TYBAF SEM V MANAGEMENT-II (MANAGEMENT APPLICATION)-munotes

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MARKETING MANAGEMENT
Unit Structure :
1.0 Objectives
1.1 Introduction of marketing
1.2 4 p’s of marketing
1.3 Importance
1.4 Introduction of product Management
1.5 Product Development Strategies
1.6 Product Life Cycle
1.7 Branding
1.8 Factors I nfluencing Branding
1.9 Introduction of Price Management
1.10 Factors Affecting Price Decisions Pricing Strategies
1.11 Introduction of Place (Distribution) Management
1.12 Factors Governing Distribution Decisions
1.13 Types of Distribution Channels
1.14 Introduction of Promotion Management
1.15 Promotion Strategies
1.16 Integrated Marketing Communication
1.17 Summary
1.18 Case Studies
1.19 Questions
1.20 References
1.0 OBJECTIVES
After studying this unit the student will be able to -
 Understa nding the concept of marketing management
 To understand product life cycle
 Know the importance of price place promotion strategy
 Explain about integrated marketing communication munotes.in

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2 1.1 INTRODUCTION OF MARKETING
Meaning
Marketing is a fundamental business c oncept that encompasses a range of
activities aimed at identifying, anticipating, and satisfying customer needs
and wants. It involves creating, communicating, delivering, and
exchanging offerings that have value for customers, clients, partners, and
socie ty at large.
Definition of Marketing
PHILIP KOTLER defines marketing as “the science and art of exploring
,creating and delivering value to satisfy the needs of a target market at a
profit.
1.2 -4PS OF MARKETING

The 4Ps of marketing is a marketing mix fr amework that was introduced
by E. Jerome McCarthy in 1960. It provides a systematic approach to
understanding and managing the key elements of a marketing strategy.
The 4Ps stand for Product, Price, Place, and Promotion. Let's delve into
each component:
1. Product: This refers to the tangible or intangible goods and services
that a company offers to its target market. It involves understanding
the features, benefits, and unique selling points of the product, as well
as how it addresses the needs of the custome rs.
2. Price: Price represents the amount of money customers are willing to
pay for the product or service. Setting the right price is crucial as it
influences customer perception, profitability, and market positioning.
Factors like production costs, competit or pricing, and perceived value
play a role in determining the pricing strategy.
3. Place: Also known as "Distribution," this component focuses on
getting the product to the right target customers at the right place and
time. It involves decisions regarding t he distribution channels,
logistics, inventory management, and retailing strategies.
4. Promotion: Promotion refers to the activities undertaken to
communicate and promote the product to the target audience. It
includes advertising, public relations, sales pr omotions, direct
marketing, and other communication efforts aimed at creating
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3 The 4Ps of marketing serve as a foundation for developing an effective
marketing strategy. However, with the evolution of the bus iness
landscape, the marketing mix has expanded, and newer frameworks have
emerged to encompass other critical elements like People, Process, and
Physical Evidence, particularly in service -oriented industries. Nonetheless,
the 4Ps concept remains a valuabl e tool for understanding and organizing
the core aspects of a marketing plan.
1.3 IMPORTANCE OF MARKETING
Marketing plays a crucial role in the success of any business or
organization. Its importance lies in several key aspects that contribute to
the growt h and sustainability of a company. Here are some of the reasons
why marketing is essential:
1. Customer Understanding: Marketing involves conducting market
research to understand customer needs, preferences, and behaviors.
This information helps companies cre ate products and services that
cater to their target audience, leading to higher customer satisfaction
and loyalty.
2. Market Positioning: Effective marketing helps businesses position
themselves in the market and differentiate their offerings from
competitor s. A well -defined market position helps attract the right
customers and establishes a unique brand identity.
3. Building Awareness: Marketing activities such as advertising, social
media campaigns, and content marketing help create awareness about
a brand and its products or services. Increased visibility leads to
potential customers recognizing the brand and considering it when
making purchasing decisions.
4. Generating Demand: Through various promotional efforts, marketing
stimulates demand for products and ser vices. By showcasing the
benefits and value of what they offer, businesses can encourage
customers to make purchases.
5. Sales Growth: A well -executed marketing strategy can lead to
increased sales and revenue. Effective marketing campaigns can attract
new cu stomers, retain existing ones, and persuade them to make repeat
purchases.
6. Customer Retention: Marketing is not solely focused on acquiring
new customers; it also involves maintaining strong relationships with
existing ones. Customer retention is often mor e cost -effective than
customer acquisition, and marketing strategies can help keep
customers engaged and loyal.
7. Adaptation to Changes: Market conditions, consumer preferences,
and industry trends are continually evolving. Marketing helps
businesses stay in formed about these changes and adapt their strategies
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4 8. Innovation and New Product Development: Marketing plays a role
in the identification of opportunities for new product development or
product improvements based on market needs and feedback. It
facilitates the successful introduction of new products or services into
the market.
9. Profitability: Effective marketing helps companies target the right
customers and optimize their marketing efforts. This focus on th e most
relevant audience can lead to increased sales and improved
profitability.
10. Economic Impact: Marketing activities drive economic growth by
creating demand for products and services, leading to job creation and
contributing to overall economic developm ent.
1.4 INTRODUCTION OF PRODUCT MANAGEMENT
Meaning
Product Management is the general business practice within a company
that supports and manages all the activities related to planning,
developing, marketing, and launching a product. The Product
Managemen t role usually falls within the product development
department.
Definition
Product management is an organizational function that guides every step
of a product's lifecycle — from development to positioning and pricing —
by focusing on the product and its c ustomers first and foremost .
1.5 PRODUCT DEVELOPMENT STRATEGIES
Product development strategies are the planned approaches and methods
used by a company to create, design, and introduce new products or
improve existing ones. These strategies are essential f or companies to stay
competitive, expand their market share, and meet changing customer
needs. Here are some common product development strategies:
1. Market Research and Consumer Insights: Companies conduct
market research and gather consumer insights to ide ntify potential
product opportunities and understand customer preferences and pain
points.
2. New Product Development (NPD): This strategy involves the
creation of entirely new products that are not currently offered by the
company. NPD may result from innova tive ideas, emerging
technologies, or identified gaps in the market.
3. Product Improvements and Upgrades: Enhancing existing products
based on customer feedback and technological advancements can lead
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5 4. Line Exten sions: Companies can introduce line extensions by adding
new variations or flavors to an existing product line. This strategy
leverages the existing brand recognition to launch new offerings.
5. Brand Licensing and Partnerships: Partnering with other companie s
or licensing existing brands can help in the development of new
products or leveraging existing brand equity in different product
categories.
6. Product Diversification: Diversification involves expanding the
product portfolio into new markets or industries . This strategy can help
reduce risk and create new revenue streams.
7. Product Lifecycle Management: Strategically managing products
throughout their lifecycle, from introduction to eventual decline,
allows companies to plan for updates, replacements, or pro duct
discontinuation.
8. Reverse Engineering and Benchmarking: Companies may study
competitors' products through reverse engineering or benchmarking to
understand their strengths and weaknesses and identify areas for
improvement.
9. Rapid Prototyping and Iterati ve Development: Using rapid
prototyping techniques, companies can quickly develop and test
product concepts, allowing for iterative improvements based on user
feedback.
10. Cost Leadership and Value Engineering: Developing products with
a focus on cost efficie ncy while maintaining quality and meeting
customer needs can give a competitive edge.
Effective product development strategies involve a combination of
creativity, market understanding, technical expertise, and responsiveness
to customer demands. By implem enting successful product development
strategies, companies can maintain their competitive edge, sustain growth,
and deliver value to their target markets.
1.6 PRODUCT LIFE CYCLE
Product Life Cycle :
The product life cycle refers to the different stages t hat a product goes
through over time, from its initial introduction to its eventual decline or
discontinuation. The product life cycle consists of four main stages: munotes.in

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6
1. Introduction: At the introduction stage, the product is launc hed into
the market. It is a period of slow sales growth as consumers become
aware of the brand. Companies often invest heavily in marketing and
advertising to build brand awareness and establish a market presence.
Profits during this stage are usually low or negative due to high
marketing expenses and limited sales.
2. Growth: During the growth stage, the product experiences rapid sales
growth as it gains acceptance in the market. Consumer demand
increases, and competitors may enter the market. Companies may
expand distribution channels and product variations to meet growing
demand. Profits start to improve in this stage as sales increase and
economies of scale are achieved.
3. Maturity: The maturity stage is characterized by stable sales and
market saturation. T he product has reached its peak in terms of market
acceptance, and competition becomes intense. Companies focus on
product differentiation, customer loyalty programs, and cost -cutting
measures to maintain market share. Profits may level off or decline
slightly due to competitive pressures.
4. Decline: In the decline stage, the product faces decreasing sales and
market share. Consumer preferences may shift to newer or more
innovative products. Companies may choose to discontinue the brand
or target niche market s to extend its life. Profits decline sharply during
this stage, and companies need to carefully manage costs.
1.7 BRANDING
“Branding is endowing products and services with the power of a brand”
(Kotler & Keller, 2015)
Branding is the process of giving a meaning to specific organization,
company, products or services by creating and shaping a brand in
consumers’ minds. It is a strategy designed by organizations to help

