UNIT 1 HISTORICAL DEVELOPMENT

1.0 INTRODUCTION

Management is a wide term. It is described as an activity, a process and a group of people vested with the authority to make decision. Management is the process of design and maintenance of a system, in which individuals, working together as groups, accomplish effectively the desired objectives. In short, it is the manipulation of the available resources to achieve the desired objectives. The efforts and activities of management are: 1. 2. 3. 4. 5. 6. Formulation of objectives, plans and policies. Assembling money, human resource, material, machine and accomplishment. Directing and motivating the people at work. Co-ordinating the physical and human resources. Supervising and controlling performance. Securing maximum satisfaction of both employer and employee and providing the public with the best possible services.

1.1. DEFINITION OF MANAGEMENT

According to Henry Fayol, to manage is the forecast and plan to organise, to command, to coordinate and to control. According to Koontz and O Donnel, management is defined as the creation and maintenance of an environment in an enterprise, where individuals working in groups, can perform effectively and efficiently towards the attainment of group goals. According to Koontz, management is the art of getting things done through and with the people in formally organised groups.

2 1.1.1 Roles of the Manager

A Textbook on Principles of Management

The managerial roles can be divided into three types, as follows:

1. Inter-personal Roles

(a) The figurehead role: In this role, every manager has to perform some duties, of a ceremonial nature, such as attending the wedding of an employee. (b) Leader role: As a leader every manager must motivate and encourage his employees. He must also try to recognise their individual needs and orient them with organisational goals. (c) The liaison role: In this type, every manager must cultivate contacts outside his vertical chain of command to collect information useful for his organisation. 2. Informational Roles (a) Monitor role: He has to receive information from his subordinates. (b) Disseminator role: He is to pass information to his subordinates. (c) Spokesman role: The manager informs, transmits and satisfies various group and people who influence his organisationmostly outsiders. 3. Decision Roles (a) Entrepreneurial role: The manager constantly looks up for new ideas and seeks to improve his unit by adapting it to changing conditions in the environment. (b) Disturbance handler role: The manager has to work like a fire-fighter. He must seek solution for various unanticipated problems. (c) Resource allocation role: In this role, the manager must divide work and delegate authority among his subordinates. (d) Negotiation role: The manager has to spend considerable time in negotiation. Thus the President of a company may negotiate with the union leader on a strike issue.
1.2 MANAGEMENT ART OR SCIENCE ? 1.2.1 Management, a Science

Science is a systematised knowledge based on certain fundamentals which are capable of general application. To some extent, management is science, because there are some universal principles governing formulation of goals, hypotheses, collection, analysis and interpretation of data. Like a scientist, a manager confronts problem in a scientific (study and establishment of relationship between the cause and effect) way and systematic (inter-dependence and interactions between entities concerned) way. Management, however, can never be an exact science, because business is always dynamic. Conditions of business constantly change, and sometimes unstable.

Historical Development 1.2.2 Management, an Art

Art is a way of doing or presenting things. It is bringing about of a desired result through the application of skills. Management is an art, in the sense that its principles are not developed for the sake of knowledge itself, but for their application to specific situations. Art needs existence of science, and science requires skillful application of knowledge. A manager, like an artist, requires creativity, vision, knowledge, intelligence, and successful communication. Management in this respect is regarded as an art; an art of getting things done through others.
1.2.3 Management, both Science and Art

If science enables a person to know, art enables one to do. A manager should know what he should do and know how to do it effectively and efficiently. Thus management is both an art and a science. Manager should be aware of the science of management i.e., the principles governing the management, and should possess or have to acquire the skills of managing the subordinates. Management is an art blossoming into science. Although many aspects of management have become scientific, some of the management practices remain as art.
1.2.4 Is Management a Profession?

A profession stipulates three conditions, namely, (a) Advanced expertise: It requires knowledge and skills for execution and judgement and also extensive formal education (b) Self-regulation: This is implemented through the professional societies and codes of ethics, and (c) Public good: Priority to the welfare, safety, and health of the public, including voluntary community service. As these features are not applied to the managers, as of now, management is yet to be called a profession.
1.3 MANAGEMENT AND ADMINISTRATION

There is a lack of unanimity among writers, over the meaning and use of the words management and administration. According to one group, administration involves thinking. It is a top level function, which centers on determining the plans, policies and objectives of a business enterprise. On the other hand management involves doing or executing. It is a lower level function, concerned with the execution and direction of polices and operation. At the top level, administration is more important and as one moves down in the organization, management becomes more important. According to E.L.F. Brech, management is a comprehensive generic term, which includes administration. He regards management as a comprehensive generic function, embracing the entire process of planning, organizing, directing and controlling. According to him, administration is only a branch of management, which encompasses two of its functions, namely planning and controlling.

