Department of Civil Engineering Prepared By: Jay K. Kanani Darshan Institute of Engineering & Technology, Rajkot Page 1.1 1 INTRODUCTION TO ECONOMICS 1.1 Meaning of Economics The word Economics is derived from the Greek word ―OKIOS NEMEIN‖ meaning household management. Man is a bundle of desires. Goods and services satisfy these wants. But almost all the goods are scares. Economics is the science that deals with production, exchange and consumption of various commodities in economic systems. It shows how scarce resources can be used to increase wealth and human welfare. The central focus of economics is on scarcity of resources and choices among their alternative uses. The resources or inputs available to produce goods are limited or scarce. This scarcity induces people to make choices among alternatives, and the knowledge of economics is used to compare the alternatives for choosing the best among Course Contents 1.1 Meaning and Definition of Economics 1.2 Micro and Macro economics 1.3 Supply and Demand - Law of supply - Law of demand 1.4 Equilibrium 1.5 Elasticity - Price elasticity - Income elasticity
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Department of Civil Engineering Prepared By: Jay K. Kanani Darshan Institute of Engineering & Technology, Rajkot Page 1.1
1 INTRODUCTION TO ECONOMICS
1.1 Meaning of Economics
The word Economics is derived from the
Greek word ―OKIOS NEMEIN‖ meaning
household management.
Man is a bundle of desires. Goods and
services satisfy these wants. But almost all
the goods are scares.
Economics is the science that deals with
production, exchange and consumption of
various commodities in economic systems. It
shows how scarce resources can be used to
increase wealth and human welfare. The
central focus of economics is on scarcity of
resources and choices among their
alternative uses.
The resources or inputs available to produce
goods are limited or scarce. This scarcity
induces people to make choices among
alternatives, and the knowledge of
economics is used to compare the
alternatives for choosing the best among
Course Contents
1.1 Meaning and Definition of
Economics
1.2 Micro and Macro economics
1.3 Supply and Demand
- Law of supply
- Law of demand
1.4 Equilibrium
1.5 Elasticity
- Price elasticity
- Income elasticity
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Prepared By: Jay K. Kanani Department of Civil Engineering Page 1.2 Darshan Institute of Engineering & Technology, Rajkot
them. For example, a farmer can grow sugarcane, banana, cotton etc. in his
garden land. But he has to choose a crop depending upon the availability of
irrigation water.
Two major factors are responsible for the emergence of economic problems.
They are: i) the existence of unlimited human wants and ii) the scarcity of
available resources. The numerous human wants are to be satisfied through the
scarce resources available in nature. Economics deals with how the numerous
human wants are to be satisfied with limited resources. Thus, the science of
economics centres on want - effort - satisfaction.
Definition
i) Wealth Definition:
This definition was produced by Adam Smith. He defined “Economics as a science
which inquired into the nature and cause of wealth of Nations”. According to this
definition, Economics is a science of study of wealth only which deals with
production, distribution and consumption. Economics studies only material
commodities and causes of changes in wealth and changes in Economics dept.
Criticisms of this definition:(a) Wealth is of no use unless it satisfies human
wants.(b) This definition is not of much importance/important to man and
welfare.
ii) Welfare definition:
It was given by Alfred Marshall. According to Marshall “Economics is the study of
mankind in the ordinary business of life”. If examines how a person oats his
income and how he invests it. Thus on one side it is a study of wealth and the
other most important side, it is a study of man.
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Basic concept of Economics
The basic concept or elements of economics are: wants, scale of preference, choice, and opportunity cost.
1. Wants
Want may be defined as an insatiable desire or need by human beings to own
goods or services that give satisfaction. The basic needs of man include; food,
housing and clothing. Human needs are many. They include tangible goods like
houses, cars, chairs, television set, radio, e.t.c. while the others are in form of
services, e.g. tailoring, carpentry, medical, e.t.c. Human wants and needs are
many and are usually described as insatiable because the means of satisfying
them are limited or scarce.
2. Scarcity
Scarcity is defined as the limited supply of resources which are used for the
satisfaction of unlimited wants. In other words, scarcity is the inability of human
beings to provide themselves with all the things they desire or want. These
resources are scarce relative to their demand. As a student you will need to buy
school materials, e.g books worth $100 but you have only $50. It can be seen that
the money you have, which is your resources, will not be sufficient to buy all you
need. The available resources within the environment can never at any time be in
abundance to satisfy all human wants. Since wants are numerous and insatiable
relative to the available resources, human beings have to choose the most
important ones and leave the less important ones. There would be no economic
problem if resources were not scarce hence economics is sometime defined as
the study of scarcity.
3. Scale of preference
It is defined as a list of unsatisfied wants arranged in the order of their relative
importance. In other words, it is list showing the order in which we want to
satisfy our wants arranged in order of priority. In the scale of preference, the
most pressing wants come first and the least pressing ones come last. It is after
the first in the list has been satisfied that there will be room for the satisfaction of
the next. Choice therefore arises because human wants are unlimited or
numerous, while the resources for satisfying them are limited or scarce.
4. Choice
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Choice can be defined as a system of selecting or choosing one out of a number
of alternatives.
Human wants are many and we cannot satisfy all of them because of our limited
resources. We therefore decide which of the wants we can satisfy first. Choice
arises as a result of the resources used in satisfying these wants. Choice therefore
arises as a result of scarcity of resources. Since it is extremely difficult to produce
everything one wants, choice has to be made by accepting or taking up the most
pressing wants for satisfaction based on the available resources.
5. Opportunity Cost
Opportunity cost is defined as an expression of cost in terms of forgone
alternatives. It is the satisfaction of one’s want at the expense of another want. It
refers to the wants that are left unsatisfied in order to satisfy another more
pressing need. Human wants are many, while the means of satisfying them are
scarce or limited. We are therefore faced with the problem where we have to
choose one from a whole set of human wants, to choose one means to forgo the
other. A farmer who has only $20 and wants to buy a cutlass and a hoe may
discover that he cannot get both materials for $20. He would therefore choose
which one he has to buy with the money he has. If he decides to buy a cutlass, it
means he has decided to forgo the hoe. The hoe is thus what he has sacrificed in
order to own a cutlass. The hoe he has sacrificed is the forgone alternative and
this is what is referred to as opportunity cost. Opportunity cost should not be
confused with money cost. Money cost refers to the total amount of money that
is spent in order to acquire a set of goods and services. For example, a customer
who spent $20 to buy a pair of trousers has dispensed with cash. The $20 spent is
the money cost.
1.2 Micro and Macro economics
The difference between micro and macroeconomics is simple. Microeconomics is the
study of economics at an individual, group or company level. Macroeconomics, on
the other hand, is the study of a national economy as a whole.
1. Microeconomics:
Microeconomics is the study of particular firm, particular household,
individual prices, wages, incomes, individual industries, and individual
commodities.
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Micro means very small or millionth part.
The subject or example of microeconomics is about person, an investor, a
producer.
As it analyzes individually it provides a partial concept or partial figure of a
country.
Micro economics is concerned with the individual entities.
While both fields of economics often use the same principles and formulas to
solve problems, microeconomics is the study of economics at a far smaller scale,
while macroeconomics is the study of large-scale economic issues.
Both fields of economics are interdependent
At first glance, micro and macro economics might seem completely different from
one another. In reality, these two economic fields are remarkably similar, and the
issues they study often overlap significantly.
For example, a common focus of macroeconomics is inflation and the cost of living
for a specific economy. Inflation is caused by a variety of factors, ranging from low
interest rates to expansion of the money supply.
While this might seem like a purely macroeconomic field of study, it’s actually one
that’s very important in microeconomics. Since inflation raises the price of goods,
services and commodities, it has serious effects for individuals and businesses.
