Options are contracts between sellers and buyers which obligate the former to deliver and entitle
the latter without obligation to buy stated quantities of asset with stated quality at some future
dates at today contracted prices.
 When the buyer has the right to receive the delivery of asset they are known as call options.
 When they have the right to receive the payment by handing over the assets they are known
as put options
 The options in whose dates are different known as American options.
 In which dates are same known as European options.
Swaps are agreements between two parties to exchange assets or sets of financial obligation or a
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
series of cash flows for a specified period of time at pre-determined intervals.

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BOSTON CONSULTING
 Established in 1963.
1) Cash cow- It is where company has high market share in a slow growing industry. These units typically
generate cash in excess of the amount of cash needed to maintain the business. They are regarded as
staid & boring, in a mature market and every corporation would be thrilled to own as many as possible.
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They are to be milked continuously with as little investment would be washed in an industry with low
growth.
2) Dogs- more charitable called pets, are units with low market share in a mature, slow growing industry.
These units typically break even generating barely enough cash to maintain the business market share.
Though owing a break even unit provides the social benefit of providing jobs and possible synergies
that assist other business.
3) Question mark- (problem children) is business operating in a high market growth, but having a low
market share. They are starting point for most business. Question mark has a potential to gain market
share and become stars & eventually cash cows when market growth slows. If questions marks so not
succeed in becoming a market leader then after perhaps years of cash consumption, they will
regenerate into dogs when market growth declines.
4) Stars- It is unit with a high market share in a fast growing industry. They are graduated question marks
with a market or niche leading trajectory, for example, amongst market share front runners in a high
growth sector. The hope is that stars become the next cash cow.
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UNIT-11
ACCOUNTS
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 International accounting standard committee (IASC) who renamed as Informational financial

reporting board set up in 1973 on 23rd June.
 Institute of Chartered Accountant of India on 21st April 1977 set up the Accounting Standard
board.
 Accounting standard are a set of guidelines i.e. Generally Accepted Accounting principles issued by
accounting body of country.
 Accounting standard as a code of conduct imposed on an accountant by custom, law &
professional body.
 Accounting standard as follows- (SHORT CUT)
 AS-1 = Accounting policies
 AS-2 = Inventory
 AS-3 = cash flow statement
 AS-4 = contingencies event
 AS-5 = prior period
 AS-6 = depreciation
 AS-7 = construction
 AS-8 = Research & development
 AS-9 = revenue recognition
 AS-10 = Fixed assets
 AS-11 = Foreign exchange rate
 AS-12 = Government Grant
 AS-13 = Investment
 AS-14 = Amalgamation
 AS-15 = retirement
 AS-16 = Borrowings
 AS-17 = Segment
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 AS-18 = Related
 AS-19 = Lease
 AS-20 = EPS

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 AS-21 = Consolidated
 AS-22 = Tax
 AS-23 = Assessment
 AS-24 = Continuity
 AS-25 = Interim
 AS-26 = Intangible
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 AS-27 = Joint ventures

 AS-28 = Impairment
 AS-29 = contingent assets & liabilities
 AS-30 = Recognition & Measurement
 AS-31 = Presentation
 AS-31 = Disclosure
 Father of Accounts – Lucas Pacioli 1494,
 Accounting principles+ concepts+ accounting conventions commonly known as GAAP (Generally
accepted accounting principles) on the basis of which financial statements are to be prepared.
 Principles of accounting are the general law or rule adopted or proposed as a guide to action, a
settled ground or basis of conduct or practices.
 Accounting concepts are the basic assumptions of fundamental propositions within which
accounting operates.
 Concepts are as follows-
1) Going concern- according to this it is assumed that business shall continue for a foreseeable period
and there is no intention to close the business or scale down its operations. It is because of this
concept that a distinction between capital & revenue expenditure.
2) Consistency assumptions- accounting practices once selected and adopted should be applied
consistency year after year. Change if law or accounting standard requires, straight line method and
written down value method.
3) Accrual assumptions- A transactions are recorded in the books of accounts at the time when it is
entered into and not when the settlement takes place. Thus revenue is recognized when it is realized. The
concept is particularly important because it recognizes the assets, liabilities, income and expenses as
and when transactions relating to it are entered into.
4) Accounting entity or business entity- according to business entity principle business is considered
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too be separate and distinct from its owners. Business transactions therefore are recorded in the books
of accounts from the business point of view and not from that of the owners. The accounting entity
principle is a useful principle as from it responsibility accounting has developed.

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5) Money measurement principle- According to the money measurement principle, transactions and
events that can be measured in money terms are recognized in the books of accounts of the enterprise.
Money is the common denominator in recording & reporting all the transactions.
6) Accounting period principle- According to accounting period principle the life of an enterprise is
broken into smaller periods so that its performance is measured at regular intervals. The life of the
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enterprise is broken into smaller periods which are termed as accounting period. An accounting period is
the interval of time at the end of which income statement (P & l account or statement of profit & loss in
the case of a companies and balance sheet are prepared to know the result and resources of the
business.
7) Full disclosure principle – there should be complete and understandable reporting on the financial
statement of all significant information relating to the economic affairs of the entity. Good accounting
practice requires all material and significant information to be disclosed. Reason for low turnover
should be disclosed.
8) Materiality concept – It refers to the relative importance of an item or an event. An item should be
regarded as material if there is a reason to believe that knowledge of it would influence the decision
of an informed investors.
9) Prudence or conservatism principle- Do not anticipate a profit but provide for all possible losses.
It takes into consideration all prospective losses but not the prospective profit. The financial statement
present a realistic picture of the state of affairs of the enterprise and do not paint a better picture than
what it actually is conservatism does not record anticipated revenue but provide all anticipated
expenses & losses. It may be used to create secret reserve.
10) Cost concept or historical concept- According to this asset is recorded in the books of accounts at
the price paid to acquire it and the cost is the basis for all subsequent accounting of the assets should
be shown in the book of accounts at its book value. Cost concept brings objectivity in the preparation
and presentation of financial statements. They are not influenced by the personal bias or judgement.
11) Matching concept – It is necessary to match revenues of the period with the expenses of that
period to determine correct profit or loss for the accounting period. As per this concept adjustments are
made for all outstanding expenses, prepaid expenses, accrued income, unearned income. The expenses
for an accounting period are matched against related revenues rather than cash received & cash paid.
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12) Dual concept or duality- The transactions entered into by an enterprise has two aspects a debit and
a credit of equal amount. For every debit there is a credit of equal amount in one or more accounts.