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7 people to quickly identify and experience their brand, and give them a
reason to choose their products over the competition’s, by clarifying what
this particular brand is and is not.
The objective is to attract and retain loyal customers and other
stakeholders by delivering a product that is always aligned with what the
brand promises.
1.8 F ACTORS INFLUENCING BRANDING
Branding in marketing is influenced by a variety of factors, all of which
contribute to shaping how a brand is perceived by its target audience. Here
are some key factors that influence branding in marketing:
1. Target Audience : Understanding your target audience's preferences,
needs, values, and behaviors is crucial in shaping your brand. Your
branding efforts should resonate with your intended customer base.
2. Brand Identity : This encompasses your brand's visual elements
(logo, co lors, typography) and its personality (tone of voice, values,
messaging). A strong and consistent brand identity helps create
recognition and differentiation.
3. Positioning : How you position your brand in relation to competitors
in the market can greatly in fluence branding. Are you the luxury
option, the affordable choice, or something else? This impacts how
customers perceive your brand.
4. Value Proposition : Your brand should clearly communicate the
unique value it offers to customers. What problems do you s olve? How
do you improve customers' lives? Your value proposition shapes your
brand's purpose.
5. Consistency : Consistency across all touchpoints is key to successful
branding. From advertising to customer service to product quality,
maintaining consistency builds trust and reliability.
6. Emotion and Storytelling : Emotional connections can create strong
brand loyalty. Storytelling that resonates with customers' emotions can
enhance brand engagement and long -term relationships.
7. Customer Experience : Every inter action a customer has with your
brand contributes to its perception. Positive experiences lead to
positive brand associations, and vice versa.
8. Innovation and Adaptation : Brands that innovate and adapt to
changing market trends and customer needs can maint ain relevance
and a competitive edge.
9. Cultural and Social Trends : Brands that align with or tap into
current cultural and social trends can capture attention and connect
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8 10. Ethics and Values : In today's socially conscious w orld, a brand's
ethical stance and values can strongly influence consumer perception
and loyalty.
11. Packaging and Presentation : The way your products are packaged
and presented can impact how they're perceived on the shelves and in
the minds of consumers.
12. Marketing Channels : The channels you use to reach your audience
(social media, traditional advertising, influencer marketing, etc.) affect
how your brand is seen and interacted with.
13. Competitor Analysis : Understanding your competitors' branding
strategie s can help you differentiate and position your brand
effectively.
14. Customer Feedback : Listening to customer feedback and adapting
your brand accordingly demonstrates responsiveness and a
commitment to improvement.
15. Long -Term Consistency: Brands that endure often have a consistent
core message and identity over time, even as they evolve to stay
relevant.
Remember, successful branding is a combination of these factors working
together to create a coherent and compelling brand image that resonates
with your ta rget audience.
1.9 INTRODUCTION OF PRICE MANAGEMENT
Price management refers to the strategic process of setting, adjusting, and
optimizing prices for products or services in order to achieve specific
business objectives. It is a critical component of mark eting and business
strategy, as pricing directly impacts a company's revenue, profitability,
market positioning, and customer perception. Effective price management
involves a deep understanding of market dynamics, customer behavior,
competitive landscape, and internal cost structures. In this introduction, we
will explore the key concepts and significance of price management in
today's business environment.
1. Pricing as a Strategic Tool : Price management goes beyond simply
assigning a monetary value to a pr oduct. It involves considering the
broader business goals and using pricing strategically to achieve them.
Whether a company aims to capture market share, maximize profits,
enter new markets, or convey a specific brand image, pricing decisions
play a pivot al role in realizing these objectives.
2. Factors Influencing Pricing : Numerous internal and external factors
influence pricing decisions. These include production costs,
competitor pricing, customer willingness to pay, market demand,
economic conditions, se asonality, regulatory constraints, and more.
Effective price management requires a comprehensive analysis of
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9 3. Value -Based Pricing : One prevalent approach in price management
is value -based pricing, where prices are set based on the perceived
value of a product or service to the customer. This approach involves
understanding how customers perceive the benefits and advantages
offered by the product and aligning the price accordingly.
4. Dynamic Pricing : Dynam ic pricing involves adjusting prices in real -
time based on changing market conditions, demand fluctuations,
competitor actions, or other variables. This approach is often
employed in industries such as e -commerce, travel, and entertainment,
where prices ca n vary frequently.
5. Price Elasticity : Price elasticity measures how changes in price affect
the quantity demanded of a product. Understanding price elasticity
helps companies predict how customers will respond to price changes
and make informed decisions a bout pricing adjustments.
6. Psychological Pricing : Psychological pricing takes into account the
psychological impact of pricing on consumer perception. It considers
strategies such as using charm pricing (ending prices in "9" or "99"),
tiered pricing, or bu ndle pricing to influence purchasing decisions.
7. Competitive Pricing :Analyzing and responding to competitor pricing
is a crucial aspect of price management. Companies need to position
their prices relative to competitors' prices to remain competitive while
maintaining their desired market positioning.
8. Pricing Strategies : Various pricing strategies, such as penetration
pricing (setting a low initial price to quickly gain market share),
skimming pricing (setting a high initial price and gradually lowering
it), and value pricing (emphasizing value for money), can be employed
based on the business's goals and the product's life cycle.
9. Price Optimization Tools : Advancements in technology have led to
the development of sophisticated price optimization tools and
software. These tools use data analytics, algorithms, and machine
learning to analyze market trends, customer behavior, and competitor
pricing, helping businesses make data -driven pricing decisions.
In conclusion, price management is a dynamic and multifac eted discipline
that requires a deep understanding of market dynamics, consumer
behavior, and business objectives. It is a strategic tool that can
significantly impact a company's success by influencing customer
perception, market positioning, and financia l performance. Effective price
management involves a continuous process of analysis, adjustment, and
optimization to ensure that prices align with business goals and market
realities.

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10 1.10 FACT ORS AFFECTING PRICING DECISIONS
Pricing decisions are critica l in determining the success and profitability of
a product or service. Various internal and external factors influence
pricing decisions. Some of the key factors include:
1. Cost of Production: The cost of producing the product or delivering
the service is a fundamental factor in setting the price. Companies
need to ensure that the selling price covers the production costs and
allows for a reasonable profit margin.
2. Competition: The competitive landscape plays a significant role in
pricing decisions. Companies must consider the prices set by
competitors for similar products or services. Pricing too high may
result in losing customers to competitors, while pricing too low may
lead to lower profits.
3. Customer Perceptions: Customer perception of value greatly
influ ences pricing decisions. Companies need to understand how their
target customers perceive the product's benefits and whether they are
willing to pay a premium for it.
4. Market Demand: Price elasticity of demand, i.e., how sensitive
customer demand is to chan ges in price, impacts pricing decisions. In a
highly competitive market with elastic demand, lowering prices may
lead to increased sales.
5. Positioning Strategy: The intended market positioning of the product
also affects pricing decisions. A premium pricing strategy positions the
product as high -quality, while a lower price may target price -sensitive
customers.
6. Objectives: The company's pricing objectives can vary. It may aim for
market share growth, maximizing short -term profits, or long -term
brand building . Each objective may require a different pricing
approach.
7. Legal and Ethical Considerations: Pricing decisions must comply
with legal regulations and ethical standards. Anti -competitive
practices, price discrimination, and predatory pricing are examples of
illegal pricing activities.
8. Product Life Cycle: Pricing strategies may differ at different stages of
the product life cycle. For instance, introductory pricing may involve
setting lower prices to gain market share, while mature products may
offer discount s to maintain sales.
9. External Economic Factors: Economic conditions, inflation rates,
and exchange rates can impact pricing decisions, especially in