On a microeconomic level, this has several effects. Businesses are forced to raise
their prices in response to the increased cost of materials. They also need to pay
their employees more over the long term to account for the higher cost of living.
This is just one example of a macroeconomic phenomenon – in this case, inflation
and a rising cost of living – affecting a microeconomic one. Other macroeconomic
decisions, such as the creation of a minimum wage or tariffs for certain goods and
materials, have significant microeconomic effects.
Do you want to gain a detailed understanding of macroeconomics? Enroll in our
Economics Without Borders course to learn how currencies, central banks and a wide
variety of other factors affect national and global economies.
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For example, we are likely to buy more oranges if the price per dozen is $3 and less if
the price per dozen is $6.
Demand schedule: The demand schedule of sugar which is purchased in the market at different prices per unit of time is given below: Price per Kg Quantity demanded in rupees
in rupees in Kg.
10 1000
8 2000
6 3000
4 4000
2 5000
Explanation:
The above schedule shows that a consumer buys 1000 Kg. sugar 10 rupees per Kg.
when price falls to two rupees his demand increases up to 5000 Kg. We can say that
if other things remaining the same, a consumer buys more goods at lower price and
fewer goods at higher prices.
Demand curve:
Demand curve is a graphic representation of the demand schedule.
In the demand curve, the price is shown on the vertical and quantity demand is
plotted on the horizontal axies. The curve DD' demand curve slopes down which
shows that price and quantity demanded work in opposite direction.
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Determinants of Demand
When price changes, quantity demanded will change. That is a movement along the same demand curve. When factors other than price changes, demand curve will shift. These are the determinants of the demand curve.
1. Income: A rise in a person’s income will lead to an increase in demand (shift demand curve to the right), a fall will lead to a decrease in demand for normal goods. Goods whose demand varies inversely with income are called inferior goods (e.g. Hamburger Helper).
2. Consumer Preferences: Favorable change leads to an increase in demand, unfavorable change lead to a decrease.
3. Number of Buyers: the more buyers lead to an increase in demand; fewer buyers lead to decrease.
4. Price of related goods:
a. Substitute goods (those that can be used to replace each other): price of substitute and demand for the other good are directly related.
Example: If the price of coffee rises, the demand for tea should increase.
b. Complement goods (those that can be used together): price of complement and demand for the other good are inversely related.
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Example: if the price of ice cream rises, the demand for ice-cream toppings will decrease.
5. Expectation of future:
a. Future price: consumers’ current demand will increase if they expect higher future prices; their demand will decrease if they expect lower future prices.
b. Future income: consumers’ current demand will increase if they expect higher future income; their demand will decrease if they expect lower future income
Supply
Supply is defined as the total quantity of a product or service that the marketplace
can offer. The quantity supplied is the amount of a product/service that suppliers
are willing to supply at a given price. This relationship between price and the amount
of a good/service supplied is known as the supply relationship.
B. The Law of Supply
The law of supply describes the practical interaction between the price of a
commodity and the quantity offered by producers for sale. The law of supply is a
hypothesis, which claims that at higher prices the willingness of sellers to make a
product available for sale is more while other things being equal. When the price of a
product is high, more producers are interested in producing the products. On the
contrary, if the price of a product is low, producers are less interested in producing
the product and hence the offer for sale is low. The concept of law of supply can be
explained with the help of a supply schedule and a supply curve.
Supply Schedule
Supply schedule represents the relationship between prices and the quantities that
the firms are willing to produce and supply. In other words, at what price, how much
quantity a firm wants to produce and supply.
Suppose the following is an individual’s supply schedule of oranges.
1. Introduction of Economics ENGINEERING ECONOMICS AND MANAGEMENT (2140003)
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Price Per Dozen ($)
Quantity Supplied (in dozens)
4 3
6 6
8 9
10 12
12 13
The supply curve is a graphical representation of the law of supply. The supply curve
has a positive slope, and it moves upwards to the right. This curve shows that at the
price of $6, six dozens will be supplied and at the higher price $12, a larger quantity
of 13 dozens will be supplied.
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Determinants of Supply
Determinants of supply (also known as factors affecting supply) are the factors which
influence the quantity of a product or service supplied. We have already learned that
price is a major factor affecting the willingness and ability to supply. Here we will
discuss the determinants of supply other than price. These are the factors which are
assumed to be constant in law of supply.
The price change of a product causes the price-quantity combination to move along
the supply curve. However when the other determinants change, the supply curve is
shifted.
Following are the major determinants of supply other than price:
1. Number of Sellers
Greater the number of sellers, greater will be the quantity of a product or service
supplied in a market and vice versa. Thus increase in number of sellers will increase
supply and shift the supply curve rightwards whereas decrease in number of sellers
will decrease the supply and shift the supply curve leftwards. For example, when
more firms enter an industry, the number of sellers increases thus increasing the
supply.
2. Prices of Resources
Increase in resource prices increases the production costs thus shrinking profits and
vice versa. Since profit is a major incentive for producers to supply goods and
services, increase in profits increases the supply and decrease in profits reduces the
supply. In other words supply is indirectly proportional to resource prices. Increase in
resource prices reduces the supply and the supply curve is shifted leftwards whereas
decrease in resource prices increases the supply and the supply curve is shifted
rightwards.
3. Taxes and Subsidies
Taxes reduces profits, therefore increase in taxes reduce supply whereas decrease in
taxes increase supply. Subsidies reduce the burden of production costs on suppliers,
thus increasing the profits. Therefore increase in subsidies increase supply and
decrease in subsidies decrease supply.
1. Introduction of Economics ENGINEERING ECONOMICS AND MANAGEMENT (2140003)
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4. Technology
Improvement in technology enables more efficient production of goods and services.
Thus reducing the production costs and increasing the profits. As a result supply is
increased and supply curve is shifted rightwards. Since technology in general rarely
deteriorates, therefore it is needless to say that deterioration of technology reduces
supply.
5. Prices of Related Products
Firms which are able to manufacture related products (such as air conditioners and
refrigerators) will the shift their production to a product the price of which increases
substantially related to other related product(s) thus causing a reduction of supply of
the products which were produced before. For example a firm which produces
cricket bats is usually able to manufacture hockey sticks as well. When the price of
hockey sticks increases, the firm will produce more hockey sticks and less cricket
bats. As a result, the supply of cricket bats will be reduced.
6. Prices of Joint Products
When two or more goods are produced in a joint process and the price of any of the
product increases, the supply of all the joint products will be increased and vice
versa. For example, increase in price of meat will increase the supply of leather.
1.4 Equilibrium
When supply and demand are equal (i.e. when the supply function and demand
function intersect) the economy is said to be at equilibrium. At this point, the
allocation of goods is at its most efficient because the amount of goods being
supplied is exactly the same as the amount of goods being demanded. Thus,
everyone (individuals, firms, or countries) is satisfied with the current economic
condition. At the given price, suppliers are selling all the goods that they have
produced and consumers are getting all the goods that they are demanding.
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As you can see on the chart, equilibrium occurs at the intersection of the demand
and supply curve, which indicates no allocative inefficiency. At this point, the price of
the goods will be P* and the quantity will be Q*. These figures are referred to as
equilibrium price and quantity.
In the real market place equilibrium can only ever be reached in theory, so the prices
of goods and services are constantly changing in relation to fluctuations in demand
and supply.
1.5 Elasticity
The quantity demanded of a good is affected mainly by
changes in the price of a good,
changes in price of other goods,
changes in income and c
Changes in other relevant factors.
Elasticity is a measure of just how much the quantity demanded will be affected by a change in price or income or change in price of related goods. Different elasticity of demand measures the responsiveness of quantity demanded to changes in variables which affect demand so:
Price elasticity of demand - measures the responsiveness of quantity
demanded by changes in the price of the good
Income elasticity of demand – measures the responsiveness of quantity
demanded by changes in consumer incomes.