A Textbook on Principles of Management

According to Ordway, administration is the process as well as the agency which is responsible for the determination of the aim. It establishes the broad policies under which they are to operate. According to him, management is process and agency which directs and guides the operation of normalization of organization in achieving the decided objectives. However separate persons are not required to carry out administrative and management function. In fact, each manager performs both activities, but manager at higher level devotes more time to administrative functions and less to management functions. Table 1.1 explains the distinct features of administration and management.
Table 1.1 Distinction between Administration and Management Administration Management

(1) It is concerned with determining the major policies and objectives of the business (2) It refers to owners.

(1) It is concerned with the doing. (2) It refers to employee.

(3) Decision making is mainly influenced by the (3) The scope of decision making is force of public opinion, government policies limited. Decisions are influenced and social factors. by values, opinion and beliefs of manager. (4) It is a part of management. (4) It is a general name for the total process of executive control in concern. (5) As it refers to employees, they get remuneration in the form of salaries.

(5) As it refers to owners, they receive profits by way of dividend.

1.4 MODERN ORGANISATION THEORY

Modern organisation theory has two basic models, namely, a) the systems model and b) the contingency model. At the outset, it should be maintained that organisational theory is not a homogeneous body of thought, because each writer has his special emphasis, when he considers the system. However, one unifying strand in modern theory is the effort made by all to look at human system in their totality. The modern organisation theory is centered on the concept of a system. William B. Wolf stressed the need to view the organisation as a system of causality, which determines an organisations character. Other modern scientists, such as Kast, Rozenzweig Van Court Hare and Walter Buckley contend that systems theory plays a significant role in understanding and managing the organisation.

Historical Development

The Modern theory has two basic models namely: 1. System Model A system is defined as an inter-connected complex of functionally related components. It is a set of interrelated, interdependent and interacting entities. Actually, anything can be viewed as a system. Human body is a system consisting of various sub-systems such as circulatory, digestive, nervous, reproductive etc. Every sub-system performs different functions but every sub-system is depending on one another. An automobile is a mechanical system, a flower is a botanical system, and a donkey is a zoological system. Further, a business firm is a socio-technical system. Organisation can also be considered in terms of general open-system model, where the firm interacts with the environment. Every system has at least the following elements, namely input, process, output, environment and feedback. A simplified model of organisation is an open system. With the feedback, the controlling process is established.
External Environment

I NPUT

TRANSFORMATION

OUTPUT

FEEDBACK
Fig. 1.1 Management as a system

From Fig. 1.1, the following features of a System may be derived. 1. A system consists of entities, which are interdependent and interacting, 2. Each system is a part of the whole. The whole is greater than the sum of its parts. This principle is known as synergy, 3. Every system has an inherent regulatory mechanism, 4. The boundaries of system are not rigid. However, the boundaries are reasonably tight, and 5. Every system transforms input into output. This transformation process is indispensable for the survival of the system, 6. Open system, in general, is unstable, i.e., the output cannot be controlled. Feedback is designed accordingly, to make the system stable, i.e., to get the desired output. 2. Contingency Model Contingency approach was evolved as an extension of the system approach. Contingency approach accepts the premises of system theory about the interdependency and organic nature of organisation.

A Textbook on Principles of Management

They, no doubt, accept the open adaptive character of the modern organisation, but they feel the need to preserve flexibility, in the face of a change. The basic idea of this approach is that no management technique or theory is appropriate in all situations. Management practices and styles will differ according to particular circumstances of the situation. The main determinants of a contingency are related to the external and internal environment of an organisation. External environment includes the economic, social, technological and political factors, while internal environment refers to various constraints and resources, that are available within the concern, viz. cost constraints and human factors.
Uses: (1)

It is a practical and realistic approach to the task of a management, (2) It puts a balanced emphasis on all roles and all skills of a manager, (3) It recognises that the manager is more than just a leader of the subordinates or a decision maker or information handler, and (4) This approach is useful in strategy formulation, organisational design, leadership and organisational development. Limitations: (1) It lacks a theoretical foundation, making it impossible to gain valuable information, or develop an information base, (2) This approach is suspected to create only confusion in the practice of management, and (3) The manager has to think through all possible approaches, and he is likely to get confused.
1.5 SCIENTIFIC MANAGEMENT 1.5.1 Taylors Contribution