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Capital = assets.
13) Revenue recognition concept- Revenue is considered to have been realized when a transactions has
been entered into and the obligation to receive the amount has been established.
Verifiable objective concept- It holds that accounting should be free from personal bias. It means all
accounting transactions should be evidenced and supported by business documents. These supporting
documents are cash memo, invoices, sales bills etc and they provide the basis for accounting &
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audit.

CAPITAL AND REVEUNE EXPENDITURE

 Capital expenditure- It results in addition to an asset accident expenditure incurred for improving
and extending an existing asset is called capital expenditure. It makes an asset more valuable & increase
their liability. Money spent on repairs to increase the life of an asset.
 Expired cost is called expenses.
 Betterment of fixed assets or improvement of an asset to produce more to improve its earning
capacity or to reduce its operating expenses or to increase the life of asset.
 Examples of capital expenditure are as follows- 1) Purchase of machinery 2) Purchase of land 3) Cost
of making additions to building 4) Enlarging the seating accommodation of a college hall 5) Interest on
capital paid during the period of construction 6) Expenditure in connection with or incidental to the
purchase or installation of an asset. 7) Additions and extensions to existing assets. 8) Interest and
financing charges paid, brokerage and commission paid.
 Revenue expenditure – A revenue expenditure is one that result in addition to an expense account.
Revenue expenditures do not increase the earning capacity of the asset nor prolong is estimated useful
life but represent normal maintenance cost. Incurred in one period of the accounting the full benefit of
which is enjoyed in that period only. It includes all expenses which arise in normal course of business.
 Examples are selling and distribution expenses incurred for sale of finished goods e.g. sales office
expenses, delivery expenses & advertisement expenses.
 Some examples when revenue expenditure may become capital expenditure-
1) Repairs are usually revenue expenditure but if we purchase a second hand machinery and pay for
repairs necessary to make it suitable for our purpose then such repairs become capital expenditure &
should be added to the cost of the machinery.
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2) Wages are usually a revenue charges but if we paid to the employees for the constructions or erection
or installation of the fixed assets of the business then these become be added to the cost of the fixed
assets concerned .

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3) Legal expenses are usually a revenue charges but if paid for conveyancing (transferring property) on
acquisition of property should form an additional cost of the asset acquired.
4) Freight and carriage are usually a revenue item but payments made for transporting newly acquired
asset will form additional cost of the asset this being treated as capital expenditure.
5) Interest on borrowings and capital generally revenue item is allowed to be treated as capital item if
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paid during the period of construction.

6) Preliminary expenses- Initial expenses connected with the formation of a company though revenue in
nature are allowed to be capitalized and can be shown as an asset in the balance sheet.
 Deferred Revenue expenditure – It includes those non-recurring expenses which are expected
to be of financial nature, distributed to several accounting periods of indeterminate total length. Quasi
capital nature, the benefits which extended to number of years are 3 to 5 years. Research &
development, heavy advertisements.
PRINCIPLE OF ERROR
 Types of error are error of principle and clerical error.
 Clerical error includes error of commission, error of omission, compensating error.
 Error of omission – An error of omission is an error when a transactions is completely or partially
omitted from being recorded in the books of accounts. When a transactions is completely or partially
omitted to be recorded in books of accounts it is called error of omission. Goods purchased on credit
from Mr. A, this transactions is not recorded in the purchase journal. This is called error of complete
omission.
 Error of commission- It is those errors which arise due to wrong recording, wrong posting, wrong
carrying forward, wrong casting (totaling) of subsidiary books, wrong balancing.
 Error of recording- wrong amount
 Error of casting- totaling error
 Error of carry forward
 Error of posting on wrong side
 Error of commission results in disagreement of trial balance.
 Compensating error- when one mistake nullifies the wrong effect of another it is called a
compensating error. These are two or more error in number and balance each other. These are
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generally arithmetical error.

 Error of principle- These are error arising from net observing the accounting principles correctly eg
wages paid for installation of machinery debited to wages a/c, purchase of fixed assets on credit recorded

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in purchase journal. These error will not affect the trial balance.
 Balance sheet prepared on a particular date to determine the financial position of the
concern.
 Some important types of Accounting –
1) Inflation accounting- Inflation rate is the percentage of change in the price level from the previous
period. Inflation a/c is to correct the conventional historical cost accounts for the understatement of
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inventory and plant used in production i.e the cost of goods sold & depreciation in order to prevent
erosion of capital during inflation.
2) Human resource accounting – It is basically an information system that tells management what
changes are occurring over time to the human resources of the business.
3) Social Accounting- social accounting and audit is a framework which allows an organization to build on
existing documentation and reporting and develop a process whereby it can account for its social
performance and draw up an action plan to improve on that performance and through which it can
understand its impact on the community and be accountable to its key stakeholders.
4) Responsibility accounting- The framework of responsibility accounting was developed by
Prof. AJE Sorgdrager titled particularization of Indirect cost. Responsibility accounting is a method of
budgeting and performance reporting created around the structure of the organization. It is designing
the accounting system according to answerability of the managers also called profitability account
and activity account.
RATIO ANALYSIS
 Relationship between two figures expressed in arithmetical terms is called a ratio.
 Relationship between two or more variables.
 Main objectives of ratio analysis are as follows- 1) Liquidity 2) Leverage/solvency (strength of the
firm) 3) Activity ratio (efficiency of assets) 4) Profitability (profit of the firm) 1) Liquidity ratio – ability
of firm to meet its current liabilities.
 Short term solvency
 It includes 3 ratio’s 1-current ratio. 2-liquid ratio. 3-working capital ratio.
 Current ratio shows relationship between current assets and current liabilities.
 Its ideal ratio 2:1
 It is susceptible to window dressing
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 Current ratio = current assets/ current liabilities

 Acid test/ quick ratio / liquid ratio – whether the firm is in a position to pay
its current liabilities within a month or immediately.