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3. Cross elasticity of demand – measures the responsiveness of quantity demanded
by changes in price of another good
Price elasticity
Assume that the price of coke increases by 1 %. If the quantity demanded
consequently falls by 20%, then there is very large drop in quantity demanded in
comparison to the change in price. The price elasticity of coke would
be said to be very high.
Assume that when gas prices increase by 50%, gas purchases fall by 25%. Using the
formula above, we can calculate that the price elasticity of gasoline is:
= (-25%) = - 0.50 (50%)
a) Elastic demand: b) Inelastic demand c) Unit elastic demand d) Perfectly elastic demand e) Perfectly inelastic demand
Price elasticity of demand is always with negative sign. This negative sign shows that
the price and quantity are negatively related, so we can ignore this negative sign.
According to the value of price elasticity of demand there are following types of
elasticity.
If PED > 1 Elastic Demand
If PED < 1 Inelastic Demand
If PED = 1 Unitary Elastic Demand
If PED = 0 Perfectly Inelastic Demand
If PED =∞ Perfectly elastic demand
a) Elastic Demand:
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Elastic goods are generally non-necessities or luxuries. An elastic good is a good
where if the price goes up, people will stop buying or greatly reduce demand of a
particular product; and if the price goes down, people will greatly increase of
increase demand of a particular good.
When percentage change in demand is more then percentage change in price, its
called elastic demand. For example if there is 25% increase or decrease in price, it
leads to 50% increase or decrease in demand. This is called elastic demand or
elasticity of demand greater than one.
Eg. Movie tickets, museum tickets etc.
b) Inelastic Demand :
Inelastic goods are generally necessary goods. An inelastic good is a good where if
the price goes up, people will only slightly reduce demand of a particular product;
and if the price goes down, people will only slightly increase demand of a particular
good.
when percentage change in demand is less than percentage change in price, its called
inelastic demand. For example, if there is 50% increase or decrease in price but the
percentage change in demand is 25%, it is called inelastic demand.
Eg. Water, gas etc.
1. Introduction of Economics ENGINEERING ECONOMICS AND MANAGEMENT (2140003)
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c) Unitary elasticity of demand :
When percentage change in demand and percentage change in price are equal, its
called unit elastic demand. An example would be that a price increase of 5% will
result in a reduction in demand of 5%.
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d) Perfectly elastic Demand :
If there is very little change in demand but there is infinite percentage change in
demand, it is called perfectly elastic demand. The demand curve is zero.
e) Perfectly inelastic demand
When there is any change in percentages of a commodity of things but no change in
demand, its called perfectly inelastic demand. The demand curve is vertical.
Eg. Electricity or fuel.
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Income elasticity
In economics, income elasticity of demand measures the responsiveness of the
demand for a good to a change in the income of the people; it is calculated as the
ratio of the percentage change in demand to the percentage change in income.
E = change in quantity demanded
change in income
For example, if, in response to a 10% increase in income, the demand for a good
increased by 20%, the income elasticity of demand would be
=20%/10%
= 2
Characterizing Income Elasticity
Normal Goods (E>0).
In economics, normal goods are any goods for which demand increases when income
increases, and falls when income decreases but price remains constant, i.e. with a
positive income elasticity of demand. In general, Nike or Adidas shoes would be a
normal good. As you make more money you are likely to move from off-brand shoes
to nicer quality tennis shoes. To summarize, a good is normal when you consume or
demand more of the good because your income increased.
Luxury Good (E>1).
These are goods whose consumption increases an amount larger than an increase in
income. People become wealthier, they will buy more and more of the luxury good.
This also means, however, that should there be a decline in income its demand will
drop.
Example is Luxury car, Private education, Designer clothes etc.
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5. It is difficult to evaluate a manager's performance if the manager is not given
much latitude in what he or she can do.
Disadvantage of Decentralization
Can be extremely expensive
Training lower-level managers
Potential cost of poor decisions
Duplication of activities
Developing and operating sophisticated planning and reporting system
The difference of centralization and de centralization of power is, centralization of
power is when the government makes all the rules and runs everything on his own
but decentralization of power means the government gives some power to smaller
communities which allow the citizens in decision making.
Implications of Decentralization
1. There are fewer burdens on the Chief Executive as in the case of centralization.
2. In decentralization, the subordinates get a chance to decide and act independently which develops skills and capabilities. This way the organization is able to process reserve of talents in it.
3. In decentralization, diversification and horizontal can be easily implanted. 4. In decentralization, concern diversification of activities can place effectively
since there is more scope for creating new departments. Therefore, diversification growth is of a degree.
5. In decentralization structure, operations can be coordinated at divisional level which is not possible in the centralization set up.
6. In the case of decentralization structure, there is greater motivation and morale of the employees since they get more independence to act and decide.
7.3 Staffing
After an organization's structural design is in place, it needs people with the right
skills, knowledge, and abilities to fill in that structure. People are an organization's
most important resource, because people either create or undermine an
organization's reputation for quality in both products and service.
This is the kind of structure that is based on the different divisions in the organization. These structures can be further divided into:
Product Structure
a product structure is based on organizing employees and work on the basis of
the different types of products. If the company produces three different types
of products, they will have three different divisions for these products.
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Advantages:
1. Coordination within product lines made easier
2. More adaptable to changes in environment (e.g., can shut down a
division when a product is no longer selling)
3. Responsibility for failures, successes identifiable
4. Competition across divisions can serve as a motivator
Market Structure
Market structure is used to group employees on the basis of specific market. A
company could have 3 different markets they use and according to this
structure, each would be a separate division in the structure.
Washing Machine
Division
Lighting
Division
Television
Division
Corporate
Managers
CEO
Corporation
Large Business
Customers
Small Business
Customers
Educational
Institutions
Individual
Customers
Corporate
Managers
CEO
Corporation
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Geographic Structure
Large organizations have offices at different place, for example there could be
a north zone, south zone, west and east zone. The organizational structure
would then follow a zonal region structure.
3. Matrix Structures
Northern
Region
Western
Region
Southern
Region
Eastern
Region
Corporate
Managers
CEO
Corporation
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This is a structure, which is a combination of function, and product structures.
This combines both the best of both worlds to make an efficient organizational
structure.
This structure is the most complex organizational structure.
A subordinate in matrix structure may receive instructions from two bosses.
Managers group people by function and product teams simultaneously.
• Results in a complex network of reporting relationships.
• Very flexible and can respond rapidly to change.
• Each employee has two bosses which can cause problems.
– Functional manager gives different directions than product
manager and employee cannot satisfy both.
Advantages:
• It attempts to retain the benefits of both structures (functional
organization and project organization).
• Coordinates resources in a way that applies them effectively to
different projects.
• Staff can retain membership on teams and their functional department
colleagues
Disadvantages:
• Potential for conflict between functional vs. project groups.
• Greater administrative overhead.
• Increase in managerial overhead
7.8 Types of Organization (Formal and Informal organization)
In an organization, there may be two types of groups on the basis of structuring. These are: (i) formal groups and (ii) informal groups.
1. Formal organization
According to Chester Bernard , “Formal organization is a system of consciously
coordinated activities of two or more persons towards a common objectives. The
essence of formal organization is conscious common purpose and formal
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organization comes into existence when persons (A) are able to communicate with
each other (B) are willing to act and (C) share a purpose.”
Formal groups are created and maintained to fulfill needs or tasks which are related
to the total organization mission. Thus these are consciously and deliberately
created. Such groups may be either permanent in the form of top management team
such as board of directors or management committees, work units in the various
departments of the organization, staff groups providing specialized services to the
organization, and so on; or the formal groups may be constituted on temporary basis
for fulfilling certain specified objectives. Formal groups may be quite large in size.