The following are the principles stated and explained by F. William Taylor, the father of management theory: 1. Determination of true science by investigation and analysis: Taylor replaced the ruleof-thumb method of production and traditional methods to scientific method by enquiry, investigation, data collection, analysis and framing of rules. The worker is to be provided with necessary information regarding the work and the methods of doing the work. Taylor called it as planning of work, in advance. 2. Scientific selection of worker: Proper selection of workers on the basis of their suitability for the job is very important. Worker must be selected on a scientific basis. Certain tests of ones ability and aptitude should be held, before anyone is selected. 3. Scientific training and development of workers: Scientific execution with proper training is necessary; otherwise the worker may damage the machine besides himself. Scientific

Historical Development

4.

5.

6. 7.

8.

training is necessary to avoid wrong methods of work. It also ensures opportunities for the development of worker, having better capacities. Mental resolution: Scientific management lays utmost emphasis on the promotion of harmony and co-operation between worker and management, which can be achieved only if there is a mental change between the worker and management, from conflict to cooperation. Division of work and responsibility: There must be equal division of work and responsibility between the worker and management. Management should take more responsibility for planning and supervision, while worker should be more responsible for the execution of work, as per the instructions of the management. Taylor preferred functional organisations, in order to run the organisation smoothly. Separation of planning from doing: The planning departments main job is to decide the work / shop operation in advance, before the actual performance. Functional foremanship: Taylor evolved functional foremanship to supervise and giving various directions. In this system, eight people are involved to direct the activities of workers. This includes: (a) Route clerk (b) Instrument card clerk (c) Time and cost clerk (d) Disciplinarian (e) Speed boss (f) Inspector (g) Maintenance foreman and (h) Gang boss. Job analysis: There is one best way of doing a job, which requires least movement, consequently less time and cost. In every industry, this should be determined which involves time, motion, and fatigue studies. (a) Time study: Time study involves the determination of time to complete a movement. The movement, which takes minimum time, is the best. (b) Motion study: It involves the study of movements in parts, which are involved in doing a job and thereby eliminating the wasteful movement to increase productivity. (c) Fatigue study: This indicates that the workers feel fatigued after certain period of time and therefore not able to do the work at their full capacity. They should be provided appropriate rest and interval. The fatigue study shows the required time and frequency of rest.

1.5.2 Contribution by Henry Fayol

Henry Fayol is the father of modern management theory. He was a French mining engineer, a leading industrialist, and a successful manager. He wrote a monograph on general and industrial administration, in 1916. He classified the industrial activities as

A Textbook on Principles of Management

(a) Technical (b) Commercial (c) Financial (d) Security (e) Accounting and (f) Managerial. Fayol presented fourteen principles of management; as a guide to the management process and practice. They are as follows: 1. Division of work: Division of labour leads to specialisation. Division of work in the management process produces more and better work with the same effort. Various functions of management like planning, organising, directing and controlling cannot be performed efficiently by a single person or by a group of directors. They must be entrusted to a specialist in the related field. 2. Authority and responsibility: The right to give order, the right to command is called authority. The obligation to accomplish objectives or expected results or performance is called responsibility. The authority and responsibility should go hand in handcomplementary to each other. 3. Discipline: Discipline and obedience are absolutely essential for smooth running of business. It is important to observe the rules and norms of service, respect for agreement, sincere efforts for completing the assigned job, respect for superiors etc. The best means of maintaining discipline are clarity of rules, good supervision and judicious application of penalties. 4 Unity of command: This principle states that one subordinate should have only one supervisor, from whom he shall receive orders and to whom he shall be accountable. An employer should receive orders and instructions only from one superior. 5. Unity of direction: All the members of the organisation work together, to accomplish common objectives. Their effort shall be directed towards one common super-goal. 6. Subordination of individual interest to general interest: Enterprise is superior to individuals or groups. Superiors must set good examples and be sound and reasonable in their decisions. They should serve common and not individual interests. 7. Remuneration: Remuneration payable to workers must be fair, reasonable and satisfactory, both to the employer and the employee. 8. Centralisation: There must be a good balance between centralisation and decentralisation of authority and power. Extreme centralisation and decentralisation must be avoided. 9. Scalar chain: The unity of command brings about a chain or hierarchy of command linking all members of the organisation, from top to the bottom. Scalar denotes steps.