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 Most rigorous test of liquidity

 Ideal ratio 1:1
 Quick ratio = liquid assets/ current liabilities
 Liquid assets include all current assets except stock and prepaid expenses.
Net working capital ratio = current assets – currents liabilities
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LEVERAGE OR SOLVENCY RATIO( soundness of the long term financial policies of the firm)
1) Debt equity ratio – desirable 2:1 , relationship between long term loans and shareholders fund or net
worth.
2) Total assets to debt ratio = total assets/ long term loans
3) Total assets includes all current as well as fixed assets and exclude all fictitious assets such as-
preliminary expenses, underwriting commission, share issue expenses, discount on issue, debit balance
of p & l account. 4) Properitory ratio = equity/ total assets
ACTIVITY RATIO OR TURNOVER RATIO (it indicates the rapidity with which the resources available to the
concern are being used to produce sales.

 Calculated on the basis of sales or cost of salesInventory turnover ratio/ stock turnover ratio
– relationship between cost of goods sold & average stock
 Cost of goods sold/ average stock
 Indicates whether stock has been efficiently used or not
 Shows the speed with which the stock is rotated into sales or number of times the stock is turned
into sales during the year.
 Higher the ratio better it is
 Ratio can be used for comparing the efficiency of sales policies of two firms doing same type of
business.
 Whose stock turnover is higher will be treated as more efficient.
 Debtor turnover ratio = net credit sales/ average debtors + average br
 Credit sales= total sales – cash sales
 Average collection period = number of days in year/ debtor turnover ratio
 Creditors turnover ratio/ payables turnover ratio= net credit purchase/ average creditors +
average bills payable
 It indicates the speed with which the amount is being paid to creditors
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 It increase the credit worthiness of the firm.

 Average payment period = 365 days / creditors turnover ratio
 Working capital turnover ratio= net sales/ working capital
 Important in non- manufacturing concerns

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 Shows number of times working capital has been rotated in producing sales.
PROFITABILITY RATIO/ INCOME RATIO
 The efficiency & success of a business can be measured with the help of profitability ratio.
 Gross profit ratio = gross profit/net sales *100
 Net sales= sales- sales return
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 The margin of profit available on sales, higher the gross profit better it is.
 Operating profit- measures the proportion of an enterprise cost of sales & operating
expenses.
 Operating profit= cost of goods sold + operating expenses/net sales* 100
 Gross profit= net sales- cost of goods sold
 Cost of goods sold= net sales- gross profit
 Operating expenses include office & administration expenses + selling & distribution expenses +
discount+ bad debt+ interest on short term loans.
 Not included non- operating expenses such as loss on sales of assets, loss from fires, charities,
donations, income tax.
 Lower operating ratio is better
 Net profit ratio= net profit / net sales * 100
 Operating profit ratio= operating profit/net sales* 100
 Operating profit = gross profit- operating expenses
 EPS (Earning per share) – its shows the overall profitability of a company.
 Earnings refer to profit available for equity shareholders.
 EPS= net profit (after tax, dividend on interest)/ no of equity shares
 This ratio is helpful in the determination of the market price of equity share of the company.
 The capacity of the company to declare dividends on equity shares.
CASH FLOW STATEMENT
 It is a statement showing inflows (receipts) and outflows (payments) of cash during a
particular period.
 The term cash here stands for cash & cash equivalent.
 It is also known as statement of changes in financial position.
 For past- cash flow, for future – cash budget.
 Cash flow statement prepared at the end of the year.
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 It is useful for short term financial planning.

 Three activities are included in this- 1) operating activities 2) investing activities 3) financing
activities.
 There is a possibility of window dressing in cash flow statement so fund flow statement presents a

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more realistic picture than a cash flow statement.

 It ignores the accrual concept It is of historical nature
 Format of cash flow statement (AS-3)
1) CASH FLOW FROM OPERATING ACTIVITIES
 Net profit before tax& extraordinary items
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 Adjustment for depreciation, foreign exchange, loss on sale of fixed assets, gain on sale of fixed
assets, interest paid, interest received, dividend received.
 Operating profit before working capital changes- ADD (+) decrease in current assets, increase in
current liabilities. Sub (-) Increase in current assets, decrease in current liabilities.
 Cash generated from operating activities, Income tax paid
 Net cash from operating activities.
2) CASH FLOW FROM INVESTING ACTIVITIES
 Purchase of fixed assets
 Purchase of fixed assets
 Purchase of Investment
 Sale of Investment
 Interest received
 Dividend received
 Net cash from investing activities
3) CASH FLOW FROM FINANCING ACTIVITIES
 Proceeds from issue of share capital
 Proceeds from long term borrowings
 Repayment of long term borrowings
 Interest paid
 Dividend paid
 Net cash from financing activities

FUND FLOW STATEMENT

 Depicts various sources of funds & their uses.
 ADD (+) Increase in liability, Decrease in assets. SUB (-) Decrease in liability, increase in assets.
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 Statement of change in financial position 1) working capital basis i.e. fund flow statement. 2) cash
basis i.e. cash flow statement
 Net working capital = current assets – current liabilities
 Fund flow statement shows the sources & uses of working capital between two balance sheet