It refers to the organization structure deliberately created by management for
achieving the objectives of enterprise. It is a network of official authority
responsibility relationships and communication follows. It is an official and rational
structure.
There are two main components of Formal group as,
a) Command group—specified by the organization chart and comprised of employees who report directly to a supervisor.
b) Task group—comprised of employees who work together to compete a particular task/project; e.g., self managed team
Advantages of Formal Organization:
1) Systematic Working:
Formal organization structure results in systematic and smooth functioning of an
organization.
2) Achievement of Organizational Objectives:
Formal organizational structure is established to achieve organizational objectives.
3) No Overlapping of Work:
In formal organization structure work is systematically divided among various
departments and employees. So there is no chance of duplication or overlapping of
work.
4) Co-ordination:
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Formal organizational structure results in coordinating the activities of various
departments.
5) Creation of Chain of Command:
Formal organizational structure clearly defines superior subordinate relationship, i.e.,
who reports to whom.
6) More Emphasis on Work:
Formal organizational structure lays more emphasis on work than interpersonal
relations.
Disadvantages of Formal Organization:
1) Delay in Action:
While following scalar chain and chain of command actions get delayed in formal
structure.
2) Ignores Social Needs of Employees:
Formal organizational structure does not give importance to psychological and social
need of employees which may lead to demonization of employees.
3) Emphasis on Work Only:
Formal organizational structure gives importance to work only; it ignores human
relations, creativity, talents, etc.
2. Informal organization
According to Chester Bernard , “ Informal organization is joint personal activity with out conscious common purpose though contributing to joint result.” Natural groupings of employees that form to fulfill social needs, evolving naturally.
There are two main components of informal group as,
a) Interest group
Established to meet a mutual objective (a group formed to lobby management
for more fringe benefits).
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b) Friendship group—
Formed because members have something in common. The difference between formal and informal groups.
A formal organization has its own set of distinct characteristics, including well-defined rules and regulations, an organizational structure, and determined objectives and policies, among other characteristics.
Formal rules are often adapted to subjective interests, giving the practical everyday life of an organization more informality.
The deviation from rulemaking on a higher level was documented for the first time in the Hawthorne studies in 1924. This deviation was referred to as informal organization.
Advantages of Informal Organization:
1) Fast Communication:
Informal structure does not follow scalar chain so there can be faster spread of
communication.
2) Fulfills Social Needs:
Informal communication gives due importance to psychological and social need of
employees which motivate the employees.
3) Correct Feedback:
Through informal structure the top level managers can know the real feedback of
employees on various policies and plans.
Disadvantages of informal organization:
1) It Creates Rumors:
All the persons in an informal organization talk carelessly and sometimes a
wrong thing is conveyed to the other person which may bring in horrible
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This organization resists change and lays stress on adopting the old
techniques.
3) Pressure of Group Norms:
In this organization, people are under pressure to observe group norms.
Sometimes the people assembled in informal group lose sight of their
objective and all decide to oppose their superiors unanimously. Such a
situation adversely affects productivity.
Distinction from Informal Organization
Formal rules are often adapted to subjective interests giving the practical everyday life of an organization more informality. Practical experience shows no organization is ever completely rule-bound: all real organizations represent some mix of formal and informal characteristics. When attempting to create a formal structure for an organization, it is necessary to recognize informal organization in order to create workable structures. Tended effectively, the informal organization complements the more explicit structures, plans, and processes of the formal organization. Informal organization can accelerate and enhance responses to unanticipated events, foster innovation, enable people to solve problems that require collaboration across boundaries, and create paths where the formal organization may someday need to pave a way.
7.9 Departmentalization
Department is a unique group of resources established by management to
perform some organizational task. The process of establishing departments
within the management system is called Departmentalization.
Departmentalization refers to the process of grouping activities into
departments.
Division of labor creates specialists who need coordination. This coordination is
facilitated by grouping specialists together in departments.
Division of labor or specialization is the specialization of cooperative labor in
specific, circumscribed tasks and roles, intended to increase the productivity of
labor. Historically the growth of a more and more complex division of labor is
closely associated with the growth of total output and trade, the rise of
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capitalism, and of the complexity of industrialization processes. Later, the
division of labor reached the level of a scientifically-based management practice
with the time and motion studies associated with Taylorism.
Coordination is the act of coordinating, making different people or things work
together for a goal or effect.
After reviewing the plans, usually the first step in the organizing process is
departmentalization. Once jobs have been classified through work
specialization, they are grouped so those common tasks can be coordinated.
Departmentalization is the basis on which work or individuals are grouped into
manageable units. There are five traditional methods for grouping work
activities:
1. Departmentalization by function
2. Departmentalization by product
3. Departmentalization by geographical regions
4. Departmentalization by matrix process
5. Departmentalization by customer
1. Functional Departmentalization
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2. Product Departmentalization
3. Geographic Departmentalization
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4. Matrix Departmentalization
5. Customer Departmentalization
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Advantages of departmentalization :
The greatest advantage to this sort of departmentalization is that it allows for
specialization. The people in the department are focused on one task and the
managers can be expert in that task.
Disadvantages of departmentalization :
The greatest disadvantage of this type of departmentalization is that it isolates
the department from the other parts of the process. The department may
become excessively concerned with its own function instead of acting in ways
that will benefit the overall production process and firm.
7.10 Span of control
The concept of span of control was developed in the United Kingdom in 1992 by Sir Ian Hamilton.
Span of control, also known as span of management, is a Human resources management term that refers to the number of subordinates a supervisor can effectively manage.
A span of control is the number of people who report to one manager in a hierarchy. The more people under the control of one manager - the wider the span of control. Less means a narrower span of control.
Span of control is widely employed in large organization like the Military, Government agencies.
Span of Control refers to the area in which a particular person or manager has direct influence over, and whose responsibility the area comes under.
Types of Span of Control
Structure in an organization refers to the reporting relationships between employees. These relationships can be shown in graphic form via an organizational chart, such as this one:
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The organizational chart displays the reporting relationships between different staff members.
In this chart, the span of control of the CEO is 3 - this is the number of people reporting directly to him.
Also, this chart has 3 layers - this is the number of different positions in the reporting structure from the bottom row to the top position.
1. Flat/Wide Structure
Flat organization structure refers to having a relatively small number of layers in your
company's organizational chart. The specific number will vary with the complexity of
the business. A very small company with a flat organizational structure may have all
staffers reporting directly to the president, whereas a multinational corporation
might have a large number of levels of management - but still be flatter than its
peers.
Advantages:
In a flat organization structure, each manager has a relatively higher number of
direct reports, as compared to similar companies. This can have advantages:
Fewer layers of management means fewer approvals in decision-making, so
decisions can be made faster and the organization can respond more quickly
to new opportunities or threats.
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Fewer layers of management also mean that decisions reach the ultimate
decision maker sooner in the process, which gives the ability for faster
decision-making and therefore a faster response to new business issues.
Fewer layers of management can lead to better and more frequent
communication between higher-level managers and staffers, resulting in
better understanding of company goals for the staffers and a better
understanding of daily operational issues by the managers.
Disadvantages:
A flat organization structure also has some disadvantages:
Fewer opportunities for promotions, since there are fewer management
positions in the company. This will not matter for some employees, but those
who have aspirations of managing a team will have fewer opportunities in a
flat organization and may leave for one with more chances to lead.
A wider span of control for managers means that manager input will be
relatively harder for staffers to obtain. This means employees need to be
more self-motivated and independent in their work style and that less
independent employee will not function as well in the environment.
A wider span of control for managers also means that they will have less time
to focus on individual decisions. This can be a disadvantage for important
strategic decisions that will have a long term impact on the company, since
they will tend to get relatively less time spent on determining the best
strategic path.