Historical Development

10. Order: Fayol suggested that there is a place for everything and everyone, which ought to be so occupied. Order or system alone can create a sound organisation and efficient management. Disorder leads to chaos and confusion. 11. Equity: An organisation consists of human beings, a group of people involved in joint efforts. Hence, equity, i.e., justice and kindness must be there, based on predetermined customs or conventions. 12. Stability of tenure: A person needs time to adjust himself with new working conditions and demonstrate efficiency in due course. Hence employees and manager must have job security. 13. Initiative: Creative thinking and capacity to take initiative can give us sound managerial planning and execution of predetermined plans. 14. Esprit de corps: It means the spirit of loyalty and devotion which unites the members of a group or society. The policy of divide and rule should be replaced by the union is strength. This is very essential for effective team-work and communication.
1.6 FUNCTIONS OF MANAGEMENT

The process means a systematic way of doing things. Management is described as a process because all managers, irrespective of their individual abilities and aptitudes are engaged in interrelated activities with the view of accomplishment of their decided goals. They covert diverse resources of people, machine, material, money, time and space into a useful productive enterprise. Integration of unrelated resources into a total system of objective accomplishment is referred to as the process of management, which comprises planning, organising, directing, controlling and co-ordinating of the organisational resources. 1. Planning Management is concerned with selection of goals to be achieved and the actions to achieve them; it involves thinking about the goals and actions in advance. It is looking ahead and preparing for the future. It is determination of what is to be done and how and where is to be done, who is to do it and how results are to be evaluated. 2. Organising It is concerned with establishing an intentional structure of roles for people and other resources of the organisation, for the purpose of achieving the stated goals. Designing the organisation structure and assigning the roles to people are the activities of organising. Even though an organisation has got plenty of resources, it may not be able to use them effectively due to lack of proper organisation. 3. Directing It is concerned with getting the employee do the things that management wants them to do. While performing this function, managers interact directly with the people on job. Successful performance of

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A Textbook on Principles of Management

the leading function requires the leadership qualities, styles and power. Directing involves influencing the work behaviour directly and therefore, it is a challenging function of management. 4. Staffing It is concerned with determination and filling of human resource requirements of the organisation. It signifies recruitment, selection, training and development of human resources. Selecting the right person for the right job at right time is crucial for the success of any enterprise. Training the personnel to equip them to handle the positions of higher responsibility, inculcating in them a sense of belonging to the organisation are the significant aspects of staffing functions of the management. 5. Co-ordinating It is the process of integrating the work activities of various groups, individuals and departments with the organisational goals. The need for integration and alignment will be in direct proportion to the interdependence, between individuals and departments performing the divided activities. Where the performance of one department depends on the other department, there exists a need for maximum co-ordination. 6. Controlling Control refers to the process of devising the ways and means to ensure that planned performance is actually achieved. It signifies measurement, correcting the individuals and the organisational performance to ensure that the objectives are realised. The controlling function involves: (a) Establishment of standards of performance, (b) measuring the actual performance, (c) comparing actual with the standards, and (d) taking necessary corrective and preventive measures against deviations. Through control, manager keeps the organisation on the right track. Planning and controlling functions are inseparable twins. While planning looks ahead, controlling looks behind.
1.7 TYPES OF BUSINESS ORGANISATIONS

Organisation is defined as the establishment of authority relationships with provision for coordination between them. It is a group of people working together to achieve some common goals. The organisation uses different resources and coordinates to achieve the desired outputs or objectives. Various types of structures of organisations are adopted in practice depending on the requirements and the environments. These are:

Historical Development 1.7.1 Sole Trader

11

Sole Proprietorship or a Sole Trading Concern is perhaps the oldest form of business organization. As the word sole indicates, it is run by a single individual. The business is owned and controlled by the same person. In other words, it is literally a one person show. A sole trading concern is a form of business organization, in which an individual invests only his capital, uses his own skill and intelligence in the management of its affairs. He is entitled to earn all the profits, as also is solely responsible for all the risks of ownership. A. Features 1. Single ownership: The sole trading concern is owned by a single individual known as sole proprietor and he owns all the property or assets of the business. 2. Unlimited liability: The liability of a sole trader is unlimited in the sense that in case of losses or when his business assets fall short to meet his business liabilities, his personal assets or property are at stake. He has to meet his business liabilities with the help of his personal assets. In other words, the personal assets and the business assets are replaceable. 3. No one else to share profit and risks: The sole trader owns all the profit of the business and at the same time he also undertakes to bear the entire risks. 4. Personal contacts with the customers: Generally, the size of a sole trading concern is not very big and as such it is possible for the businessman to keep close contacts with all the customers. In fact, the success of the business depends upon how he manages his customers. He is always directly involved and is also rewarded for his personal involvement. The effort-reward relationship being a direct one, the sole trader takes maximum interest in his venture. 5. Ownership and management together: A sole proprietor is the owner of his business and is the manager of his business too. He is the master of his show. He can take any decision regarding his business at his sweet will. This enables him to react to any situation very quickly. B. Merits A Sole proprietorship enjoys various advantages. Some of them are: 1. Easy formation: The business involves no legal formalities. It can be formed without any difficulties. This results in saving of time, money and labour otherwise involved in the formation. 2. Quick decisions and early action: Since all the decisions are taken personally by a sole proprietor, no time is lost in decision making and also in its implementation. The fast action enables the businessman to encash any opportunity. The functioning is most flexible.

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A Textbook on Principles of Management

3. Total business secrecy: There is complete secrecy about the business matters, since it is the Sole trader who is solely responsible for decisions and actions. It is not necessary for the businessman to seek anybodys permission. It is also not necessary to publish any accounts. 4. Direct and close contacts with the customers: The nature of the business is very personal. There is a close contact with the customers. There are no middlemen involved. The sole trader is familiar with the likes and dislikes of his customers as well as their financial position. This enables him to take decisions regarding increasing or reducing or changing the pattern of the business. 5. Personal involvement and interest in business: The sole trader is directly involved in his business. He is the only person to gain from his business activities. Similarly he is solely responsible for any losses. This makes the businessman take keen personal interest in every business activity. C. Limitations 1. Limited capital: Sole trader is a lone businessman. He has to provide all the capital necessary for his business. His capacity, ordinarily, is bound to be limited. All the capital comes from ones personal savings or borrowings. It is for this reason that one cannot think of expanding the business. 2. Limited managerial ability and skill: A sole proprietor has to look after every facet of his business activity. It cannot be expected that he is a versatile person knowing everything and possessing every skill for managing his business. It is possible that he is not familiar with various strategies that are necessary to face the growing complications in modern business. The limited organizing capacity may limit the growth or expansion of the business. 3. Unlimited liability: The unlimited liability of the business is really a sword hanging over the head of the proprietor. If he happens to make losses in the business, his personal assets and property are at stake. He therefore, cannot afford to take any hasty decision or adopt any wrong strategy. In other words he has to be alert all the time. 4. Lack of continuity: One of the greatest demerits of the sole proprietorship is the fact that it lacks continuity. The business may literally come to an end with the death of the proprietor. The successor may or may not continue the operations. Besides, he may lack the expertise or the skill necessary to run the business with success. The successor may not be interested in the type of business which he may inherit by virtue of the death of the earlier proprietor. 5. Limited supervision: There are always limits to the capacity of a person. It is not always possible for him to manage various activities with the same efficiency. Sometimes, it is not possible for a sole trader to supervise properly because he is busy with many other jobs. In such a case he is likely to suffer.

Historical Development 1.7.2 Partnership

13

Partnership is defined as the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Two or more persons who perform business activities are called partners and jointly they are called firm.

A. Characteristics 1. Unlimited liability: The liability of the members of the partnership firm is often unlimited, i.e., they will be liable personally for the losses caused to the business irrespective of their profit-sharing ratio. 2. Contract: There must be an agreement among the partners. If a person is not capable of entering into contract, he will not be considered as partner. 3. Mutual relations: In partnership, the partners are the owners of the property of the firm, they are entitled as agent of the firm for each other for the business activities of the firm, and they can make it liable by their act in discharging the duties for the firm. 4. Retirement of the partners: Although every partner is empowered to leave the firm, a unanimous decision should be taken if they want to get somebody out from the partnership firm. No partner can transfer his share in partnership to any other person. He may, however, do so with the consent of all other partners. 5. Profit-sharing: There must be a contract of sharing profits among the partners. If there is no contract of such nature, they will be entitled to share the profits equally, irrespective of their contribution in share capital. Indian Partnership Act does not lay down specific provision for sharing the losses. The partners if they so desire may have separate ratio of sharing profits and separate proportion of sharing the losses, and 6. Life duration: Legally, a partnership comes to an end if a partner dies, retires, or becomes insolvent. But, if the remaining partners agree to work together under the original name and style of the firm, the firm will continue its business as such. B. Kinds of Partnership 1. Partnership at will: In this case, it is open for any partner to bring the relationship to an end by giving 14 days notice of his intention to the remaining partners. 2. Partnership for specific period: In this case, upon a specific period, the partnership comes to an end. Thus, if it is agreed that the partners should work for a period of two years starting from January 1, 2006, the partnership will cease to exist on December 31, 2007. 3. Partnership for specific purpose: The partnership for a purpose does not continue when the purpose is over. Thus, if a partnership firm is formed for the purpose of