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dates.
 Fund flow statement is a historical record of where the funds came from & how these were
utilized during the period.
 When the net effect of a transactions is to increase or decrease the working capital by affecting any
elements of current assets or current liability affect one current account & one non- current
account.
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 Working capital increase when increase in current assets/ decrease in current liability
 Working capital decrease when increase in current liabilities, decrease in current assets.
 Long term planning
 Based on accrual basis.
 Steps in Fund flow statement 1) Change in working capital 2) Fund from operations 3) Sources
of fund includes
 Fund from operations
 Issue of share capital
 Issue of debentures
 Long term borrowings
 Sales of assets / investment
 Non-operating income
 Profit
 Decrease in working capital 4) Application of fund
 Loss from operations
 Redemption of share capital
 Redemption of debenture
 Repayment of loan
 Purchase of asset/ investment
 Payment of dividend
 Loss
 Increase in working capital
FIANCIAL STATEMENT
 Shows the financial performance & financial position
 Also called final account prepared from trial balance
 Trading account> profit & loss account> balance sheet
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 In profit & loss account all gains & losses are collected in order to ascertain the excess of
gains over the loss.
 Operating profit= net sales- operating cost.

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 Balance sheet shows the financial position of the business on a certain date.
 A statement which sets out the assets & liabilities of a firm or an institution as at a certain
date.
 Manufacturing account > trading account > profit and loss account > profit & loss appropriation
account > balance sheet
GROUPING AND MARSHALLING OF ASSETS & LIABILITIES
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 Grouping means putting items of a similar nature under a common accounting head.
 Marshalling arrangement of assets & liabilities in a particular order in the balance sheet.
 In order of liquidity (assets which easily converted in to cash)
 In order of permanence ( permanently used in the business)
NON PROFIT ORGANIZATIONS
 NGO’s are those organizations whose main object is not to earn profit but render to services to
its members & to the society.
 Receipts & payments a/c (real a/c) > income & expenditure a/c (surplus & deficit a/c)> balance
sheet.
MERGER AND ACQUISITIONS
 MERGER- It refers to a situation when two or more existing firms combine together and form a
new entity.
 If a new company incorporated then it is called consolidation or amalgamation.
 If an existing company is merged into another existing company it is known as absorption.
 External reconstruction – it means changing only the name or outer cover of the company.
 Internal reconstruction- Internal reconstruction means to change in the paid up capital of the
company either increase or decrease after making a settlement with shareholders & creditors for
reducing the paid up capital company has to take a permission from company law board.
 Under sec 80 a company cannot reduce its share capital if it reduce so then it has to open a new
separate a/c capital redemption reserve a/c but of the revenue reserve a/c for the following purpose- 1)
Writing off accumulated losses 2) Writing off preliminary expenses 3) Writing off goodwill 4)
Correcting over valued assets
 If any balance left out after this them it has to transfer to capital reserve.
 When x company takeover y company then x company is known as purchaser and y Company is
known as vendor.
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 Purchaser Company has to make a payment to vendor company by three methods; 1) Net payment
method 2) Net assets method 3) Lump sum method
 Net payment method – under this method purchase consideration is discharge in terms of equity

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share or preference share of new company against the share & debt of the old company. The assets of
the old company is not to be considered under this method but it is the ratio of exchange is not given
intrinsic value of the two companies are to be completed. Intrinsic value = net assets/ number of equity
shares.
 Net assets method – under this method the net assets of the old company are to be calculated by
subtracting external liabilities from the total assets of the old company & consideration is paid by
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way of shares & cash or combination of both.

 Lump sum method – under this method a lump sum payment is made to the vendor company by
purchasing company in full settlement of their assets & liabilities.
 Amalgamation in the nature of merger is known as pooling of Interest
 Amalgamation in the nature of purchase is known as absorption.
 Conditions to check whether amalgamation is merger or purchase-: all merger but if any of the
condition did not follow then purchaser- 1) Al the assets & liabilities of the vendor company are to be
taken over by the purchasing company at their original book value. 2) The consideration is discharge by
way of shares of new company only. 3) Atleast 90% shareholders of the vendor company should have
agreed o be the shareholders of the new company 4) The new company should be intended to carry the
business of the old company 5) Any difference in the purchase consideration will be adjusted by
way of general reserve.

HOLDING AND SUBSIDIARY COMPANY

 51% stake partially owned
 The Company which is taking over is holding & which is being taken over is subsidiary
company.
 If x company take over 74% share of y company then remaining shareholder of y company i.e
26% is called minority interest.
 Share which is not taken by holding company is called minority interest also known as CBS
consolidated balance sheet.
 Assets and liabilities of subsidiary company are consolidated with holding company to give a true &
fair value to existing shareholders.
TAKEOVERS
 Whenever a company holds another company in between the financial year dates the profit of the
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subsidiary company upto the extent of their share is divided in to two parts. 1) Capital profit 2)
Revenue profit
 The profit which is related to the pre- acquisitions is known as capital profit which is adjusted

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against goodwill or capital reserve.

 The profit earned by the subsidiary company after post acquisitions will be treated as revenue profit
and will be added in the profit & loss a/c of holding company.
PARTNERSHIP
 Partnership is the relation between persons who have agreed to share the profit and loss of business
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carried on by all or any of them acting for all.