2. Tall/Narrow structure
Tall organizational structure is one which has many levels of hierarchy. In these
organizations, there are usually many managers, and each manager has a small
span of control – they are in charge of only a small group of people. Tall
structures tend to be more complicated and complex, and may be slower to
respond to market changes than organizations where managers have a larger
span of control.
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Advantages:
There is a narrow span of control ie each manager has a small number of
employees under their control. This means that employees can be closely
supervised.
There is a clear management structure.
Clear progression and promotion ladder
The function of each layer will be clear and distinct. There will be clear lines of
responsibility and control.
Disadvantages:
The freedom and responsibility of employees (subordinates) is restricted.
Decision making could be slowed down as approval may be needed by each of
the layers of authority.
High management costs because managers are generally paid more than
subordinates. Each layer will tend to pay it’s managers more money than the
layer below it.
Communication has to take place through many layers of management.
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Factor affecting Span of Control
1. Qualification and Qualities
If the superiors and subordinates are well-qualified, trained, experienced, and if they are
experts in their jobs then the span of control will be wide and vice-versa.
2. Level of Management
If the superiors are working at the top-level of management, then they have more
responsibilities. Therefore, their span of control will be narrow and vice-versa.
3. Nature of Work
If the work is difficult then the span of control is narrow and vice-versa.
4. Superior - Subordinates Relationship
If there are good relations between the superior and subordinates, then the span of control
will be wide and vice-versa.
5. Degree of Centralization
Under decentralization, the superior has to take fewer decisions. Therefore, he can have a
wide span of control. However, under centralization, the superior has to take many
decisions. Therefore, he should have a narrow span of control.
7. Financial position of the Organization
If the organization has a good financial position, then it can have a narrow span of control.
This is because a narrow span requires more managers. More managers will increase the
compensation or wage bill of the organization. However, if the organization has a bad
financial position, then it will be forced to have a wide span of control.
8. Clarity of Plans and Responsibilities
If the plans are clear and if the responsibilities are well-defined, then the span of control will
be wide. This is because the subordinates will not have to go and consult their superior
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8.8 Functions of Financial management
Estimation of capital requirements:
A finance manager has to make estimation with regards to capital
requirements of the company. This will depend upon expected costs and
profits and future programmes and policies of a concern. Estimations have to
be made in an adequate manner which increases earning capacity of
enterprise.
Determination of capital composition:
Once the estimation has been made, the capital structure have to be decided.
This involves short- term and long- term debt equity analysis. This will depend
upon the proportion of equity capital a company is possessing and additional
funds which have to be raised from outside parties.
Choice of sources of funds:
For additional funds to be procured, a company has many choices like-
a. Issue of shares and debentures
b. Loans to be taken from banks and financial institutions
c. Public deposits to be drawn like in form of bonds.
Choice of factor will depend on relative merits and demerits of each source
and period of financing.
Investment of funds:
The finance manager has to decide to allocate funds into profitable ventures
so that there is safety on investment and regular returns is possible.
Disposal of surplus:
The net profits decision has to be made by the finance manager. This can be
done in two ways:
a. Dividend declaration - It includes identifying the rate of dividends and
other benefits like bonus.
b. Retained profits - The volume has to be decided which will depend
upon expansion, innovational, diversification plans of the company.
Management of cash:
Finance manager has to make decisions with regards to cash management.
Cash is required for many purposes like payment of wages and salaries,
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payment of electricity and water bills, payment to creditors, meeting current
liabilities, maintenance of enough stock, purchase of raw materials, etc.
Financial controls:
The finance manager has not only to plan, procure and utilize the funds but he
also has to exercise control over finances. This can be done through many
techniques like ratio analysis, financial forecasting, cost and profit control, etc.
8.9 Objectives of Financial management
The objectives or goals or financial management are- (a) Profit maximization, (b)
Return maximization, and (c) Wealth maximization. We shall explain these three
goals of financial management as under:
Goal of Profit maximization.
The main objective of financial management is profit maximization. The finance
manager tries to earn maximum profits for the company in the short-term and
the long-term. He cannot guarantee profits in the long term because of business
uncertainties. However, a company can earn maximum profits even in the long-
term, if:-
- The Finance manager takes proper financial decisions.
- He uses the finance of the company properly.
A few replace the goal of 'maximization of profits' to 'fair profits'. 'Fair Profits'
means general rate of profit earned by similar organization in a particular area.
Goal of Return Maximization.
The second goal of financial management is to safeguard the economic interest
of the persons who are directly or indirectly connected with the company, i.e.,
shareholders, creditors and employees.
The all such interested parties must get the maximum return for their
contributions. But this is possible only when the company earns higher profits or
sufficient profits to discharge its obligations to them. Therefore, the goal of
maximization of returns is inter-related.
Goal of Wealth Maximization.
Frequently, Maximization of profits is regarded as the proper objective of the
firm but it is not as inclusive a goal as that of maximizing it value to its
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shareholders. Value is represented by the market price of the ordinary share of
the company over the long run which is certainly a reflection of company's
investment and financing decisions. The log run means a considerably long
period in order to work out a normalized market price.
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9 INTRODUCTION OF PRODUCTION AND
HUMAN RESOURCE MANAGEMENT
9.1 Meaning of Production
Production function is that part of an
organization, which is concerned with the
transformation of a range of inputs into the
required outputs (products) having the requisite
quality level.
Production is defined as “the step-by-step
conversion of one form of material into another
form through chemical or mechanical process to
create or enhance the utility of the product to
the user.” Thus production is a value addition
process. At each stage of processing, there will
be value addition.
Meaning of Production Management
Production management is a branch of
management which is related to the production
function.
Production may be referred to as the process
concerned with the conversion of inputs (raw
materials, machinery, information, manpower,
and other factors of production) into output (Semi finished and finished goods and
Course Contents
9.1 Meaning of Production and
Production management
9.2 Classification of Production
system
9.3 Objectives of Production
management
9.4 Plant location
- Meaning and definition
- Factor affecting
9.5 Plant layout
- Objective
- Types
9.6 Meaning and definition of
HRM
9.7 Scope of HRM
9.8 Manpower planning
- Objectives
- Process
9.9 Recruitment
- Meaning and definition
- Sources
9.10Selection
- Process
- Types
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services) with the help of certain processes (Planning, scheduling and controlling
etc.) while management is the process of exploitation of these factors of production
in order to achieve the desired results.
INPUTS OUTPUT
Raw materials
Machinery
Information
Manpower
9.2 Classification of Production system
Production systems can be classified as Job Shop, Batch, Mass and Continuous
Production systems.
1. Job shop production
Job shop production are characterized by manufacturing of one or few quantity of
products designed and produced as per the specification of customers within
prefixed time and cost. The distinguishing feature of this is low volume and high
variety of products.
A job shop comprises of general purpose machines arranged into different
departments.
Each job demands unique technological requirements, demands processing on
machines in a certain sequence.
Characteristics
The Job-shop production system is followed when there is:
1. High variety of products and low volume.
2. Use of general purpose machines and facilities.
3. Highly skilled operators who can take up each job as a challenge because of
uniqueness.
4. Large inventory of materials, tools, parts.
Goods & Services
PROCESS
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5. Detailed planning is essential for sequencing the requirements of each product,
capacities for each work centre and order priorities.
2. Batch production
Batch production is defined by American Production and Inventory Control Society
(APICS) “as a form of manufacturing in which the job passes through the functional
departments in lots or batches and each lot may have a different routing.” It is
characterised by the manufacture of limited number of products produced at regular
intervals and stocked awaiting sales.