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A Textbook on Principles of Management

selling mangoes in the season, the business would come to an end after that mongo season is over. C. Kinds of Partners 1. Active partner: An active partner takes keen interest in the working of the firm and also has a voice in the management and control of the organization. 2. Sleeping or dormant partner: A sleeping partner does not take active part in the conduct of the business and does not enjoy any voice in the management; but may only contribute capital and share the profit. Such a partner may not be known to the outside parties and he also does not involve himself into liability with outsiders, since he is not openly present in the picture. 3. Nominal partner: A nominal partner is a partner for the sake of name. Such a partner does not give any capital for the conducting of the business; but the association of his name with the name of the firm has a wonderful effect in the market. Since he enjoys a good credit, the association of his name is likely to bring good business to the firm. As far as participation in the management is concerned, he is silent. He may not even share the profits; but he is known to the outsiders as a partner of the firm and the outsiders can bind him as if he was an active partner of the firm. 4. Minor partner: According to Contract Act, a minor cannot enter into a contract. It is, therefore, not possible for a group of minors to form a partnership firm. However, it is open for an existing partnership firm (whose members are major in age) to admit a minor into the partnership only as a beneficiary of profits. A minor may act as a partner of the firm, but in such case he will have only limited liability, which is limited by his share in the capital. When a minor so admitted attains the age of majority, he has to give notice within six months to the public, as to whether he is interested in severing or continuing his relationship with the firm. If he decides to continue as a partner after attaining majority, his liability becomes unlimited and he is taken as a full-fledged partner. D. Meris of Partnership 1. Easy formation: Like the sole tradership and Joint Hindu Family business, the partnership firm can also be easily established by collecting the partners for contract. 2. More financial resources: In partnership form of business, more capital can be managed, because every partner has got his own manner to accumulate the funds for affairs of the firm and secondly the financiers and traders also start trusting the joint activities of the partners. 3. Improved business efficiency: Persons of different calibre associate in the firm, and therefore, specialized skills can be applied in the functional activities of the firm. The efficiency, in general, shall be more.

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15

4. Flexibility: In the absence of any legal restriction, a partnership firm is considered to be a flexible organization, because the partners can leave or join the firm by convincing the other partners. Similarly, the firm can also change the business, if required. 5. Partners as specialists: While selecting the partners, a rich person may prefer an expert in sales, production, purchasing, etc. Therefore, the combination of the specialists makes the business more profitable than the combination of any two rich persons. 6. Enough consultation: In partnership, not only the partners consult themselves, but each partner has got his own friend circle and tries to seek advice from different sources, thus a cream or the best of the consultants advice is used in the business. 7. Protection for the minors: Minors can be taken up in the firm with limited liability and they share the profits only. They may opt to remain in the firm after maturity, but then the liability is unlimited. E. Disadvantages 1. Secrecy: There are two aspects of this part: First, the secrecy is not maintained in the firm, because each and every activity is required to be disclosed to each and every partner; secondly, from the point of the outsiders, secrecy becomes very important and negative in partnership. 2. Unlimited liability: The acts of a person doing the business not only makes him liable; but others are also subject to unlimited liability. Thus in this form, they often not only lose their capital investment, but may also cause loss of their private property. 3. Restriction on the transfer: A member in the partnership firm cannot transfer his share or cannot leave the firm at his will. The consent of all other partners is a must. 4. Delayed decisions: For taking any decision, the consent of each and every partner is required to be obtained, because in case of losses, each puts the blame on the other partner. In business, only the spontaneous decisions can enable the firm to enjoy higher profits, and this is seldom possible in partnership. 5. Mutual differences: Misunderstanding and jealous tendencies are the common weaknesses of the human beings; in partnership, friends combine together to do some business, and gradually they part like enemies due to basic differences in their routine working.
1.7.3 Joint Stock Company