 Partnership deed – It contains all terms of agreement. It is also known as articles of
partnership.
 Sacrifice ratio- old ratio – new ratio
 Goodwill – good name, reputation earned by hardwork & honesty
 Gaining ratio= new ratio- old ratio
 Retirement of partner – A partner has the right to retire from the firm after giving due notice in
advance. Old partnership comes to an end after the retirement of a partner but the firm continues and
a new partnership comes into existence between the remaining partners.
 Retiring partners entitled to get –
1) Share in goodwill 2) Share in reserves 3) Shares in revaluation of assets and liabilities 4) Share in
accumulated profit & losses 5) Share in surrender value of joint life policy
 When partner retire or dies then we calculate gaining ratio.
 On the admission of a partner we calculate sacrifice ratio.
 Dissolution of partnership means that the firm closes down its business and comes to an end.
 On dissolution assets of firm are sold and liabilities are paid off and out of the remaining amount, the
accounts of partners are settled.
 Realization a/c is opened for disposing off all the assets of the firm & making payment to all
the creditors.
 Revaluation a/c is prepared at the time of admission, death and retirement.
 Realization a/c is prepared at the time of dissolution of a company.
COMPANY
 A company is an artificial person created by law, having separate entity with a perpetual
succession and a common seal.
 Share is the share in the share capital of the market. There are two types of shares 1)
preference share 2) equity share
 Some of the important rights of the preference shareholders-
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1) They have a right to receive dividend at a fixed rate before any dividend is paid on the equity
shares

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2) When the company is wound up, they have a right to the return of capital before that of equity
shares.

3) If any dividend is not paid on these shares in any year, the arrears of the dividend may
accumulate.

4)
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They do not have voting rights.

5) They do not participate in management of company.

 Some of the rights of the equity shareholders are as follows-
1) Rate of dividend on equity shares is not fixed. It may vary from year to year depending upon the
availability of profit.

2) Dividend cannot accumulate

3) Payment of dividend is made after the payment of preference dividend

4) Equity share capital is paid only when preference share capital is paid out fully.

5) Equity shareholders enjoy voting rights 6) they have full rights to participate in managed
company.
 Authorized registered nominal capital > issued capital > subscribed capital > called up capital >
paid up capital.
 Authorized capital – It refers to that amount which is stated in the memorandum of association.
This is the minimum capital for which a company is authorized to issue share during its lifetime.
 Issued capital – It is that part of authorized capital which is offered to the public for
subscriptions.
 Subscribed capital- It is that part of the issued capital which has been subscribed by public.
 Called up capital – only a part of the face value of a share may be called by the directors from
the shareholders.
 Paid up capital – It is the amount received against the cells made on the shares
CONTROL RATIO
 Activity ratio = actual production in standard hour/ budgeted production in standard
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hour * 100
 Capacity ratio= Actual hour worked/ budgeted working hour * 100
 Efficiency ratio = actual production in standard hour / actual hour worked * 100

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MARGINAL COSTING
 Fixed cost also called indirect or supplementary cost.
 Variable cost also called direct or prime cost
 Mixed cost= fixed cost + variable cost
 Segregation of cost means to separate fixed cost & variable cost.
 Marginal cost is the amount of cost at any given volume of output by which aggregate costs are
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changed if the volume of output is increased or decreased by 1 unit.

 Marginal cost- only variable cost
 In marginal costing only variable cost are considered in calculating the cost of product while fixed
cost are treated as period cost which will be charged against revenue of profit.
 Contribution= selling price – variable cost
 Selling price= contribution + variable cost
 Profit= contribution – fixed cost
 In marginal method we take only variable cost but in absorption method we take both fixed
cost and variable cost.
 In absorption costing both fixed & variable overheads are charged to production while in marginal
costing only variable costs are charged. Thus under absorption costing there will be either over
absorption or under absorption of fixed overhead. Whereas in marginal costing the actual amount of
fixed overheads is wholly charged to contribution.
 Profit volume ratio= contribution/sales, PV ratio depicts the soundness of a firm.
 Pv ratio can be improved by improving contribution & contribution can be improved by increasing
sales, decreasing variable cost, putting more effort on those products which have higher ratio.
 Break even analysis- no profit no loss
 BEP units= Fixed cost/contribution per unit
 BEP Rs = Fixed cost/ PV ratio
 Valuation of stock in marginal costing is higher.
 MOS (Margin of safety) = total sales- BEP (SALES)
STANDARD COSTING
 Standard costing is one of the most important tools which helps the management to plan and
control cost of business operations.
 A standard which can be attained under the most favorable working conditions is called Ideal
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standard.
 Standard costing is one of the most important tools which helps the management to plan and
control cost of business operations.

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 All the costs are pre- determined

 Difference between pre-determined cost & actual costs are known as variance.
 Some types of standard are as follows- 1) Basic standard- It is a standard which is established for use
over a long period of time. It remain constant over a long period of time. Base year is choose for
comparison. 2) Current standard- It is for short period & current condition. 3) Ideal standard – most
favorable conditions, best possible operating conditions. 4) Normal standard – Achieved under normal
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operating conditions. This standard is difficult to set as it requires a significant degree of forecasting. 5)
Attainable standard (expected standard) – it shows the potential that a business is attainable to
achieve.

VARIANCE
 Variance means the difference between standard cost and comparable actual cost incurred
during a period.
 Actual cost < standard cost= unfavorable or adverse variance.
 Actual cost > standard cost= favorable variance.
 Material variance:
1) Direct material cost variance= (standard cost for actual output- actual cost), standard cost = standard
price * standard quantity for actual output, actual cost= actual price * actual quantity.
2) Direct material price variance= actual quantity (standard price- actual price)

3) Material usage/ quantity variance = standard price (standard quantity for actual output-
actual output)

4) Material mix variance = (Revised standard quantity – actual quantity) * standard price, RSQ = Standard
quantity for each material/ total standard quantity for all material * total actual quantity of all material.
Or if AQ> RSQ then RSQ = total actual quantity/ total standard quantity * standard quantity of each
material.
5) Material yield variance = (actual yield – standard yield) * standard output price, whereas
standard output price is the total standard material cost per unit of output. Standard yield= actual usage
of material / standard usage per unit of output or total actual quantity/ input/ output, standard
material cost per unit of output = standard cost / output.
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 Direct labor cost variance – the labor directly engaged in the production of a product is
known as direct labor.
 The wages paid to such labor is known as direct wages.
 Labor variance arises when actual labor cost are different from standard labor cost.