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11 10. Channel Relationships: If products are sold through intermediaries,
such as distribu tors or retailers, their margins and markups will
influence the final retail price.
By carefully considering these factors, companies can set appropriate
prices that align with their business goals, target customer preferences, and
market conditions. Prici ng decisions require ongoing evaluation and
adjustment to remain competitive and profitable.
1.11 PLACE DISTRIBUTION MANAGEMENT:
Meaning
Place distribution management, also known as channel distribution
management, refers to the process of planning, implem enting, and
controlling the efficient and effective movement of products or services
from the producer to the end consumer. It involves managing the
distribution channels, intermediaries, logistics, and activities to ensure that
products reach the right pl ace at the right time and in the right condition.
Definition
Distribution management involves moving finished goods from a
manufacturer or supplier to the so -called end user . The process includes
warehousing, inventory management, packing, shipping, and d elivery.
1.12 FACTORS GOVERNING DISTRIBUTION
DECISION
Several factors influence distribution decisions for a company. Some of
the key factors include:
1. Nature of the Product: The characteristics of the product, such as
perishability, fragility, and compl exity, influence the choice of
distribution channel. Some products may require specialized handling
or storage, which can impact the selection of intermediaries.
2. Target Market: Understanding the geographic location and
preferences of the target market help s in determining the most efficient
distribution channels to reach the intended customers.
3. Competition: Analyzing how competitors distribute their products can
provide insights into the effectiveness of different distribution
channels in the industry.
4. Comp any Resources: The financial, logistical, and operational
capabilities of the company influence its ability to manage different
distribution channels effectively.
5. Customer Expectations: Customer expectations regarding product
availability, delivery times, and convenience play a significant role in
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12 6. Market Reach: Companies need to evaluate the coverage and reach
provided by different distribution channels to ensure maximum market
penetration.
7. Intermediaries: The availability, reliabili ty, and suitability of
intermediaries, such as wholesalers, retailers, and distributors, impact
distribution decisions.
1.13 TYPES OF DISTRIBUTION CHANNELS
1. Direct Distribution: In this channel, the producer sells products
directly to the end consumer witho ut intermediaries. It can include
selling through company -owned retail stores, e -commerce platforms,
or direct sales representatives.
2. Indirect Distribution: Indirect distribution involves the use of
intermediaries to reach the end consumer. There are three main types
of indirect channels:
a. Retail Distribution: Products are sold through retail stores that
directly serve consumers.
b. Wholesale Distribution: Products are sold in bulk to wholesalers
who then distribute them to retailers.
c. Distributor Distribution: Independent distributors purchase
products from the producer and resell them to retailers or end
consumers.
3. Dual Distribution: Some companies use a combination of direct and
indirect distribution channels. They sell products directly to consumers
through t heir stores or website while also using intermediaries for
wider market coverage.
4. Exclusive Distribution: This strategy limits the number of retailers or
distributors authorized to sell a particular product in a specific
geographic area. It is common for l uxury or premium products.
5. Intensive Distribution: Intensive distribution aims to make a product
available in as many retail outlets as possible, increasing its
accessibility to consumers.
6. Selective Distribution: Selective distribution involves using a lim ited
number of retailers or distributors who are carefully selected based on
specific criteria.
Choosing the right distribution channel and effectively managing it is
essential for ensuring product availability, customer satisfaction, and
market success. I t requires continuous evaluation and adjustments to align
with changing market dynamics and consumer preferences.
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13 1.14 PROMOTION MANAGEMENT
Meaning
Promotion management refers to the process of planning, implementing,
and coordinating various promotiona l activities and strategies to
communicate the value of a product or service to the target audience. The
primary goal of promotion management is to create awareness, generate
interest, stimulate demand, and ultimately persuade customers to make a
purchase. It involves utilizing various promotional tools and techniques to
reach the intended audience effectively and achieve marketing objectives.
1.15 PROMOTION STRATEGIES:
Promotion strategies are the planned approaches and methods used by
businesses to promot e their products or services to the target market.
Several promotion strategies can be employed, including:
1. Advertising: Advertising is a paid form of communication through
various media channels such as television, radio, print, online
platforms, and soci al media. It aims to reach a broad audience and
create brand awareness.
2. Sales Promotion: Sales promotion involves short -term incentives and
offers, such as discounts, coupons, contests, giveaways, or loyalty
programs, to encourage immediate purchases and d rive sales.
3. Public Relations (PR): PR activities focus on managing the
company's public image, building positive relationships with the media
and the public, and handling crises or negative publicity.
4. Personal Selling: Personal selling involves direct comm unication
between a salesperson and potential customers. It allows for
personalized interactions, addressing specific customer needs, and
building strong customer relationships.
5. Direct Marketing: Direct marketing involves reaching out to
individual custome rs through channels like email, direct mail,
telemarketing, or text messages. It allows for targeted communication
and immediate response.
6. Sponsorship and Event Marketing: Companies may sponsor events
or engage in event marketing to associate their brand w ith specific
experiences or causes and connect with the target audience.
7. Influencer Marketing: This strategy involves collaborating with
influencers or individuals with significant online followings to
promote products or services to their audience.
8. Conten t Marketing: Content marketing focuses on creating valuable
and relevant content, such as blogs, articles, videos, or social media
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14 1.16 INTEGRATED MARKETINGCOMMUNICATION
(IMC)
Integrated Marketing Commu nication (IMC) is a strategic approach that
involves coordinating all marketing communication efforts to deliver a
consistent and unified message to the target audience. The idea behind
IMC is to ensure that all promotional activities work together
harmoni ously, reinforcing the brand's message and enhancing its impact
on customers.
IMC considers various marketing communication channels, including
advertising, public relations, direct marketing, social media, personal
selling, and more. By integrating these channels, a company can create a
cohesive and seamless communication experience for customers, leading
to better brand recall, customer engagement, and improved marketing
effectiveness.
The key benefits of IMC include a clear and unified brand message,
optimized resource allocation, improved communication efficiency, and
enhanced customer experience. Successful implementation of IMC
requires careful planning, coordination, and evaluation of all promotional
activities to align with the overall marketing obje ctives.
1.18 CASE STUDIES 1: - 4 ‘ PS OF MARKETING
Samsung Marketing (4’Ps):
Product: The product can be classified into five categories & they are:
 Mobile Devices
 Samsung Home Appliances
 TV/AV
 Information Technology
 Memory/Storage
Price: Samsung is market leader in smart phones and is a dominant player
in market for home appliances. It uses two pricing schemes which are:
 Skimming Price
 Competitive Price
Place : Samsung sells directly to the retailers and service dealers. And due
to this strategy, only servi ce dealers are responsible for the corporate sales.
Samsung also distributes its product using a single distribution company in
a particular location that further distributes the products to other locations.
Promotion: Promotion is a strong pillar in a mar keting mix of the
company. Samsung believes that advertising the best form of promotion to
engage potential consumers and position the brand. Samsung promotes
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15 Besides advertising, Samsung also uses different promotional tactics to
make customers buy the product .Samsung also sponsors major events.
Samsung offers heavy discounts during nation festivals. This concludes
the Samsung marketing mix analysis.
Case studies 2 product management
1- Rules of Flow for Product Management: an AirBnB Case Study
“Engagement” is a term that is so overused in product management that it
has almost lost its meaning. So often I’ve heard from teams, “We’ll
measure the success of this test with engagement,” which could mean
anything from feature click through to bounce to we -aren’t -really -sure-
this-will-drive -conversion -so-we’re -hedging -our-bet. Underneath, the
reason this term has been co -opted and jargonized is that genuine,
productive engagement can be ramps toward long term customer loyalty.
And loyalty pays off: a loyalty increase of 7% can boost lifetime profits
per customer by as much as 85 %, and a loyalty increase of 3% can
correlate to a 10% cost reduction ( Brand Keys ).
Case studies 3 product life cycle
Eg.colgate