Company is a Latin word and it means to take meal together. It is derived from the word Companis where com means together and panis means bread, i.e., taking bread together or the persons who take meal together. Company is an association of persons who are running business and have got themselves registered as a company. Those who purchase the shares of the company are called shareholders. Normally the liability of every shareholder is limited to the extent of number of shares. There is a separate existence of the company and its shareholders. The company can take

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A Textbook on Principles of Management

legal actions against the shareholders. Company is a legal entity and is governed by its Board of Directors. A. Two Types There are two types of this organisation, namely, 1) Private limited company. The private limited company has two to fifty members. Mostly the stocks are owned by a close group of persons. The shares are transferable within the members only. The public is not allowed to be shareholders. This company need not submit the balance sheet to the government; and 2) The public limited company. It shall have a minimum of seven members and there is no upper limit. The public is allowed to be members or shareholders. The shares can be transferred easily from one to another. These companies have to submit the audited account and balance sheet to the government every year. B. Characteristics of JSC 1. Artificial person: A company is an artificial person created by law having separate existence of its own. It is different from shareholders and directors. 2. Limited liability: Liability of the members of the joint stock company is limited to the extent of the face value of the shares subscribed by each of them. 3. Perpetual life: People may come and go, but the existence of the joint stock company is not affected. In other words, due to death or insanity or disputes among the shareholders, the existence of the company is not affected, and in place of one group of persons, other persons may come and manage the affairs of the company. 4. Separate entity and legal existence: A member or shareholder of the joint stock company is entirely separate; therefore, the company (organisation) is quite distinct and separate from the shareholders. 5. Common seal: All the papers to be signed by and on behalf of the company should bear the common seal (stamp) of the company. In the absence of it, the liabilities of the company cannot be accepted. 6. Regulations: A joint stock company has got its own rules and regulations to conduct its routine business activities. Similarly, the shareholders and directors of the company are also required to manage their activities. 7. Transfer of shares: Every shareholder of the company is free to transfer the shares of the company to any other person; but in certain cases, the regulations of the company may prohibit the transfer of the shares to some undesirable persons. 8. Management by board: The activities of the company are managed by a properly formed board of directors. These persons are elected by and from among the shareholders of the particular company.

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C. Advantages 1. Huge capital: As compared to any other form of business organization, a large quantity of capital is made available in the joint stock company, for the simple reason of limited liability of the shareholders or investors. In our country, almost all the large scale enterprises are carrying on their business activities with huge capital, with this form of organization. 2. Limited liability: Everybody wants to play safe. In a company, every person comes forward with sufficient funds due to limited liability of shareholders, and if at all, the company suffers certain losses, the private property of the investors is not affected. 3. Better management: Elected representatives of the shareholders take active interest in the management of the company. Thus a company managed by interested and active professionals provides comparatively better results. 4. Perpetual succession: The existence of the company is permanent. Change in the status of the shareholders does not affect the structure of the company. Shareholders may come and go, but the company will go on for ever, till dissolved. 5. Economies of large scale and division of labour: A company form of business organization can avail many economies of large scale production and the specialized services of the different groups of workers can be utilized. While in medium and small scale companies, often the specialized services are seldom used due to their higher overhead costs. 6. Concessions in income tax: A company is required to pay income tax at a flat rate and the expenses incurred on the management are allowed as routine deductions, but in partnership any expenditure on the partners are disallowed and it amounts to personal expenditure. Therefore, it is comparatively cheaper to run this form of business for tax concessions. 7. Services of experts: Professional experts with their voluntary agreements come to the rescue of the company and thus the company can avail of the services of these experts for the better management. 8. Free transferability of shares: A company permits its members to transfer their shares. Free transferability of shares provides liquidity to the members investment. Thus, if one needs cash, he can sell his shares through a broker. He can buy the shares of another and more profitable company. D. Disadvantages 1. Difficulties of formation: A number of legal formalities and procedures are involved in the formation of a company. A large number of legal documents are necessary and the services of experts are unavailable. It involves sufficient cost and is also a time consuming affair. 2. Delays in decision making and red tapism: In case of sole proprietorship or partnership, the decision making is comparatively faster. In case of a company, specific procedures are necessary to be followed. Quorum, resolutions, and consents make decision making a longer

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3. 4.