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1) Direct labor cost variance = standard labor cost – actual labor cost, standard labor cost= standard hour*
standard rate, actual labor cost= actual hour * actual rate
2) Labor rate variance= actual hour paid (standard rate- actual rate)

3) Labor time variance or labor efficiency variance = standard rate (standard hour for actual
production – actual hour work)
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4) Labor idle time variance= idle hour * standard rate

5) Labor mix variance= (revised standard hour- actual hour worked)* standard rate
6) Labor revised efficiency variance = standard hour of grade/ standard hour * total actual hour.

7) Labor yield variance = (Actual yield – standard yield) standard labor cost per unit, standard yield =
standard output/total actual hour * actual hour worked, standard labor cost per unit = standard
cost/ standard output * standard rate.

LIQUIDATION OF COMPANY LIST A TO H

List A – particulars of every description of property not specifically pledged.

List B – Assets specifically pledged and creditors fully or partly succeed

List C – list of preference creditors for rates, taxes, salaries, and wages

List D – list of debenture holders secured by a floating charge

List E – list of unsecured creditors

List F – list of preference shareholders List G- list of equity shareholders

List H- deficiency account

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UNIT-12
Income Tax
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INTRODUCTION
 Income tax act 1961
 Income tax rules 1962, effective from 1st April 1962
 Total income of a person is determined on the basis of his residential status in India.
 Income tax is charged on the total Income of the previous year but it is taxable in the next
following assessment year.
 A persons include- 1) An individual 2) A Hindu undivided family (Karta is the head) 3) A company 4) A
firm 5) An association of person or body of individual 6) A local authority 7) Every artificial person
 AOP (Association of person)- It means two or more persons who join for a common purpose
with a view to earn an income.
 BOI (Body of Individual) – It means a conglomeration of Individual who carry on some activity with
the objective of earning some income.
 Assessment year means the period of months commencing on the first day of April every
year.
 Previous year means a financial year immediately preceding the assessment year.
 Cases where the income of previous year is assessed in the same year. 1) Shipping business of non-
resident 2) Assessment of persons leaving India. 3) Assessment of Association of persons or body of
Individuals or artificial juridical person formed for a particular event or purpose. 4) Assessment of
persons likely to transfer property to avoid tax 5) Discontinued business
 Section 4 states that no tax can be levied or collected in India except under the authority of
law.
 Residential status in India 1) An individual is said to be resident in India if he satisfy any
one of the conditions- 1) He is in India for a period or periods amounting in all to 182 days or more
in the relevant previous year. 2) He is in India for 60 days or more during the relevant previous year
and has been in India for 365 days or more during the 4 previous years immediately
preceding the relevant previous year.
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 When an individual is said to be resident and ordinary resident in India- an individual is said to be
resident & ordinary resident in India if he satisfies both of the following conditions- 1) He has been
resident in India for at least 2 years out of 10 previous years immediately preceding the relevant
previous year. 2) He has been in India for 730 days or more during the 7 previous years immediately

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preceding the relevant previous year.

 When an Individual is said to be resident but not ordinary resident- when he did not
satisfy any or both of the below conditions-
1) He should be resident in India for at least 2 out of 10 previous years preceding the relevant
previous year.
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2) Should be in India for atleast 730 days out of 7 relevant previous year.
 When an individual is said to be non-resident in India – if he did not satisfy none of the
following conditions-
1) He is in India for 182 days in the relevant previous year

2) He is in India for 60 days or more during the relevant previous year and has been in India for 365 days
or more during the 4 previous years immediately preceding the relevant previous year.
 There is an exception of conditions i.e. he is India for 60 days or more during the relevant previous
year and 365 days out of 4 years in the following conditions-
1) In case of an Individual who is a citizen of India and who leaves India in any of the previous year for the
purpose of employment outside India then this condition should not be applicable.
2) In case of an Individual who is a citizen of India & who leaves India in any previous year as a member
of the crew of an Indian ship.

3) In case of an Individual who is a citizen of India or is a person of Indian origin who being outside India
comes on a visit to India in any previous year.
 Scope of total Income tax applicable:
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Particulars ROR RNOR NR
1) Income accrue or arise Taxable
or Taxable Taxable
deemed to accrue or arise in India
2) Income received or deemed to
be received in India Taxable Taxable Taxable Taxable Taxable Not taxable
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3) Income accrued or arise

outside India and business is
controlled or profession is set
up in India Taxable Not taxable Not taxable
4) When business not controlled
by India

Any Income which is either received in India or deemed to be received in India is taxable in India
 Any Income which is either earned in India or is deemed to be earned in India is taxable in
India.
 For a resident of India (for individual/ HUF/ resident & ordinary resident in India) all global income
whether earned/received is taxable in India.
 For a non-resident an income is taxable only if it is either earned in India or it is received in
India.
 For not ordinary resident, income earned & received outside India will be taxable only when it is
from a business or profession controlled or set up in India.
DEDUCTIONS OF INCOME

1) 80A/AB/AC – basic rules of deductions

2) 80C – Deductions in respect of life Insurance premium, contribution to provident fund.

Individual & HUF max 100,000.

3) 80CCC – Deductions in respect of contribution to certain pensions fund. Only individuals

max rs 100,000

4) 80CCD – Deductions in respect of contribution to notified pension scheme of central

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government.

5) 80CCE – 80CCC & 80CCD

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6) 80CCF – Deductions in respect of subscriptions to long term infrastructure bonds. Max 20000

7) 80D – Deductions in respect of medical insurance premium, individual and HUF, individual 15000 and
for senior citizenship 5000+ (20000)
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8) 80DD – Deductions in respect of maintenance including medical treatment of dependent who is a

person with disability, individual & HUF, 50000 OR 100000 in case of a person with severe
disability.
9) 80DDB- Deductions in respect of medical treatment, individual HUF max 40000 and for senior
citizenship 20000+ (60000)

10) 80E – Deductions for interest paid on loan taken for pursuing higher education, individual, 8
assessment year.