Case studi es :4 price management on starbucksedya and paiks coffee
Using the PSM(price sensitivity management) technique, this study
attempted to develop pricing strategy based on an understanding about
customer perceived price sensitivity of Americano coffees in three coffee
franchises(Starbucks, Edya and Paik’s Coffee). The data were collected
from 210 customers during their visits to the three coffee chain stores in
the Seoul metropolitan area from April 20th to May 15th, 2016. The
results revealed that the curr ent prices of Americano for three brands were
within the range of an acceptable price. Among the three brands, Edya
revealed the widest price stress, the narrowest acceptable price range, and
the biggest stress factor while Starbucks revealed the lowest cu mulative
rate of indifference to price. In the case of Paik’s Coffee, respondents were munotes.in

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16 second place in acceptable price range and had the least price sensitivity in
the cumulative rate of indifference to price, price stress, and the general
stress factor. In conclusion, the price sensitivity of Americano at the Edya
chain was the highest followed by Starbucks and Paik’s Coffee. This study
concluded with implications of the research findings and suggestions for
future research areas.
Case studies on place ma nagement
FMCG Case Study: Nestle:
A multinational food and beverage firm called Nestle makes a variety of
goods, such as coffee, chocolate, and baby food. Managing the company's
distribution channels was difficult, especially in emerging regions with its
numerous small merchants and underdeveloped infrastructure.
Nestle created a distribution management system that gave them end -to-
end insight and control over its distribution routes in order to overcome
these difficulties. Nestle was able to control invent ory levels, track
shipments, and keep an eye on distribution efficiency thanks to the system.
Nestle was able to enhance product availability, lessen stock -outs, and
streamline its supply chain as a result. The business also obtained
knowledge about its di stribution systems, which helped it spot chances to
boost productivity and cut expenses.
Case studies
Integrated Marketing Communication Case Study #1 - Microsoft
Microsoft Corporation is an American technology company. It develops,
manufactures, licenses, supports and sells computer software, consumer
electronics, personal computers, and related services.
Their mission is to 'empower every person and every organization on the
planet to achieve more. '
Microsoft's Integrated Marketing Communication Channels:
Print and media are a pivotal part of Microsoft's marketing strategy.
Microsoft spends upwards of $1.5 Billion for Print and media alone.

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17 One of its ingenious print advertising campaigns for Microsoft's Office 365
software includes the WiFi -enabled promotion on the Forbes magazine.


A sleek router with a battery placed within the magazine gave its
subscribers free wifi for 15 days. This gimmick ensured that readers had to
retain the magazi ne him at all times and contributed multiple exposures of
the ad to the reader.
Currently, Microsoft is undertaking a slow shift from traditional media to
social media and other online platforms.
1.14 SUMMARY
In summary, marketing management is a dynamic process that involves a
range of activities aimed at creating, communicating, and delivering value
to customers. It requires a deep understanding of markets, customers, and
effective strategies to drive growth and achieve organizational objectives.
1.15 Q UESTIONS
Fill in the blanks :
1) In the __ ____ _ stage, the product phases decreasing sales and market
share
A) growth B) decline C) maturity D) introduction
2) ______ _ place a crucial role in the success of any business or
organization
A) Dem and B) Branding C) Marketing D) Management
3) Place distribution management also known as ______ _ distribution
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Management - II
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18 4) Product are sold in bulk to ______ _
A) wholesalers B) retailers c) distributors D) consumers
5) ______ _ is a paid form of communication
A) personal selling B) Advertising C) sampling D) Branding
True or False :
1) Sales promotion involves short termincentives and offers -true
2) Content marketing foc uses on creating value and living content such as
blogs - true
3) Integrated marketing communication is an unstaticapproach - false
4) Growth stage are same at different stages of the product life cycle -
false
5) Marketing is a fundamental business concept that enc ompasses a range
of activities - true
Match the column
A B
1.marketing mix a. supply
2.decline b. 4 p’s
3.philip Kot ler c. last stage
4.branding d. marketing
5.demand e. name
ANS --- 1. b 2. C 3. D 4. E 5. A
Answer in brief :
1. What arethe 4 P’ sofmarketing ?
2. Explain product lifecycle with the help of a diagram.
3. What are the factors governing distribution decision in place
distribution management?
4. Write a noteon
 imc
 importance of marketing
 branding
 promotions strategies
 decline stage munotes.in

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Marketing Management
19 1.16 REFER ENCES
1. "Marketing Management" by Philip Kotler and Kevin Lane
Keller - Widely regarded as a foundational textbook, this
comprehensive resource covers all aspects of marketing management,
including strategic planning, market analysis, consumer behavior,
branding, and more.
2. "Principles of Marketing" by Philip Kotler and Gary Armstrong -
Another seminal work by Philip Kotler, this book offers a solid
introduction to the principles and practices of modern marketing.
3. "Marketing Management: A Strategic Decision -Making
Approach" by John W. Mullins and Orville C. Walker Jr. - This
book emphasizes strategic decision -making processes in marketing
management, helping readers understand how to create and execute
effective marketing strategies.
4. "Contemporary Marketing" by Louis E. Boone and David L.
Kurtz - A comprehensive text that covers a wide range of marketing
topics, from consumer behavior and market segmentation to digital
marketing and global marketing.
5. "Marketing Metrics: The Definitive Guide to Measuring
Marketin g Performance" by Paul W. Farris, Neil T. Bendle,
Phillip E. Pfeifer, and David J. Reibstein - This book focuses on the
measurement and analysis of marketing performance, providing
valuable insights into assessing the effectiveness of marketing
strategies.
6. "Marketing Management: Knowledge and Skills" by J. Paul Peter
and James H. Donnelly Jr. - This textbook offers a solid foundation
in marketing concepts, strategies, and skills, with a practical approach
to marketing management.
7. "Marketing Insights from A to Z: 80 Concepts Every Manager
Needs to Know" by Philip Kotler - In this book, Philip Kotler
presents a collection of essential marketing concepts and insights,
making it a handy reference for marketing managers.
8. "Marketing Management Journal" - A reputab le academic journal
that publishes research articles and case studies related to marketing
management. It provides insights into current trends, strategies, and
best practices in the field.
9. "Journal of Marketing" - A leading academic journal in the
marketi ng discipline, publishing research on a wide range of marketing
topics, including consumer behavior, branding, marketing strategy,
and more.
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20 10. "Harvard Business Review" - While not exclusively focused on
marketing, this influential publication often feature s articles and case
studies related to marketing strategy, consumer trends, and market
analysis.
11. "Journal of Consumer Research" - This academic journal focuses
on consumer behavior research, providing valuable insights into
understanding and influencing co nsumer choices.
12. "Marketing Science" - A journal that publishes research at the
intersection of marketing and quantitative analysis, offering insights
into marketing modeling, decision -making, and data -driven strategies