5.

6.

7.

procedure. This also indicates lack of flexibility. The decisions taken are also not implemented quickly, because of red tape of the administrative staff. Lack of secrecy: The affairs of a company become public very fast. There is no secrecy. The accounts, the directors reports etc. are available to the members of public. No personal devotion: The board of directors manage the affairs of a company. Since they are not necessarily the members of the company, they may or may not exhibit any personal devotion to the conduct of the affairs of the company. The directors remuneration does not depend upon the profit, as the case of the dividend payable to the members. Excessive regulation and control of the Government: Government regulates and controls the affairs of the company through the provisions of Companies Act, right from its inception, till its closure. It imposes heavy penalty, in case of default on the part of the board of directors. In other words, the directors do not enjoy freedom like a sole proprietor or a partner of a firm. Conflicting interests: The interests of the directors and the members of a company can conflict. The directors can draw their remuneration irrespective of losses made by the company; but the dividend is payable to the members only out of the profits of the company and that too on the recommendations of the board of directors. The interests of the equity shareholders, preference shareholders and debenture holders also are likely to clash. Frauds by management: Sometimes, the directors are tempted to take undue advantages of their position and may involve themselves in fraudulent activities in their company. The insider information may be used for their own benefits. This could lead to large scale speculation in shares. Deliberate declaration of lower dividend for some period and personal purchases of shares are possible by the directors.

1.7.4 Government Company

Some departments of the government establish such organisation under company law. Bharat Heavy Electricals Ltd., and Hindustan Machine Tools Ltd., are typical examples of this type of organisation. These companies are partially or fully owned by the government. If partially owned, (a) Either the chairman is appointed by the government and managing director by the private promoters or vice versa and (b) The number of directors is fixed in proportion to their investment, as per prior agreement. The advantage of this organisation lies in the judicious combination of the social responsibility of the government and engineering and management expertise from the private sector. In fully owned Government companies, all the directors are appointed by the government and the chairman has freedom to choose policies to suit the governments commitments.
1.7.5 Co-operative Enterprise

It is a democratic form of organisation meant to serve the interests of the public. People irrespective of their faith, religion, and sex can contribute and become members.

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These organisations are managed for satisfying the social needs, rather than for profit. Typical examples of such organisations are: producers co-operative society, consumer cooperative society, housing cooperative society, handloom weavers cooperative society, credit cooperative society etc. This organisation has several merits such as: (1) Easy formation (2) Sharing of profit equally (3) The presence of middlemen is eliminated, as the purchase is done from the producer directly. This reduces the cost of production and selling price. (4) Continuity of the organisaton is not affected by the death or withdrawal of its members. At the same time, it has some limitations also, which are as follows: (1) Huge capital cannot be collected from people. Hence it is not suited for industries, which require large capital investment. (2) Due to lack of management expertise, loss may occur. (3) Political interference is too high, often leading to loss and closure of the societies, and (4) People holding power in these organisations misuse the facilities, resulting in loss of money. Yet the democratic principle promotes the development of such organisation, as a step towards social responsibility.
1.7.6 Public Sector Enterprise

The three forms of public sector enterprises are: (1) Government Company: This has been already discussed in # 1.7.4. (2) Public Corporation: The Public Corporation is a statutory body, formed by the legislature i.e. assembly in a state or Parliament. Life Insurance Corporation, State Trading Corporation, Food Corporation of India and Poompuhar Shipping Corporation are the typical examples of this form of organisation. These are meant to work for the welfare of the community and manage the day-to-day matters and financial decisions on their own. The Assembly or Parliament controls their policies and objectives. The merits of this type of oranisation are: (a) There is greater flexibility in using the funds because of absence of audit and accounting by the government. (b) More suitable for developing public utilities at reasonable cost, as profit is not the motive, and (c) More flexible in managing as compared to government departments.

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However, some limitations exist in this form, such as: (1) Being monopolistic organisations protected by the Government, they do not face competition and do not grow by adopting novelty. (2) Although the Corporations are said to be independent, politicians and ministers interfere in the working of the organisation and derail their autonomy. (3) Formation requires legislative measures and so time-consuming and (4) It is suitable for managing large enterprises with huge capital. (3) Government Department: The Railways, Defence, Telecommunication, Posts, and Transport are the examples of Government departments. They are provided finance by the Government, through budget. Their policies and budget are controlled by the respective ministers.