11) 80G – Deductions in respect of donations to certain funds charitable institutions etc.
 Donations made to the following are eligible for 50% deductions without any qualifying
limit
1) Jawaharlal Nehru memorial fund

2) Prime ministers drought relief fund

3) National Children’s fund

4) Indira Gandhi memorial fund

5) Rajiv Gandhi foundation

 Donations made to the following are eligible for 100% deductions without any qualifying
limit- all fund except above five.
 Donations to the following are eligible for 100% deductions subject to qualifying limit-
1) Donations to family planning
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2) Donations to Indian Olympic association

3) Development of Infrastructure for sports and games

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4) Sponsorship of sports & games in India

 Donations to the following are eligible for 50% deductions subject to qualifying limit
1) Housing accommodation, improvement of cities, town, villages
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2) For promoting interest of the members of a minority community

3) Charitable purpose in Masjid, Gurudwara, Church, Temple archaeological renovation

 In qualifying limit of 100% and 50% there is a deductions of 10% of adjusted gross total Income-
long term capital gain, short term capital gain, all deductions except 80c to 80u except 80g
12) 80GG – Deductions in respect of rent paid, only individual Rs. 2000 maximum

13) 80GGA- Deductions in respect of certain donations for scientific research or rural
development

14) 80GGB – Deductions in respect of contributions given by companies to political parties

15) 80GGC – Deductions in respect of contributions given by any person to political party

16) 80-IA – Deductions in respect of profits & gains from industrial undertakings or enterprises engaged
in infrastructure development.
17) 80-IAB – Deductions in respect of profits & gains by an undertaking a enterprise engaged in
development of special economic zone.
18) 80- IB – deductions in respect of profits & gains from certain industrial undertakings other than
infrastructure development

19) 80-IC – deductions in respect of certain undertakings or enterprises in certain special

category states.

20) 80-ID – Deductions in respect of profits & gains from business f hotels in specified area or world
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heritage site and convention Centre in specified area.

21) 80- IE – special provisions in respect of certain undertakings in North eastern states.

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22) 80- JJA – deductions in respect of profits & gains from business of collecting and processing of
bio degradable waste

23) 80- JJAA- Deductions in respect of employment of new workmen

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24) 80P – Deductions in respect of income of co-operative societies

25) 80QQB- Deductions in respect of royalty income etc. of authors of certain books other than
text books

26) 80RRB- Deductions in respect of royalty on patents

27) 80U – Deductions in respect of a person with disability 50000 in case of disability or 100000 in
case of severe disability.

CLUBBING OF INCOME
 The income of other persons included in the assesse income to reduce the tax liability or tax
evasion.
 Sec 60 to 65 deals with this.
 Where there is a transfer of an income by a person to another person, without the transfer of the
asset from which the income arises such income shall be included in the total income of the transferor,
whether such transfer is revocable or not and whether this transfer is
effected before or after the commencement of the Income tax Act 1961.
 Where there is a revocable transfer of asset by a person to another person any income arising/
derived from such assets shall be included in the total income of the transferor.
 Any remuneration derived by a spouse from a concern in which the other spouse has a substantial
interest shall be clubbed in the hands of the spouse who has a substantial interest in that concern.
 No clubbing if remuneration is due to technical or professional qualification.
 If the husband and wife both have substantial interest in the concern and both are in receipt of
remuneration from the concern then the remuneration of both shall be clubbed in the hands of that
spouse whose total income before including such remuneration is greater.
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 If an Individual transfer any asset other than house property to his/her spouse the income from
such an asset shall be included in the total income of the transferor except house property.
 Any income which arises from assets transferred directly or indirectly by an individual to his son’s

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wife after 1st June 1973 otherwise than for adequate consideration shall be included in the
income of the transferor.
 Where an individual transfers any assets to any person or association of persons otherwise than for
adequate consideration the income from such assets shall be included in the income of the transferor
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to the extent to which the income is for the immediate or deferred benefit of his/her spouse.
 Where an individual transfers any assets after 1st June 1973 to any person or association of
persons, otherwise than for adequate consideration the income from such assets shall be included in
the income of the transferor to the extent to which the income is for the immediate or deferred
benefit of his/her son’s wife.
 Sec 64 deals with in computing the total income of an individual, there shall be included all such
income as arises or accrues to his minor child. Therefore the income of a minor child is to be clubbed
in the hands of either of his parents. The income shall be clubbed in the hands of that parents whose
total income is greater. If the marriage of his parents does not subsist (divorce) then the income shall be
clubbed in the hands of that parent who maintains the minor child in the previous year. Where the
income of the minor child is included in the total income of a parent such parent shall be entitled to an
exemption to the extent of such income of Rs1500 whichever is less in respect of each minor child
whose income is so included.
SET OFF OR CARRY FORWARDED LOSSES (SEC 70 TO 80).
 Loss from a speculation business can be set off only against income of another speculation
business only.
 The loss arises from house property can be set off against the income of other houses in the same
head or the income of the other heads except casual income, income from speculative business. If the
income available is not sufficient then it can be carried forward to the next 8 assessment year but
adjusted against house property only.
 Any losses arises from non- speculative business can be set off against the income of same head or
other head except casual income and income from salary but loss arises from speculative business can
only be set off against the income from speculative business/ shares carry forwarded of speculative
losses is only possible for 4 assessment year.
 Speculation loss is allowed to be carried forward for 4 assessment years immediately succeeding
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the assessment year for which the loss was first computed.
 Loss of specified business can be carried forward indefinitely till it is set off.
 The short term capital loss can be set off against short term capital gain & long term capital gain

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but the loss from the long term capital assets can be set off only against long term capital gain.
 Capital loss can also be carried forward to a maximum of 8 assessment years immediately
succeeding the assessment year for which the loss was first computed.
 Loss from business/ profession and set off allowed in 8 year
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 Loss of amalgamation Company and set off allowed in fresh 8 years.