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21 2
PRODUCTION MANAGEMENT
Unit Structure :
2.0 Objectives
2.1 Introduction
2.2 Scope of Production Management
2.3 Steps in Production Planning and Control
2.4 Meaning of Productivity
2.5 Measures to Increase Productivity
2.6 Productivity Movement in India
2.7 Quality Management
2.8 Total Quality Management (TQM)
2.9 ISO 9000 and ISO 14000
2.10 Inventory Management
2.11 Summary
2.12 Questions
2.13 References
2.0 OBJECTIVES
 To study about production management
 To understand about productivity movement
 To know about inventory management
2.1 INTRODUCTION
Production Management
Meaning
Production management, also known as operations management or
manufacturing management, refers to the process of planning, organizing,
and controlling the resour ces and activities involved in the conversion of
raw materials and labor into finished goods or services. It involves
overseeing the production process to ensure efficiency, quality, and timely
delivery of products or services while optimizing resources an d
minimizing costs.
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22 Management - II
(Management Applications ) Definition
According to E.L.Brech, “Production management is the process of
effective planning and regulationg the operations of that section of an
enterprise which is responsible for the actual transformation of materials
into finishe d products.
2.2 SCOPE OF PRODUCTION MANAGEMENT
The scope of production management at Company XYZ includes:
1. Production Planning: Developing production schedules and capacity
planning to ensure optimal utilization of resources and timely delivery
of products .
2. Inventory Management: Monitoring inventory levels to avoid
stockouts and excess inventory, optimizing storage space, and
minimizing carrying costs.
3. Quality Control: Implementing quality assurance measures to meet
product specifications and minimize defec ts.
4. Supply Chain Management: Coordinating with suppliers and
logistics partners to ensure a smooth flow of materials and timely
deliveries.
5. Production Process Improvement: Identifying opportunities for
process optimization and implementing continuous impro vement
initiatives to enhance productivity and efficiency.
2.3 STEPS IN PRODUCTION PLANNING AND
CONTROL
1. Demand Forecasting: The production management team analyse
market demand and customer orders to forecast future demand
accurately.
2. Master Production Sch eduling: Based on demand forecasts, a master
production schedule is created, outlining the production quantities and
schedules.
3. Material Requirement Planning (MRP): The team uses MRP
techniques to determine the quantity and timing of raw materials
required for production.
4. Capacity Planning: Assessing the production capacity and aligning it
with demand to avoid overproduction or underproduction.
5. Production Execution: Supervising and coordinating the actual
production process, ensuring that it adheres to the planned schedules
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Production Management
23 6. Quality Control: Conducting regular quality checks at various stages
of production to identify and rectify defects.
7. Inventory Management: Maintaining optimum inventory levels to
ensure uninterrupted production while minimizing carrying costs.
2.4 MEANING OF PRODUCTIVITY
Meaning
Productivity is a measure of efficiency and output in relation to the
resources utilized in a production process. It reflects the ability to produce
more output with the same or fewer resource s.
Definition
2.5 MEASURES TO INCREASE PRODUCTIVITY
At Company XYZ, the management identifies measures to increase
productivity, such as:
1. Automation and Technology: Investing in automated machinery and
advanced technology to streamline production processes and reduce
manual labor.
2. Employee Training and Development: Providing regular training
and upskilling opportunities to the workforce to enhance their
efficiency and expertise.
3. Process Optimization: Analyzing production workflows and
identifying bottleneck s or inefficiencies to optimize processes.
4. Quality Improvement: Emphasizing quality control and minimizing
defects to reduce rework and waste, resulting in higher output.
5. Cross -Functional Collaboration: Encouraging collaboration between
different departmen ts to foster innovation and problem -solving.
2.6 PRODUCTIVITY MOVEMENT IN INDIA
The productivity movement in India refers to a series of initiatives,
strategies, and efforts aimed at improving and enhancing productivity
across various sectors of the econom y. These movements have been
driven by both government and industry bodies with the goal of boosting
economic growth, competitiveness, and overall development. Here are
some key points and phases of the productivity movement in India:
1. Post-Independence Era: The productivity movement in India gained
momentum after independence in 1947. The government recognized
the need to enhance industrial productivity for economic development.
The National Productivity Council (NPC) was established in 1958 as
an autonomou s body under the Ministry of Industry to promote
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24 Management - II
(Management Applications ) 2. Green Revolution and Agricultural Productivity: In the 1960s and
1970s, the Green Revolution aimed at increasing agricultural
productivity through the introduction of hi gh-yield crop varieties,
modern farming techniques, and improved irrigation methods. This
movement significantly boosted food production and helped alleviate
food scarcity.
3. Quality Circles and Total Quality Management (TQM): In the
1980s, the concept of qu ality circles gained prominence. It involved
involving workers in decision -making and problem -solving to enhance
productivity and quality. The introduction of Total Quality
Management (TQM) practices aimed at improving processes, reducing
defects, and enha ncing overall efficiency.
4. Liberalization and Globalization: The economic reforms of the
1990s brought about a shift towards liberalization and globalization.
These changes emphasized efficiency, competitiveness, and
productivity improvements across industr ies to compete effectively in
the global market.
5. Information Technology (IT) and Service Sector Productivity:
With the growth of the IT industry and the service sector, the
productivity movement extended to these areas. India's success in IT
and bs outsour cing (BPO) waslargely driven by improvements in
productivity, quality, and process optimization.
6. Lean and Six Sigma: Lean management and Six Sigma
methodologies gained popularity in India during the 2000s. These
methodologies aimed at reducing waste, impro ving efficiency, and
enhancing product and service quality.
7. Digital Transformation and Industry 4.0: Recent years have seen a
focus on leveraging digital technologies, automation, and data
analytics to drive productivity improvements across industries. The
"Make in India" initiative and the push for "Industry 4.0" concepts
align with this objective.
8. Sustainability and Inclusive Growth: In more recent times, there has
been an emphasis on sustainable productivity growth that considers
social and environmental factors. Inclusive growth models aim at
ensuring that the benefits of increased productivity reach all segments
of society.
9. Skill Development and Human Capital: The productivity movement
has also recognized the importance of skill development and human
capital. Efforts are being made to enhance the skills of the workforce
to contribute effectively to productivity improvement.
10. Government Initiatives: The Indian government continues to
promote productivity through various initiatives, policies, and
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Production Management
25 competitiveness, boost agricultural productivity, and promote
innovation and entrepreneurship.
It's important to note that the productivity movement in India is ongoing
and continues to evolve as the countr y seeks to enhance its economic
growth, competitiveness, and overall development. The National
Productivity Council (NPC) remains a key institution driving productivity -
related initiatives and awareness in the country.
2.7 QUALITY MANAGEMENT
Meaning
Qualit y management includes the determination of a quality policy,
creating and implementing quality planning and assurance, and quality
control and quality improvement
2.8 TOTAL QUALITY MANAGEMENT (TQM)
Meaning
Total Quality Management (TQM) is a comprehensive management
philosophy and approach that emphasizes continuous improvement,
customer focus, and the involvement of all employees in the pursuit of
quality excellence. TQM aims to create a culture where every member of
the organization is committed to delive ring high -quality products or
services and continuously seeking ways to enhance processes.
Definition
“TQM is a strategic approach to produce the best product and service
possible through constant innovation .” —Atkinson. “TQM is a
management system, not a series of programs, it is a system that puts
customer satisfaction before profit.
Key principles of TQM include:
 Customer Focus: Identifying and meeting customer needs and
expectations is the central focus of TQM.
 Continuous Improvement: Encouraging ongoin g improvement in all
aspects of the organization, from processes to products, based on
feedback and data analysis.
 Employee Involvement: Involving employees at all levels in
decision -making and problem -solving to foster a sense of ownership
and commitment to quality.
 Process Orientation: Emphasizing the importance of well -defined
and efficient processes to consistently deliver quality outcomes.
 Data -Driven Decision Making: Using data and metrics to make
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26 Management - II
(Management Applications ) Quality Circles :
Quality Circles are small groups of employees who voluntarily come
together to identify, analyze, and solve work -related problems or issues
that affect quality and productivity. These circles promote employee
involvement and empowerment, allowing them to contribute ideas and
solutions to improve processes and eliminate defects.
Quality Circles typically follow a structured approach, including problem
identification, data analysis, brainstorming solutions, implementation, and
evaluation. T hey are an integral part of TQM and help in fostering a
culture of continuous improvement within an organization.
2.9 ISO 9000 AND ISO 14000
ISO 9000 and ISO 14000 are two separate sets of international standards
that address different aspects of manageme nt and environmental practices
within organizations. Let's take a closer look at each of these standards:
ISO 9000: Quality Management System
The ISO 9000 series of standards focuses on quality management systems
(QMS) and provides guidelines for organizat ions to ensure that their
products and services consistently meet customer requirements and
enhance customer satisfaction. The standards are designed to help
organizations establish, implement, and continually improve their quality
management processes. Th e key components of ISO 9000 include:
1. ISO 9001: This is the core standard within the ISO 9000 series. It
specifies the requirements for a quality management system that an
organization can use to demonstrate its ability to consistently provide
products and services that meet customer and regulatory requirements.
2. ISO 9004: This standard provides guidance for organizations to
achieve sustained success through the effective implementation of a
quality management approach. It focuses on continuous improvement,
self-assessment, and exceeding customer expectations.
3. Benefits: Implementing ISO 9000 standards can lead to improved
product and service quality, increased customer satisfaction, enhanced
organizational efficiency, and better communication and coordinatio n
within the organization.
ISO 14000: Environmental Management System
The ISO 14000 series of standards focuses on environmental management
systems (EMS) and provides guidance for organizations to effectively
manage their environmental responsibilities and minimize their impact on
the environment. The standards help organizations establish and maintain
systematic approaches to environmental management. Key components of
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Production Management
27 1. ISO 14001: This is the core standard within the ISO 14000 series. It
specifies the requirements for an environmental management system
that an organization can use to manage its environmental
responsibilities in a systematic manner.
2. ISO 14004: This standard provides general guidelines on how to
establish, implement, maintai n, and improve an environmental
management system. It offers practical insights into the processes
involved.
3. Benefits: Implementing ISO 14000 standards can lead to reduced
environmental impact, improved regulatory compliance, cost savings
through more effi cient resource use, and enhanced public image by
demonstrating a commitment to environmental responsibility.
Both ISO 9000 and ISO 14000 standards provide frameworks for
organizations to establish systematic approaches to management (quality
and environme ntal, respectively) that contribute to better overall
performance and sustainability. Organizations often choose to implement
these standards to improve their operations, enhance customer satisfaction,
and demonstrate their commitment to quality and enviro nmental
responsibility.
2.10 INVENTORY MANAGEMENT
Meaning
Inventory management refers to the process of ordering, storing, using,
and selling a company's inventory . This includes the management of raw
materials, components, and finished products, as well as warehousing and
processing of such items.
METHODS OF INVENTORY MANAGEMENT
Inventory management tries to efficiently streamline inventories to avoid
both gluts and shortages. Four major inventory management methods
include just-in-time management (JIT), materials requirement planning
(MRP), economic order quantity (EOQ) , and days sal es of inventory
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28 Management - II
(Management Applications ) METHODS
Based on the type of products or businesses there are some inventory
management procedures. Some of the procedures are materials
requirement plannin g (MRP), just-in-time (JIT) manufacturing, day sales
of inventory (DSI) and economic order quantity (EOQ).
MRP (materials requirement planning)
This inventory management procedure is considered as sales -forecast
dependent. In this term, it mainly focuse s on monitoring accurate sales
records of manufacturing products to enable appropriate inventory needs
of the business. Along with this, it is also useful for ensuring the
communication regarding material supply on time. Besides this, the
inability for presenting accurate inventory plans and forecast sales has
benefited from the application of the MRP procedure.
DSI (day sales of inventory)
It is a financial ratio. DSI mainly indicates the average time in a day that
an organization takes to turn its invent ory into sales including goods and
work progress. Additionally, it is also known as average age of inventory,
inventory outstanding and also days in inventory (DII). These are
interpreted in multiple ways. The prime feature of the DSI procedure is to
indic ate liquid inventory management. Moreover, the figure of liquid
inventory represents what the stock of a company could stay for how
many days. In this context, a lower DSI indicates a shortened inventory
clear -off duration, whereas the average DSI varies across different
industries.
JIT (just-in-time)
This method of inventory management permits organizations for reducing
waste and saving money by keeping records of inventory that is required
for selling as well as producing products. JIT also helps in reducing
insurance and storage costs along with liquidating costs or excess
inventory discarding efficiently. On the other hand, to some extent, JIT is
considered risky. In this term, it can be explained that if unexpectedly
demand increases, then the manufac turer may not be able to fulfill that
properly due to limited inventory. Therefore, it will damage the reputation
of that organization as it will be unable to meet consumer demand spikes.
Moreover, it will also be responsible for declining the competitive
advantage of a company across the markets.
EOQ (economic order quantity)
This type of inventory management procedure is mainly applied to
calculate unit numbers of a business that should be added to its inventory.
It is also associated with batch order in terms of reducing total inventory
costs by assuming constant consumer demands as well. Additionally, EOQ
also includes the setup and holding costs of an organization's inventory.
This inventory procedure is effective for ensuring adequate inventory munotes.in