Characteristics
Batch production system is used under the following circumstances:
1. When there is shorter production runs.
2. When plant and machinery are flexible.
3. When plant and machinery set up is used for the production of item in a batch and
change of set up is required for processing the next batch.
4. When manufacturing lead time and cost are lower as compared to job order
production.
3. Mass production
Manufacture of discrete parts or assemblies using a continuous process are called
mass production.
This production system is justified by very large volume of production. The machines
are arranged in a line or product layout. Product and process standardisation exists
and all outputs follow the same path.
Characteristics
Mass production is used under the following circumstances:
- Standardization of product and process sequence.
- Dedicated special purpose machines having higher production capacities and
output rates.
- Large volume of products.
- Shorter cycle time of production.
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- Lower in process inventory.
- Perfectly balanced production lines.
- Flow of materials, components and parts is continuous and without any back
tracking.
- Production planning and control is easy.
- Material handling can be completely automatic.
4. Continuous production
Production facilities are arranged as per the sequence of production operations from
the first operations to the finished product. The items are made to flow through the
sequence of operations through material handling devices such as conveyors,
transfer devices, etc.
Characteristics
Continuous production is used under the following circumstances:
- Dedicated plant and equipment with zero flexibility.
- Material handling is fully automated.
- Process follows a predetermined sequence of operations.
- Component materials cannot be readily identified with final product.
- Planning and scheduling is a routine action.
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9.3 Objectives of Production management
The objective of the production management is ‘to produce goods services of right
quality and quantity at the right time and right manufacturing cost’.
Right quality
The quality of product is established based upon the customers’ needs. The right
quality is not necessarily best quality. It is determined by the cost of the product and
the technical characteristics as suited to the specific requirements.
Right quantity
The manufacturing organization should produce the products in right number. If they
are produced in excess of demand the capital will block up in the form of inventory
and if the quantity is produced in short of demand, leads to shortage of products.
Right time
Timeliness of delivery is one of the important parameter to judge the effectiveness of
production department. So, the production department has to make the optimal
utilization of input resources to achieve its objective.
Right manufacturing cost
Manufacturing costs are established before the product is actually manufactured.
Hence, all attempts should be made to produce the products at pre-established cost,
so as to reduce the variation between actual and the standard (pre-established) cost.
9.4 Plant location
Meaning
The selection of a place for locating a plant is one of the problems, perhaps the most
important, which is faced by an entrepreneur while launching a new enterprise.
A selection on pure economic considerations will ensure an easy and regular supply
of raw materials, labor force, efficient plant layout, proper utilization of production
capacity and reduced cost of production.
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A bad location, on the other hand, is a severe handicap for any enterprise and it
finally bankrupts it. It is, therefore, very essential that utmost care should be
exercised in the initial stages to selec4t a proper place.
Definition
According to Prof. R.C. Davis, The function of determining where the plant should be
located for maximum operating economy and effectiveness.”
Factor affecting of location
1. Raw materials
The factory needs to be close to these if they are heavy and bulky to transport.
2. Energy supply
This is needed to work the machines in a factory. Early industries were near to coalfields. Today, electricity allows more freedom.
3. Labour
A large cheap labour force is required for labour-intensive manufacturing industries. High-tech industries have to locate where suitable skilled workers are available.
4. Market
An accessible place to sell the products is essential for many industries:
those that produce bulky, heavy goods that are expensive to transport those that produce perishable goods those that provide services to people
The market is not so important for other industries such as high-tech whose products are light in weight and cheap to transport. Such industries are said to be 'footloose'.
5. Transport
A good transport network helps reduce costs and make the movement of materials easier.
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6. Cost of land
Greenfield sites in rural areas are usually cheaper than brown field sites in the city.
7. Government policies
Industrial development is encourages in some areas and restricted in others.
Industries that locate in depressed ('Development') areas may receive financial
incentives from the government and assistance from the EU in the form of low
rent and rates
Problem of Location
The problem of site selection of a factory can be solved in the following 3 stages:
- Selection of the Region: Comparative advantages are analyzed from various
options of natural regions & political boundaries in particular country.
- Selection of the Locality: Urban, Rural & Suburban areas are various
alternatives in selection of locality.
- Selection of the Site: The type of development of land, cost of leveling etc,
plant expansions & other infrastructure facilities like transport, banking,
power, communication, postal facilities etc. are considered.
9.5 Plant layout
Definition
Plant layout refers to the arrangement of physical facilities such as machines,
equipment, tools, furniture etc. in such a manner so as to have quickest flow of
material at the lowest cost and with the least amount of handling in processing the
product from the receipt of raw material to the delivery of the final product.
Objectives Of Ideal Plant Layout
A well designed plant layout is one that can be beneficial in achieving the following
objectives:
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- Proper and efficient utilization of available floor space
- Transportation of work from one point to another point without any delay
- Proper utilization of production capacity.
- Reduce material handling costs
- Utilize labour efficiently
- Reduce accidents
- Provide for volume and product flexibility
- Provide ease of supervision and control
- Provide for employee safety and health
- Allow easy maintenance of machines and plant.
- Improve productivity
Types Of Layout
There are mainly four types of plant layout:
a) Product or line layout
b) Process or functional layout
a) Product Layout or Line Layout-
In this type of layout the machines and equipments are arranged in one line
depending upon the sequence of operations required for the product. It is also called
as line layout. The material moves to another machine sequentially without any
backtracking or deviation i.e the output of one machine becomes input of the next
machine. It requires a very little material handling.
It is used for mass production of standardized products.
Advantages of Product layout:
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- Low cost of material handling, due to straight and short route and absence of
backtracking
- Smooth and continuous operations
- lesser inventory and work in progress
- Continuous flow of work
- Simple and effective inspection of work and simplified production control
- Optimum use of floor space
- Lower manufacturing cost per unit
Disadvantages of Product layout:
- Higher initial capital investment in special purpose machine (SPM)
- Breakdown of one machine will disturb the production process.
- High overhead charges
- Lesser flexibility of physical resources.
b) Process or functional layout-
- In this type of layout the machines of a similar type are arranged together at
one place. This type of layout is used for batch production. It is preferred
when the product is not standardized and the quantity produced is very small.
-
Advantages of Process layout:
- Lower initial capital investment is required.
- There is high degree of machine utilization, as a machine is not blocked for a
single product
- The overhead costs are relatively low
- Breakdown of one machine does not disturb the production process.
- Supervision can be more effective and specialized.
- Greater flexibility of resources.
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Disadvantages of Process layout:
- Material handling costs are high due to backtracking
- More skilled labour is required resulting in higher cost.
- Work in progress inventory is high needing greater storage space
- More frequent inspection is needed which results in costly supervision
Benefits derived from efficient production management
The efficient Production Management will give benefits to the various sections of the
society. They are:
(i) Consumer benefits from improved industrial Productivity, increased use value in the
product.
Products are available to him at right place, at right price, at right time, in desired quantity
and of desired quality.
(ii) Investors: They get increased security for their investments, adequate market returns,
and creditability and good image in the society.
(iii) Employee gets adequate Wages, Job security, improved working conditions and
increased Personal and Job satisfaction.
(iv) Suppliers: Will get confidence in management and their bills can be realized without any
delay.
(v) Community: community enjoys Benefits from economic and social stability.
(vi) The Nation will achieve prospects and security because of increased Productivity and
healthy industrial atmosphere.
9.6 Human resource management
Meaning
Human Resource Management (HRM) is the function within an organization that
focuses on recruitment of, management of, and providing direction for the people
who work in the organization
Essentially, the purpose of HRM is to maximize the productivity of an organization by
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Definition of Human resource management
The first definition of HRM is that it is the process of managing people in
organizations in a structured and thorough manner
Human Resource Management (HRM) is the function within an organization that
focuses on recruitment of, management of, and providing direction for the people
who work in the organization
Objectives of Human Resource Management,
- To help the organization reach its goals.