 Loss of specified business allowed to be set-off only from income of specified business
shall be carry forward indefinitely.
 Loss from activity of owing & maintaining race horses & set off allowed in 4 years.
 Brought forward losses must be set off immediately succeeding years.
 Accumulated business loss can be carried for unexpired period.
 Unabsorbed depreciation can be carried forwarded indefinitely.
 No set off & carry forward is allowed for any type of casual income even the deductions for
expenses is also not allowed.
CRPORATE TAX PLANNING
 Tax Evasion – It consist the misrepresentation of the Income earned and expenses incurred
during the years, the main objective
of this to under estimate the income in order to reduce tax burden. This is a criminal offence. This act Is
done deliberately as not done by CA.
 Tax avoidance- This consists the benefits derived from the loop holes of Income tax in order to
reduce tax burden. This is not an illegal offence. It is done deliberately.
 Tax Planning- It consist the planning of earned income in such way that tax liability can be
minimize.
 Minimum alternative tax (MAT) applicable on partnership 18.5%.

 GST:- GST is an Indirect Tax which has replaced many Indirect Taxes in
India. The Goods and Service Tax Act was passed in the Parliament on 29th
March 2017. The Act came into effect on 1st July 2017; Goods & Services
Tax Law in India is a comprehensive, multi-stage, destination-based tax that is
levied on every value addition.
 GST is one indirect tax for the entire country.
 Value Addition:- The manufacturer who makes biscuits buys flour, sugar and
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other material. The value of the inputs increases when the sugar and flour are mixed
and baked into biscuits.
The manufacturer then sells the biscuits to the warehousing agent who packs
large quantities of biscuits and labels it. That is another addition of value after which

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the warehouse sells it to the retailer.

The retailer packages the biscuits in smaller quantities and invests in the
marketing of the biscuits thus increasing its value.
GST will be levied on these value additions i.e. the monetary worth added at
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each stage to achieve the final sale to the end customer.

 Destination-Based: Consider goods manufactured in Maharashtra and are
sold to the final consumer in Karnataka. Since Goods & Service Tax is levied at
the point of consumption, in this case, Karnataka, the entire tax revenue will go
to Karnataka and not Maharashtra.
 Journey of GST in India:- The GST journey began in the year 2000 when a
committee was set up to draft law. It took 17 years from then for the Law to
evolve. In 2017 the GST Bill was passed in the Lok Sabha and Rajya Sabha. On
1st July 2017 the GST Law came into force.
 CGST: Collected by the Central Government on an intra-state sale (Eg:
transaction happening within Maharashtra)
 SGST: Collected by the State Government on an intra-state sale (Eg:
transaction happening within Maharashtra)
 IGST: Collected by the Central Government for inter-state sale (Eg:
Maharashtra to Tamil Nadu)
 GST exemptions :- Alcohol for human consumption has been kept outside the
purview of the GST. Petroleum products – petroleum crude, high speed diesel,
motor spirit, aviation turbine fuel, and natural gas will be brought under the ambit
of the GST from a date to be notified on recommendation of the GST Council.
 Zero-rated supply :- Zero rated supply refers to supply of any goods and/or
services that are taxable, but their rate of tax is nil. Input tax credits relating to such
supply of goods and services can be availed.
 GSTN :- The Goods and Services Tax Network (GSTN) provides information
technology support to ensure a smooth transition from the current indirect tax
system to procedures under GST.
It is a not-for-profit company, which has the federal government, state and
union territory governments, leading Indian financial institutions like ICICI Bank,
HDFC Bank, HDFC Ltd, LIC Housing Finance, the National Stock Exchange Strategic
Investment Corporation Ltd, and taxpayers as its shareholders.
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 Invoice matching system :- The GST allows for a seamless flow of ITC across
the supply chain. One of the essential features of the GST is to check ITC claims by
the tax payer to prevent any leakages.
For this purpose, an invoice matching system has been developed under GSTN

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to match the purchase and sale invoices of taxpayers.

Accordingly, every registered taxable person under GST is required to issue a
tax invoice, which will be uploaded on the invoice matching system.
After the sale and purchase invoices of a tax payer have been matched, the ITC
will be conferred.
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 Compliance rating system:- It is a unique form to rate whether a taxable

person in India has been compliant. In this system, every taxable person will have a
rating based on his/her record of tax compliance.
The score will be updated at periodic intervals and will be placed in the public
domain to ensure transparency.
 Anti-profiteering clause:- This clause allows businesses to pass on the benefit
of a reduced tax rate on goods or services, or both, to the consumers. This is to
prevent any rise in price of commodities following the GST.
 GST Council:- It is a federal forum that includes federal, state, and union
territory governments on its board. The GST Council comprising of the federal
Finance Minister as the chairman, the federal Minister of State (Revenue), and the
state and union territory finance ministers will make recommendations to the
federal, state, and union territory governments on issues like tax rates, exemption
lists, threshold limits, and all other matters relating to the GST.
 GSTR:- GSTR, i.e. GST Return is a document capturing the details of the
income, which a tax payer is supposed to file with the authorities to calculate his tax
liability. There are total eleven types of GST returns, starting from GSTR-1 to GSTR-
11, capturing and catering to different forms of tax payers.
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GOOD, BETTER, BEST. NEVER LET

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IT REST. ‘TILL YOUR GOOD IS

BETTER & YOUR BETTER IS BEST

HILAL AHMAD

THIRD EDITION
Page339

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HILAL AHMAD

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