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Production Management
29 amounts per batch order. Therefore, it helps a company to maintain a
record for batch orders and helps to avoid excessive and frequent ordering
issues simultaneously. Besides this, it assumes a trade -off between
inventory setup costs and inventory holding costs. Moreover, by
determining both inventory setup as well as holding costs, the total
inventory costs of an organization can be reduced.
2.11 SUMMARY
In essence, production management is a multidisciplinary field that
involves strategic planning, resource man agement, process optimization,
quality control, and continuous improvement. It plays a vital role in
achieving operational efficiency, delivering high -quality products or
services, and contributing to the overall success of a business
Case Study: Optimizin g Production Processes in a Manufacturing
Company Background: ABC Manufacturing is a medium -sized
company that produces automotive parts. The company has been facing
challenges with its production processes, including production delays,
high levels of scra p and rework, and increasing costs. The management
team is concerned about maintaining competitiveness and meeting
customer demands while improving overall efficiency.
Challenges:
1. Inefficient Workflow: The production workflow is not well -
organized, leadin g to bottlenecks and idle times at certain stages.
2. Quality Issues: The company experiences a high rate of defects,
leading to increased scrap, rework, and customer complaints.
3. Resource Utilization: There is a lack of coordination between
different departme nts, resulting in underutilization of resources and
increased lead times.
4. Lack of Data -driven Decision -making: Decisions are often made
based on intuition rather than data, leading to suboptimal production
planning.
Solution: ABC Manufacturing decides to i mplement a comprehensive
production management strategy to address these challenges.
1. Process Redesign: The company conducts a thorough analysis of its
production processes and identifies bottlenecks. It redesigns the
workflow to streamline processes, elimi nate redundancies, and reduce
waiting times.
2. Quality Control Measures: ABC Manufacturing implements a
quality control system that includes rigorous testing and inspection at
critical points in the production process. This helps identify and rectify
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30 Management - II
(Management Applications ) 3. Cross -functional Teams: The company establishes cross -functional
teams comprising representatives from different departments
(production, procurement, logistics). These teams work together to
ensure better coordination, r esource allocation, and communication.
4. Data Analytics and Forecasting: ABC Manufacturing implements a
data analytics system to gather real -time production data. This system
helps predict demand, identify production trends, and make data -
driven decisions fo r production planning.
5. Training and Skill Development: The company invests in training
programs for its workforce to enhance their skills and improve overall
productivity. This includes both technical training and soft skills
development.
Results:
1. Improved Efficiency: The redesigned production processes lead to
smoother workflows, reduced waiting times, and increased throughput.
2. Enhanced Quality: The implementation of quality control measures
results in a significant reduction in defects, leading to lower s crap rates
and improved product quality.
3. Optimized Resource Allocation: Cross -functional teams improve
communication and collaboration between departments, leading to
better resource utilization and reduced lead times.
4. Data -driven Decision -making: The use of data analytics enables
more accurate demand forecasting, optimized inventory management,
and better production planning.
5. Higher Customer Satisfaction: With improved efficiency and
quality, ABC Manufacturing experiences higher levels of customer
satisfac tion and repeat business.
Conclusion: By implementing a comprehensive production management
strategy that focuses on process optimization, quality control, cross -
functional collaboration, data analytics, and skill development, ABC
Manufacturing successfull y overcomes its production challenges. The
company not only improves its operational efficiency and quality
standards but also strengthens its competitive position in the market and
enhances customer satisfaction.
Case Study: Enhancing Productivity at XYZ Electronics
Background: XYZ Electronics is a medium -sized electronics
manufacturing company that produces a range of consumer electronic
devices. Over the past few years, the company has been experiencing
challenges related to low productivity, high produc tion costs, and
inconsistent product quality. These issues are impacting its
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Production Management
31 Challenges:
1. Low Efficiency: Production processes are not optimized, leading to
inefficiencies, delays, and extended lead times.
2. High Costs: The company is facing rising production costs due to
wastage, inefficiencies, and overutilization of resources.
3. Inconsistent Quality: Defects and rework are common, affecting
product quality and customer satisfaction.
4. Lack of Innovation: The company is struggl ing to introduce new
products and adapt to market trends.
Solution: XYZ Electronics decides to embark on a comprehensive
productivity improvement initiative to address these challenges.
1. Process Reengineering: The company conducts a thorough analysis
of its production processes, identifies bottlenecks, and redesigns
workflows. This streamlines operations and reduces waiting times.
2. Lean Principles: XYZ Electronics adopts lean manufacturing
principles to eliminate waste and unnecessary steps from its processes .
This includes implementing 5S practices, visual management, and
value stream mapping.
3. Quality Management System: The company implements a robust
quality management system, including regular inspections, quality
control checkpoints, and employee training on quality standards.
4. Technology Integration: XYZ Electronics invests in automation and
advanced manufacturing technologies to improve efficiency and
reduce human errors. This includes the implementation of robotics and
computerized systems.
5. Employee Empow erment: The company promotes a culture of
continuous improvement and encourages employees to contribute
ideas for enhancing productivity. Regular training programs are
conducted to upskill the workforce.
6. Innovation and R&D: XYZ Electronics establishes a de dicated
research and development (R&D) team to develop innovative products
and stay ahead of market trends. This helps the company introduce
new products faster.
Results:
1. Increased Efficiency: The process reengineering and lean practices
lead to a signific ant increase in production efficiency. Waiting times
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32 Management - II
(Management Applications ) 2. Cost Reduction: The adoption of lean principles and technology
integration results in reduced wastage, lower production costs, and
improved resource util ization.
3. Enhanced Quality: The implementation of a rigorous quality
management system leads to a substantial reduction in defects and
rework, resulting in higher product quality.
4. Faster Innovation: The dedicated R&D team enables XYZ
Electronics to introduc e new products to the market more quickly,
enhancing its competitiveness.
5. Higher Productivity: Overall, the company experiences a notable
increase in productivity, with more products being produced in less
time and at lower costs.
Conclusion: Through a com bination of process reengineering, lean
practices, quality management, technology integration, employee
empowerment, and innovation, XYZ Electronics successfully improves its
productivity and overcomes its operational challenges. The company not
only achie ves higher efficiency and quality but also enhances its ability to
innovate and adapt to changing market demands, ultimately strengthening
its position in the industry and improving its bottom line.
Case Study: Implementing TQM at ABC Auto Parts
Background : ABC Auto Parts is a medium -sized manufacturer of
automotive components. The company was facing challenges related to
inconsistent product quality, high defect rates, and declining customer
satisfaction. In order to address these issues and enhance its
competitiveness, ABC Auto Parts decided to adopt a Total Quality
Management (TQM) approach.
Challenges:
1. Inconsistent Quality: The company's products were prone to defects
and variations in quality, leading to frequent customer complaints.
2. High Defect Rates: The defect rates in the manufacturing process
were leading to increased scrap and rework costs.
3. Customer Dissatisfaction: The inconsistent quality and frequent
defects were affecting customer satisfaction and loyalty.
4. Lack of Continuous Improvement: The co mpany lacked a structured
approach to continuous improvement, hindering its ability to address
root causes of quality issues.
TQM Implementation: ABC Auto Parts initiated a TQM initiative with
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Production Management
33 1. Leadership Commitment: Top management demonstrated a strong
commitment to TQM, emphasizing the importance of quality and
continuous improvement.
2. Employee Training: Employees at all levels received training in
TQM principles, quality management concepts, and problem -solving
techniques.
3. Quality Circles: Cross -functional quality circles were formed,
comprising employees from different departments. These circles met
regularly to discuss quality issues, identify root causes, and propose
solutions.
4. Process Redesign: The company conducted a thorough a nalysis of its
production processes, identified bottlenecks, and redesigned
workflows to eliminate waste and improve efficiency.
5. Statistical Process Control (SPC): ABC Auto Parts implemented
SPC techniques to monitor and control the manufacturing process,
ensuring that variations were within acceptable limits.
6. Supplier Collaboration: The company collaborated closely with its
suppliers, emphasizing the importance of quality standards and timely
delivery of raw materials.
7. Customer Feedback: Customer feedback was actively collected and
analyzed to identify areas for improvement and enhance customer
satisfaction.
8. Continuous Improvement: The TQM approach fostered a culture of
continuous improvement, where employees were encouraged to
suggest and implement ideas f or enhancing quality and efficiency.
Results:
1. Improved Quality: The implementation of TQM led to a significant
reduction in defects and variations in product quality. The company's
products became more consistent and reliable.
2. Cost Savings: With fewer defe cts and rework, the company
experienced cost savings and reduced scrap expenses.
3. Enhanced Customer Satisfaction: The improved product quality
resulted in higher customer satisfaction, leading to increased customer
loyalty and repeat business.
4. Efficiency Gains: The process redesign and SPC techniques improved
overall process efficiency, reducing lead times and production delays.
5. Employee Engagement: Employees were actively engaged in
problem -solving and continuous improvement efforts, leading to a
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34 Management - II
(Management Applications ) Conclusion: By implementing Total Quality Management (TQM)
principles, ABC Auto Parts successfully transformed its operations and
overcame its quality -related challenges. The company's commitment to
quality, employee involveme nt, process optimization, and continuous
improvement resulted in improved product quality, increased customer
satisfaction, and enhanced competitiveness in the automotive industry.
TQM not only addressed immediate issues but also created a foundation
for sustained excellence in quality and operations.
Certainly, here's a case study illustrating the successful implementation of
quality circles within a manufacturing company:
Case Study: Quality Circles at XYZ Manufacturing
Background: XYZ Manufacturing is a large industrial equipment
manufacturer facing challenges related to product defects, high levels of
rework, and inefficient production processes. To address these issues and
foster a culture of continuous improvement, the company decided to
implement qual ity circles.
Challenges:
1. High Defect Rates: The company was experiencing frequent product
defects, leading to increased scrap and rework costs.
2. Inefficient Processes: Production processes were not optimized,
resulting in bottlenecks and longer lead times.
3. Lack of Employee Involvement: Employees were not actively
involved in identifying and solving quality -related issues.
Quality Circle Implementation: XYZ Manufacturing introduced quality
circles with the following steps:
1. Formation of Quality Circles: Cross -functional quality circles were
formed, comprising employees from various departments, including
production, engineering, and quality control.
2. Training and Education: Employees in the quality circles received
training on quality management concepts, proble m-solving techniques,
and effective team collaboration.
3. Identification of Issues: Quality circle members were encouraged to
identify and prioritize quality -related issues within their respective
areas of expertise.
4. Data Collection and Analysis: The quality circles collected data on
defects, production inefficiencies, and other quality -related metrics.
They analyzed the data to identify root causes.
5. Brainstorming and Solutions: The quality circle members conducted
brainstorming sessions to generate potential solutions for the identified
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35 6. Implementation of Solutions: Once solutions were agreed upon, the
quality circle members implemented changes to the processes,
workflows, and quality control measures.
7. Regular Meetings: Quality circles held regular mee tings to discuss
progress, share insights, and evaluate the impact of implemented
solutions.
Results:
1. Reduced Defects: The implementation of quality circle initiatives led
to a significant reduction in product defects, resulting in lower scrap
and rework c osts.
2. Efficiency Improvements: Quality circles identified and addressed
inefficiencies in production processes, leading to streamlined
workflows and reduced lead times.
3. Employee Empowerment: Employees in the quality circles felt
empowered and engaged, as t hey actively contributed to problem -
solving and process improvement.
4. Cross -Functional Collaboration: Quality circles promoted
collaboration between different departments, facilitating a holistic
approach to problem -solving.
5. Continuous Improvement Culture: The introduction of quality
circles fostered a culture of continuous improvement throughout the
organization.
Conclusion: By implementing quality circles, XYZ Manufacturing
successfully addressed its quality -related challenges and improved overall
producti on processes. The active involvement of employees in problem -
solving, data analysis, and solution implementation resulted in reduced
defects, enhanced efficiency, and a culture of continuous improvement.
Quality circles not only led to immediate improvemen ts but also
contributed to a more engaged and empowered workforce, ultimately
benefiting the company's competitiveness and long -term success
Case Study: ISO 9000 and ISO 14000 Implementation at GreenTech
Electronics
Background: GreenTech Electronics is a me dium -sized electronics
manufacturing company that specializes in producing environmentally
friendly consumer electronics. The company recognized the need to
enhance its quality management and environmental practices to remain
competitive and align with its sustainability goals. To achieve this,
GreenTech Electronics decided to implement ISO 9000 and ISO 14000
standards.