- To ensure effective utilization and maximum development of human
resources.
- To ensure respect for human beings. To identify and satisfy the needs of
individuals.
- To ensure reconciliation of individual goals with those of the organization.
- To achieve and maintain high morale among employees.
- To provide the organization with well-trained and well-motivated employees.
9.7 Scope of HRM
The scope of HRM refers to all the activities that come under the banner of HRM.
These activities are as follows
1. Human resources planning:-
Human resource planning or HRP refers to a process by which the company to
identify the number of jobs vacant, whether the company has excess staff or
shortage of staff and to deal with this excess or shortage.
2. Job analysis design:-
Another important area of HRM is job analysis. Job analysis gives a detailed
explanation about each and every job in the company. Based on this job analysis the
company prepares advertisements.
3. Recruitment and selection:-
Based on information collected from job analysis the company prepares
advertisements and publishes them in the news papers. This is recruitment. A
number of applications are received after the advertisement is published, interviews
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are conducted and the right employee is selected thus recruitment and selection are
yet another important area of HRM.
4. Orientation and induction:-
Once the employees have been selected an induction or orientation program is
conducted. This is another important area of HRM. The employees are informed
about the background of the company, explain about the organizational culture and
values and work ethics and introduce to the other employees.
5. Training and development:-
Every employee goes under training program which helps him to put up a better
performance on the job. Training program is also conducted for existing staff that
have a lot of experience. This is called refresher training. Training and development is
one area where the company spends a huge amount.
6. Performance appraisal:-
Once the employee has put in around 1 year of service, performance appraisal is
conducted that is the HR department checks the performance of the employee.
Based on these appraisal future promotions, incentives, increments in salary are
decided.
7. Compensation planning and remuneration:-
There are various rules regarding compensation and other benefits. It is the job of
the HR department to look into remuneration and compensation planning.
8. Motivation, welfare, health and safety:-
Motivation becomes important to sustain the number of employees in the company.
It is the job of the HR department to look into the different methods of motivation.
Apart from this certain health and safety regulations have to be followed for the
benefits of the employees. This is also handled by the HR department.
9. Industrial relations:-
Another important area of HRM is maintaining co-ordinal relations with the union
members. This will help the organization to prevent strikes lockouts and ensure
smooth working in the company.
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9.8 Manpower planning
Manpower Planning which is also called as Human Resource Planning consists
of putting right number of people, right kind of people at the right place, right time,
doing the right things for which they are suited for the achievement of goals of the
organization. Human Resource Planning has got an important place in the arena of
industrialization. Human Resource Planning has to be a systems approach and is
carried out in a set procedure.
Objectives of Manpower planning
- Assessing manpower needs for future & making plans for recruitments &
selection.
- Assessing skill requirement in future.
- Determining training & development needs of the organization.
- Anticipating surplus or shortage of staff & avoiding unnecessary detention or
dismissal.
- Controlling wages & salary casts.
- Ensuring optimum use of human resource in the organization.
- Helping the organization to cope with the technological development &
modernization.
- Ensuring higher labour productivity.
- Ensuring career planning of every employee of the organization & making
succession programmers.
Process/Steps in Manpower Planning
1. Analyzing the current manpower inventory- Before a manager makes
forecast of future manpower, the current manpower status has to be
analyzed. For this the following things have to be noted-
- Type of organization
- Number of departments
- Number and quantity of such departments
- Employees in these work units
Once these factors are registered by a manager, he goes for the future
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forecasting.
2. Making future manpower forecasts- Once the factors affecting the future
manpower forecasts are known, planning can be done for the future
manpower requirements in several work units.
The Manpower forecasting techniques commonly employed by the
organizations are as follows:
i. Expert Forecasts: This includes informal decisions, formal expert surveys
and Delphi technique.
ii. Trend Analysis: Manpower needs can be projected through extrapolation
(projecting past trends), indexation (using base year as basis), and
statistical analysis (central tendency measure).
iii. Work Load Analysis: It is dependent upon the nature of work load in a
department, in a branch or in a division.
iv. Work Force Analysis: Whenever production and time period has to be
analyzed, due allowances have to be made for getting net manpower
requirements.
v. Other methods: Several Mathematical models, with the aid of computers
are used to forecast manpower needs, like budget and planning analysis,
regression, and new venture analysis.
3. Developing employment programmes- Once the current inventory is
compared with future forecasts, the employment programmes can be framed
and developed accordingly, which will include recruitment, selection
procedures and placement plans.
4. Design training programmes- These will be based upon extent of
diversification, expansion plans, development programmes, etc. Training
programmes depend upon the extent of improvement in technology and
advancement to take place. It is also done to improve upon the skills,
capabilities, knowledge of the workers.
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9.9 Recruitment
Meaning
Recruitment is the process of searching the candidates for employment and
stimulating them to apply for jobs in the organization. Recruitment of candidates is
the function preceding the selection, which helps create a pool of prospective
employees for the organization so that the management can select the right
candidate for the right job from this pool.
The basic purpose of recruitments is to create a talent pool of candidates to enable
the selection of best candidates for the organization, by attracting more and more
employees to apply in the organization.
Recruitment is a positive process i.e. encouraging more and more employees to
apply.
The factors effecting recruitment are: -
- Size if the organization.
- The employment condition.
- The effect of past recruiting efforts.
- Working condition and salary.
- Rate of growth of organization.
- The future expansion plans.
- Cultural, economic and legal factors.
- Company’s image.
- Recruitment policy.
Definition
According to Edwin B. Flippo, “Recruitment is the process of searching the
candidates for employment and stimulating them to apply for jobs in the
organization”.
Recruitment is the process of hiring the right kinds of candidates on the
right job.
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Source of Recruitment:
Basically organizations are available by the two main sources of recruitment which are:
1) Internal Recruitment. 2) External Recruitment.
Vacancies in upper level management can be filled either by hiring people from
outside the organization or by promoting lower level mangers. Both strategies have
advantages and disadvantages. We will consider both internal and external
recruitment sources in detail:
1) Internal Recruiting :
When job vacancies exist, the first place that an organization should look for
placement is within itself. An organization’s present employees generally feel that
they deserve opportunities to be promoted to higher-level positions because of their
service and commitment to organization. More over organizations have
opportunities to examine the track records of its present employees and to estimate
which of them would be successful. Also recruiting among present employees is less
expensive than recruiting from outside the organization. The major forms of the
internal recruiting include:
a. Promotion and Transfers b. Employee referrals. c. Former Employees d. Retirements
a. Promotions and Transfers: Promotion is an effective means using job posting and
personnel records. Job posting requires notifying vacant positions by posting notices,
circulating publications or announcing at staff meetings and inviting employees to
apply. Personnel records help discover employees who are doing jobs below their
educational qualifications or skill levels.
Promotions has many advantages like it is good public relations, builds morale,
encourages competent individuals who are ambitious, improves the probability of
good selection since information on the individual’s performance is readily available,
is cheaper than going outside to recruit, those chosen internally are familiar with the
organization thus reducing the orientation time and energy and also acts as a training
device for developing middle-level and top-level managers.
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However, promotions restrict the field of selection preventing fresh blood & ideas
from entering the organization. It also leads to inbreeding in the organization.
Transfers are also important in providing employees with a broad-based view of the
organization, necessary for future promotions.
b. Employee referrals: Employees can develop good prospects for their families and
friends by acquainting them with the advantages of a job with the company,
furnishing them with introduction and encouraging them to apply.
This is a very effective means as many qualified people can be reached at a very low
cost to the company.
The other advantages are that the employees would bring only those referrals that
they feel would be able to fit in the organization based on their own experience. The
organization can be assured of the reliability and the character of the referrals. In this
way, the organization can also fulfill social obligations and create goodwill.
c. Former Employees: These include retired employees who are willing to work on a
part-time basis, individuals who left work and are willing to come back for higher
compensations. Even retrenched employees are taken up once again. The advantage
here is that the people are already known to the organization and there is no need to
find out their past performance and character. Also, there is no need of an
orientation programme for them, since they are familiar with the organization.
d. Retirements: At times, management may not find suitable candidates in place of
the one who had retired, after meritorious service. Under the circumstances,
management may decide to call retired managers with new extension.
Advantages of Internal Recruitment:
1. Provides greater motivation for good performance.
2. Provides greater opportunities for present employees
3. Provides better opportunity to assess abilities
4. Improves morale and organizational loyalty
5. Enables employees to perform the new job with little lost time
Disadvantages of Internal Recruitment:
1. Creates a narrowing thinking and stale ideas
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2. Creates pressures to compete
3. Creates homogeneous workforce
4. Chances to miss good outside talent Requires strong management
development programs specially to train for technology.
2) External Recruiting:
A broad variety of methods are available for external recruiting. An organization
should carefully assess the kinds of positions it wants to fill and select the recruiting
methods that are likely to produce the best results.
There are some employee needs that a firm must fill through external recruitment.
Among them are: filling entry-level jobs, acquiring skills not possessed by current
employees, and obtaining employees with different backgrounds to provide new
ideas. The major forms of the internal recruiting include:
a. Advertising b. Employment agency c. Schools, Colleges and Professional Institutions d. Labor unions e. Casual applicants f. Unconsolidated applications g. Computer data bank
a. Advertising
A way of communicating the employment needs within the firm to the public
through media such as radio, newspaper, television, industry publications, and the
Internet.
Sometimes organizations can perform the recruitment function through blind
advertisements in blind advertisements no identification about the company is
provided to applicants. Companies can use blind advertisements for many reasons
e.g.
• Company wants to keep the recruitment in low profile so that lesser number of
applicants should apply in order to discourage the irrelevant people.
• Due to bad reputation or image of the organization
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• Advertisement is made just for the purpose of test marketing for example just to
have knowledge about the supply of applicants in labor market etc.
b. Employment Agencies
An organization that helps firms recruits employees and, at the same time, aids
individuals in their attempt to locate jobs. There are two types of the employment
agencies i.e.
• Public Employment Agencies.
• Private Employment Agencies
Both of these sources provide coordination between the organizations and
applicants who are searching for jobs, for this service they use to charge a fee
.Employment agencies are able to tailor their services to the specific needs of the
clients For example some agencies Specialize in a particular employment areas, such
as engineering, human resource or Computer programming, etc.
c. Schools, Colleges and Professional Institutions: Offer opportunities for recruiting
their students. They operate placement services where complete bio-data and other
particulars of the students are available.
The companies that need employees maintain contact with Guidance Counselors of
Employment Bureaus and teachers of business and vocational subjects. The
prospective employers can review Credentials and interview candidates for
management trainees or probationers.
Whether the education sought involves a higher secondary certificate, specific
vocational training, or a college background with a bachelor’s, masters’ or doctoral
degree, educational institutions provide an excellent source of potential employees
for entry-level positions in organizations. These general and technical/ professional
institutions provide blue-collar applicants, white-collar and managerial personnel.
d. Labour unions: Firms with closed or union shops must look to the union in their
recruitment efforts. Disadvantages of a monopolistically controlled labour source are
offset, at least particularly, by savings in recruitment costs. With one-fifth of the
labour force organized into unions, organized labour constitutes an important source
of personnel.
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e. Casual applicants: Unsolicited applications, both at the gate and through the mail,
constitute a much-used source of personnel. These can be developed through
provision of attractive employment office facilities and prompt and courteous replies
to unsolicited letters.
f. Unconsolidated applications: For positions in which large numbers of candidates
are not available from other sources, the companies may gain keeping files of
applications received from candidates who make direct enquiries about possible
vacancies on their own, or may send unconsolidated applications. The information
may be indexed and filed for future use when there are openings in these jobs.
g. Computer data banks: When a company desires a particular type of employee, job
specifications and requirements are fed into a computer, where they are matched
against the resume data stored therein. The output is a set of resumes for individuals
who meet the requirements. This method is very useful for identifying candidates for
hard-to-fill positions which call for an unusual combination of skills.
Advantages of External Recruitment:
1. provides new ideas and new insights
2. Provides greater diversity and helps achieve EEO goals by making
affirmative action easy
3. Provides opportunities to handle rapid growth if the organization
4. Opportunities to get people with up-to-date knowledge education and
training
Disadvantages of External Recruitment:
1. It is more expensive and time consuming
2. Destroys incentives of present employees to strive for promotion
3. More chances to commit hiring mistakes due to difficult applicant
assessment that will lead to wastage of resources.
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9.10 Selection
Meaning
Selection involves the series of steps by which the candidates are screened for
choosing the most suitable persons for vacant posts.
The basic purpose of selection process is to choose the right candidate to fill the
various positions through various interviews and tests in the organization.
Selection process
The Employee selection Process takes place in following order-
1. Preliminary Interviews-
It is used to eliminate those candidates who do not meet the minimum eligibility
criteria laid down by the organization. The skills, academic and family background,
competencies and interests of the candidate are examined during preliminary
interview. Preliminary interviews are less formalized and planned than the final
interviews. The candidates are given a brief up about the company and the job
profile; and it is also examined how much the candidate knows about the company.
Preliminary interviews are also called screening interviews.
2. Application blanks-
The candidates who clear the preliminary interview are required to fill application
blank. It contains data record of the candidates such as details about age,
qualifications, reason for leaving previous job, experience, etc.
3. Written Tests-
Various written tests conducted during selection procedure are aptitude test,
intelligence test, reasoning test, personality test, etc. These tests are used to
objectively assess the potential candidate. They should not be biased.
4. Employment Interviews-
It is a one to one interaction between the interviewer and the potential candidate. It
is used to find whether the candidate is best suited for the required job or not. But
such interviews consume time and money both. Moreover the competencies of the
candidate cannot be judged. Such interviews may be biased at times. Such interviews
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should be conducted properly. No distractions should be there in room. There should
be an honest communication between candidate and interviewer.
5. Medical examination-
Medical tests are conducted to ensure physical fitness of the potential employee. It
will decrease chances of employee absenteeism.
6. Appointment Letter-
A reference check is made about the candidate selected and then finally he is
appointed by giving a formal appointment letter
Types Of Selection Tests
Individuals differ in characteristics related to job performance. These differences,
which are measurable, relate to cognitive abilities, psychomotor abilities, job
knowledge, work samples, vocational interests, and personality. Various tests
measure these differences.
a. Cognitive Aptitude Tests
It measures an individual’s ability to learn, as well as to perform a job. Job-related
abilities may be classified as verbal, numerical, perceptual speed, spatial, and
reasoning.
b. Job Knowledge Tests
This sort of test is designed to measure a candidate’s knowledge of the duties of the position for which he or she is applying.
c. Work-Sample Tests (Simulations)
It identifies a task or set of tasks that are representative of the job. The evidence
concerning these tests, to date, is that they produce high predictive validity, reduce
adverse impact, and are more acceptable to applicants.
d. Personality Tests
It is a selection tools, personality tests have not been as useful as other types of
tests. They are often characterized by low reliability and low validity. Because some
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personality tests emphasize subjective interpretation, the services of a qualified
psychologist are required.
e. Drug and Alcohol Testing
Basic purpose of the drug-testing programs contends that it is necessary to ensure
workplace safety, security, and productivity.
f. Internet Testing
The Internet is increasingly being used to test various skills required by applicants.
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