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(Management Applications ) Implementation Process:
ISO 9000 (Quality Management System):
1. Assessment and Planning: GreenTech Electronics conducted a
thorough assessment of its existing quality management practices and
identified areas for improvement. The management team established a
clear plan for ISO 9000 implementation.
2. Documentation: The company developed comprehensive
documentation outlining its quality management processes,
procedures, and policies. This documentation provided a clear
roadmap for employees to follow.
3. Training and Awareness: Employees received training on ISO 9000
standards, quality principles, and their roles in ensuring product
quality. Awareness campaigns were conducted to emphasize the
importance of quality throughout the organization.
4. Implementation: GreenTech Electronics implemented the documented
quality management processes across all departments. Quality control
checkpoints and inspections we re introduced at various stages of
production.
5. Monitoring and Continuous Improvement: The company
established a system to monitor and measure key quality metrics, such
as defect rates and customer complaints. Regular reviews and audits
were conducted to id entify areas for continuous improvement.
ISO 14000 (Environmental Management System):
1. Environmental Assessment: GreenTech Electronics conducted an
environmental assessment to identify its significant environmental
aspects and potential impacts. This assessm ent helped the company
understand its environmental responsibilities.
2. Development of EMS: Based on the environmental assessment, the
company developed an Environmental Management System (EMS).
This system included policies, objectives, and action plans to minimize
environmental impacts.
3. Employee Training: Employees were trained on the importance of
environmental sustainability, waste reduction, and resource
conservation. They were educated on how their roles contributed to the
company's environmental goals.
4. Implementation of EMS: GreenTech Electronics integrated the EMS
into its operations. Energy -efficient practices, waste reduction
measures, and responsible sourcing of materials were implemented.
5. Monitoring and Compliance: The company closely monitored its
environmental performance, tracking metrics such as energy
consumption, waste generation, and emissions. Regular compliance
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37 Results:
ISO 9000:
1. Enhanced Product Quality: The implementation of ISO 9000 led to
improved product quality, fewer defects, and higher customer
satisfaction.
2. Streamlined Processes: The structured quality management processes
helped streamline production workflows and reduce errors.
3. Cultural Shift: Employees developed a culture of quality awareness,
leading to greater attention to detail and proactive problem -solving.
ISO 14000:
1. Reduced Environmental Impact: The implementation of ISO 14000
resulted in reduced energy consumption, minimized waste generation,
and lowered environmental impacts.
2. Green Reputation: GreenTech Electronics gained a reputation for
environmental responsibility, attracting environmentally conscious
customers.
3. Compliance: The company consistently met environmental
regulations, avoiding penalties and legal issues.
Conclusion: By implementing ISO 9000 and ISO 14000 standards,
GreenTech Electronics successfully improved its quality management
practices, enhanced product quality, and demonstrated its commitment to
environmental sustainability. These initiatives not only led to operational
improvements but also positioned the company as a responsible and
competitive player in the electronics manufacturing industry.
Case Study: Inventory Management Optimization at XYZ Retail
Background: XYZ Retail is a large chain of retai l stores with multiple
locations. The company was facing challenges in managing its inventory
effectively, leading to stockouts, excess inventory, and increased carrying
costs. To address these issues and improve overall inventory management,
XYZ Retail de cided to implement a comprehensive inventory
management solution.
Challenges:
1. Stockouts and Lost Sales: Inadequate inventory levels were resulting
in frequent stockouts, leading to lost sales and customer
dissatisfaction.
2. Excess Inventory: Some stores were holding excess inventory, tying
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38 Management - II
(Management Applications ) 3. Lack of Visibility: The company lacked real -time visibility into
inventory levels across its various locations, leading to inefficient
replenishment decisions.
4. Manual Processes: Inventory management was primarily managed
manually, leading to errors, inaccuracies, and delays in replenishment.
Inventory Management Solution:
1. Technology Implementation: XYZ Retail adopted an advanced
inventory management software that provided real -time v isibility into
inventory levels, sales trends, and demand patterns across all locations.
2. Demand Forecasting: The company implemented demand
forecasting models to predict future demand based on historical data,
seasonal trends, and market conditions.
3. Reorde r Point Optimization: Using the demand forecasts and lead
time data, XYZ Retail established optimal reorder points to ensure
timely replenishment without excess inventory.
4. Safety Stock Levels: Safety stock levels were calculated to account
for demand varia bility and unexpected disruptions in the supply chain.
5. ABC Analysis: XYZ Retail categorized its inventory items using the
ABC analysis, classifying items based on their value and criticality.
This helped prioritize inventory management efforts.
6. Supplier Collaboration: The company collaborated closely with key
suppliers to improve visibility into their production schedules, lead
times, and delivery capabilities.
7. Employee Training: Store employees were trained on the new
inventory management system and proces ses, emphasizing accurate
data entry and timely replenishment.
Results:
1. Reduced Stockouts: With optimized reorder points and safety stock
levels, XYZ Retail experienced a significant reduction in stockouts,
leading to higher customer satisfaction and sales .
2. Lower Carrying Costs: Excess inventory was minimized, leading to
lower carrying costs and improved capital utilization.
3. Improved Replenishment: Real-time visibility into inventory levels
and demand patterns allowed the company to make informed
replenishm ent decisions, reducing the need for emergency orders.
4. Efficiency Gains: The adoption of technology and automated
processes streamlined inventory management, reducing manual errors
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39 5. Data -Driven Decisions: The company began making data -drive n
decisions based on accurate demand forecasts and inventory insights
Conclusion:
By implementing an advanced inventory management solution, XYZ
Retail successfully optimized its inventory levels, reduced stockouts, and
improved overall operational efficie ncy. The company's ability to make
informed replenishment decisions based on accurate data and demand
forecasts led to improved customer satisfaction, reduced carrying costs,
and enhanced profitability. The case demonstrates the significance of
adopting te chnology and data -driven approaches in effective inventory
management.
Technology Implementation: XYZ Retail adopted an advanced
inventory management software that provided real -time visibility into
inventory levels, sales trends, and demand patterns acros s all locations.
1. Demand Forecasting: The company implemented demand forecasting
models to predict future demand based on historical data, seasonal
trends, and market conditions.
2. Reorder Point Optimization: Using the demand forecasts and lead
time data, XYZ Retail established optimal reorder points to ensure
timely replenishment without excess inventory.
3. Safety Stock Levels: Safety stock levels were calculated to account
for demand variability and unexpected disruptions in the supply chain.
4. ABC Analysis: XYZ Retail categorized its inventory items using the
ABC analysis, classifying items based on their value and criticality.
This helped prioritize inventory management efforts.
5. Supplier Collaboration: The company collaborated closely with key
suppliers to impr ove visibility into their production schedules, lead
times, and delivery capabilities.
6. Employee Training: Store employees were trained on the new
inventory management system and processes, emphasizing accurate
data entry and timely replenishment.
Results:
1. Reduced Stockouts: With optimized reorder points and safety stock
levels, XYZ Retail experienced a significant reduction in stockouts,
leading to higher customer satisfaction and sales.
2. Lower Carrying Costs: Excess inventory was minimized, leading to
lower carrying costs and improved capital utilization.
Improved Replenishment: Real-time visibility into inventory levels and
demand patterns allowed the company to make informed replenishment
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40 Management - II
(Management Applications ) 2.12 QUESTIONS
Q.1Fill in the blanks :-
1) ________ is a measure of efficiency
a) productivity b) inventory c) technology
2) The productivity movement in India started in________
a)1957 b) 1947 c) 1966
3) DSL is a ______ ratio
a) financial b) sales c) cost
4) Tqm is a _________ ratio
a) enhance b) strategic c) extensive
5) Quality circles are ___ group
a) small l b) large c) mass
True or False
1) The team uses MRP techniques to determine the quantity -true
2) In 1950 the green revolution bo omed -false
3) Monitoring inventory level to avoid stock Out -true
4) Jit method helps in reducing insurance and storage cost - true 5)
Developing production schedules ensures capacity planning - true
Match the column
A B
1. Production management a. Cost
2. Npc b. Operation
3. IT c. Labour
4. Inventory d. BPO
5. Automation e. 1958
Ans- 1-b 2-e 3- d 4-a 5- c
Answer in brief
1) what is the scope of production management ?
2) what are the types of inventory management?
3) Write key principles of tqm .
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41 4) Write a note on
 productivity movement in India
 TQM
 ISO 9000 14000
 measures to increase productivity
 steps in planning
2.13 REFERENCES
1. "Operations Management" by Jay Heizer and Barry Render: This
comprehensive textbook covers various aspects of operat ions
management, including production planning, scheduling, inventory
management, and quality control.
2. "Production and Operations Analysis" by Steven Nahmias: This
book provides a detailed analysis of production and operations
management concepts, with a f ocus on quantitative techniques and
decision -making.
3. "Introduction to Materials Management" by J.R. Tony Arnold,
Stephen N. Chapman, and Lloyd M. Clive: While primarily focused
on materials management, this book offers insights into the broader
aspects of production management, including inventory control and
supply chain management.
4. "Manufacturing Planning and Control for Supply Chain
Management" by F. Robert Jacobs and William L. Berry: This
book covers manufacturing planning and control techniques, inclu ding
production scheduling, capacity planning, and resource allocation.
5. "Production and Operations Management" by S. Anil Kumar and
N. Suresh: A comprehensive textbook that covers various topics in
production and operations management, including production systems,
facility layout, and quality management.
6. "Production Planning and Control" by Stephen A. Zaharuddin
and Mohd Nizam Ab Rahman: This book focuses on production
planning and control techniques, providing insights into demand
forecasting, scheduling, and capacity planning.
7. "Operations Management" by Nigel Slack, Alistair Brandon -
Jones, and Robert Johnston: An in -depth textbook covering
operations management principles, including production processes,
capacity management, and lean production.
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42 Management - II
(Management Applications ) 8. "Modern Production/Operations Management" by Elwood S.
Buffa and Rakesh K. Sarin: This classic book explores production
and operations management concepts, including process analysis,
layout planning, and quality management.
9. "Principles of Operations Management" by Jay Heizer and Barry
Render: Another valuable textbook by Heizer and Render, this book
provides a comprehensive overview of operations and production
management principles.
10. "Operations Management: Sustainability and Supply Chain
Management" by Jay Heizer, Barry Render, and Chuck Munson:
This book explores operations management in the context of
sustainability and supply chain management, addressing contemporary
challenges.
11. "Handbook of Production Management Methods" by Andrew M.
Sage and William B. Rouse: A comprehensive reference book that
covers a wide range of production management methods, techniques,
and tools.
12. "The Goal: A Process of Ongoing Improvement" by Eliyahu M.
Goldratt: While not a traditional production management textbook,
this novel introdu ces the Theory of Constraints, which is a valuable
concept in optimizing production processes.



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43 3
HUMAN RESOURCE MANAGEMENT - I
Unit Structure :
3.0 Objective
3.1 Introduction
3.2 Human Resource Management
3.3 Nature/Features of Human Resource Management
3.4 Functions Of HRM
3.5 Human Resource Planning (HRP)
3.6 Human Resource Development
3.7 Performance Appraisal
3.8 Employee Retention
3.9 Summary
3.10 Questions
3.0 OBJECTIVE
On successful completion of the module students will be able to:
1. To develop an understanding of the functions of HRM.
2. To distinguish between Recruitment a nd Selection.
3. To relate the various stages in the Training cycle.
4. To develop an understanding of the basics of compensation
management and Performance appraisal.
5. To discuss managing employee relations.
3.1 INTRODUCTION
Human Resource Management ( HRM) is a strategic and integral function
within organizations that focu ses on the effective management of people
to achieve organizational goals. It encompasses a wide range of activities
related to the acquisition, development, utilization, and managemen t of an
organization's workforce . The primary objective of HRM is to max imize
the performance and potential of employees in order to contribute to the
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44 Management - II
(Management Applications ) 3.2 HUMAN RESOURCE MANAGEMENT
The term human resources was first us ed in the early 1900s, and then more
widely in the 1960s, to describe th e people who work for the organization,
in aggregate . Human Resource Management is the process of
recruiting , selecting , inducting employees, providing orientatio n,
imparting training and development , appraising the performance of
employees , deciding compensation and providin g benefits , motivating
employees , maintaining proper relations with employees and their trade
unions , ensuring employees safety, welfare and heal th measures in
compliance with labour laws of the land.
HRM is employee management with an emphasis on those employees as
assets of the business. In this context, employees are sometimes referred to
as human capital. As with other business assets, the goa l is to make
effective use of employees, reducing risk and maximizing return on
investment.
HRM as a discipline has a few essential features. HRM is regarded as a
subsystem of the organization.
3.3 NAT URE/FEATURES OF HUMAN RESOURCE
MANAGEMENT
1. Human Re source Management Is an Art and a Science.
2. Human Resource Management Is Pervasive
3. HRM is a Serv ice Function
4. HRM is a Process
5. HRM is a Cont inuous Process
6. HRM must Be Regulation -Friendly.
7. HRM is An Inte rdisciplinary and Fast -Changing
8. Human Resource Management is Focused on Results.
9. Human Resource Management is People -Centered
10. Human Relation s Philosophy
11. HRM i s an Integrated Concept
12. HRM Develops Team Spirit
3.4 FUNCTIONS OF HRM
1. Job design and job analysis
2. Employee hiring and selection.
3. Employee trainin g & development
4. Compensation and Benefits
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45 6. Managerial relations
7. Labour relations
8. Employee eng agement & communication
9. Health and safety regulations
10. Personal support for employees
11. Succession Planning
12. Industrial Relations
1. Job de sign and job analysis: Job design involves the process of
describing dut ies, responsibilities and operations of the job. To hire the
right employees based on rationality and research, it is important to
identify the traits of an ideal candidate who would b e suitable for the
job. This can be done by describing the skills and ch aracter traits of
your top -performing employee. Doin g so will help you determine the
kind of candidate you want for the job. You will be able to identify
your key minimum requirements in the candidate to qualify for the
job.Job analysis involves describing the job requirements, such as
skills, qualification and work experience. The vital day -to-day
functions need to be identified and described in detail, as they will
decide the future c ourse of action while recruiting.
2. Employee hiring and selection: HRM ai ms to obtain and retain
qualified and efficient empl oyees to achieve the goals and objectives
of the company. All this starts with hiring the right employees out of
the list of appl icants and favourable candidates.HRM helps to source
and identify the ideal candidates for interview and selection. The
candidates are then subjected to a comprehensive screening process to
filter out the most suitable candidates from the pool of applicants. The
screened candidates are then taken through different interview ro unds
to test and analyse their skills, knowledge and work experience
required for the job position.
Once the primary functio ns of HRM in recruitment are completed, and
the candidate gets selected after rounds of interviews, they are then
provided with the job offer in the respective job positions.
3. Employee training & developme nt: Imparting proper training and
ensuring the right development of the selected candidatesis a crucial
function of HR. After all, the success of the organization depends on
how well t he employees are trained for the job and what are their
growth and devel opment opportunities within the organization.The
role of HR should be to ensure that the new employees acquire the
company -specific knowledge and skills to perform their task
efficient ly. It boosts the overall efficiency and productivity of the
workforce, which ultimately results in better business for the company.
4. Compensation and Benefits : The role of human resource
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46 Management - II
(Management Applications ) without d isturbing the finances of the company.The primary ob jective
of the benefits and compensation is to establish equitable and fair
remuneration for everyone. Therefore, one of the core HR department
functions is to lay down clear policies and guidelines about employee
compensation and their available benefits.
5. Employee performance management: Effective performance
management ensures that the output of the employees meets the goals
and obje ctives of the organization. Performance management doesn’t
just focus on the performance of the employee. It also focuses on the
performance of the team, the department, and the organization as a
whole.
6. Managerial relations: Relationships in employment are normally
divided into two parts — managerial relations and labour relat ions.
While labour relations is mainly about the rel ationship between the
workforce and the company, managerial relations deals with the
relationship between the various processes in a n or ganization.It
determine the amount of work that needs to be done in a given day and
how to mobilise the workforce to acc omplish the objective. It is about
giving the appropriate project to the right group of employees to
ensure efficient completion of the project. It is essential that HR
handles such relations effectively to maintain the efficiency and
productivity of the c ompany.
7. Labour relations: Cordial labour relations are essential to maintain
harmonious relationships between employees at the workp lace. At the
workplace, many employees work together towards a single ob jective.
However, individually, everyone is differen t from the other in
characteristics. Hence, it is natural to observe a communication gap
between two employees. If left unattended, such behaviours can spoil
labour relations in the company.Therefore, it is crucial for an HR to
provide proper rules, regula tions and policies about labour relations, so
that every employee will be aware of the policies which will create a
cordial and harm onious work environment.
8. Employee engagement and communication: Employee
engagement is a crucial part of every organization. Higher levels of
engagement guarantee better productivity and greater employee
satisfaction. Efficiently managing employee engagement activities will
help in improving the employee rete ntion rates too. HRM is the right
agent who can manage the employee engagement seamlessly. Proper
communication and engagement will do w onders for the employees as
well as the organization. The more engag ed the employees are, the
more committed and motivat ed they will be.
9. Health and safety regulations: Every employer should mandatorily
follow the health and safety regulations laid out by the authorities. Our
labour laws insist every employer provide whatev er training, supplies,
and essential information to ensure the safety and health of the
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47 procedures or culture is t he right way to ensure the safety of the
employees. Making these safety regulations part of company activities
is one of the important functions of HRM.
10. Personal support for employees : HRM assists employees when they
run into personal problems which may i nterfere with the workflow.
Along with discharging administrative respon sibilities, HR
departments also help employees in ne ed. Since the pandemic, the
need for employee support and assistance has substantially increased.
For example, many employees needed extra time off and medical
assistance during the peak period of the pan demic. For those who
reached out for help, whether i t may be in the form of insurance
assistance or extra leaves, compani es provided help through HR teams.
11. Succession Planning: Succession plann ing is a core function of
HRMs. It aims at planning, monitoring, and managing the growth path
of the employees from within the organizations.What usually happens
is that promising and bright employees within the organization who
have excelled in their role s are handpicked by their supervisors and
HRs, and t heir growth paths are developed.Succession planning helps
identify the next person who is just right to replace the outgoing
individ ual.However, while developing such employees towards a
higher role, comp anies must keep in mind several aspects, such as
improving employee engagement, assigning challenging tasks and
activities.
12. Industrial Relations: For a company, especially into manufac turing
and production, the HRs must have ongoing Industrial Relations
practices. They must also continuously engage with the Unions in a
friendly and positive manner to maintain amicable relations.The true
motive of Industrial Relation touches on a lot of issues within the
company. Industrial Relations may be in place to meet wage standards,
reduce instances that call for strik es and protests, improve working and
safety conditions for employees, reduce resource wastage and
production time and so on.Industri al Relations is extremely important
because, if handled properly, it can circumvent protests, violence,
walkouts, lawsuits, loss of funds and production time. IR is a sensitive
yet critical function of the HR department, naturally, it requires
personnel wi th vast experience.
3.5 HUMAN RESOURCE PLANNING (HRP)
Human resources planning ensures the right type of people, in the ri ght
number, at the right time and place, who are trained and motivated to do
the right kind of work at the right time, It determines the requirement of
personnel as per organizational objectives. The ulti mate aim of HRP is
the optimum allocation of a quali fied workforce .In HRP, the manager
recruits human resources for present and future requirements.
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48 Management - II
(Management Applications ) Steps in Human Resource Planning :
Hum an resource planning is a process through which the right candidate
for the right job is ensured. For conducting any pro cess, the foremost
essential task is to develop the organizational objective to be achieved
through conducting the said process.
1. Anal yzing Organizational Objectives: The objective to be achieved in
future in various fields such as production, marketing, finance, expansion
and sales gives the idea about the work to be done in the organization.
2. Inventory of Present Human Resources: From the updated human
resource information storage sys tem, the current number of employees,
their capacity, perfor mance an d potential can be analyzed. To meet the
various job requirements, the internal sources (i.e., employees from within
the organizatio n) a nd external sources (i.e., candidates from various
placement agencie s) can be estimated.
3. Forecasting Demand and Suppl y of Human Resource: The human
resources required at different positions according to their job profile are
to be estimated. The avai lable internal and external sources to fulfill those
requirements are al so measured. There should be proper matching of job
description and job specification of one particular work, and the pro file of
the person should be suitable to it.
4. Estimating Man powe r Gaps: Comparison of human resource demand
and human resource supply will provide with the surplus or deficit of
human r esource. Deficit represents the number of people employed,
whereas surplus represents termination. Extensive use of proper training
and development program can be done to upgrade the skills of employees.
5. Formulating the Human Resource Action Plan: The hu man resource
plan depends on whether there is deficit or surplus in the organization.
Accord ingly, the plan may be finalized either for new recruitment,
training, interdepartmental transfer in case of de ficit of termination, or
voluntary retirement scheme s and redeployment in case of surplus.
6. Monitoring, Control and Feedback: It mainly involves
implementation of the human resource a ction plan. Human resources are
allocated according to the requirements, and inventories are updated over
a period. The plan is monitored strictly to identify the deficiencies and
remove them. Comparison between the human resource plan and its actual
imple ment ation is done to ensure the appropriate action and the
availability of the required number of employees for various jobs .
3.6 HUMAN RESOURCE DEVELOPMENT
Human resource development includes training a person after he or she is
first hired, providing opp ortunities to learn new skills, distributing
resources that are benefici al for the employee's tasks, and any other
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49 Human resource development in the organization context is a process by
which the employees of an organization are h elped, in a continuous and
planned way to:
1. Acquire or sharpen capabiliti es required to perform various functions
associated with their present or expected future roles.
2. Develop their general capabilities as individuals and discover and
exploit their own in ner potentials for their own and/or organizational
development purposes; and
3. Develop an organizational culture in which supe rvisor -subordinate
relationships, teamwork and collaboration among sub -units are strong
and contribute to the professional wellbeing , mo tivation and pride of
employees.
Methods of Training:
Management dev elopment is a systematic process of growth and
devel opment by which the managers develop their abilities to man age. It is
concerned with not only improving the performance of managers but also
giving them opportunities for growth and develop ment.
There a re two methods through which managers can improve th eir
knowledge and skills. One is through formal training and other is through
on the job experiences. The two methods are:
I: On-the-job Training Method
II: Off-the-Job Methods
On the job training is ve ry important since real learning takes place only
when one practices what they have studied.
But it is also equally important in gaining knowledge through classroom
learning. Learning beco mes fruitful only when theory is combined with
practice. Therefore, on the job methods can be balanced with classroom
training methods (off -the-job methods).
I.On-the-job training methods are as follows:
1. Job rotation: This training method involves the m ovem ent of a trainee
from one job to another to gain knowledge and exper ience from
different job assignments. This method he lps the trainee under stand
the problems of other employees.
2. Coaching: Under this method, the trainee is placed under a particular
supervisor who functions as a coach in training and provides feedback
to the trainee. Sometimes the trainee may not get an opp ortunity to
express his ideas.
3. Job instructions: Also known as step -by-step training in which the
trainer explains the way of doing t he jobs to the trainee and in case of
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50 Management - II
(Management Applications ) 4. Committee assignments: A group of trainees are asked to solve a
given organizational problem by discussing the problem. This helps to
improve teamwork.
5. Internship training: Under this met hod, instructions through
theoretical and practical aspects are provided to the trainees. Usually,
students from the enginee ring and commerce colleges receive this type
of training for a small stipend.
II: Off-the-job Methods are as follows:
1. Case study method :Usually case study deals with any problem
confronted by a business which can be solved by an employee. The
trainee is g iven an opportunity to analyse the case and come out with
all possible solutions. This method can enhance analytic and critical
thinking of an employee.
2. Incident method: Incidents are prepared on the basis of actual
situations which happened in different or ganizations and each
employee in the training group is asked to make decisions as if it is a
real-life situation. Later on, the enti re group discusses the incident and
takes decisions related to the incid ent on the basis of individual and
group decisions.
3. Role play: In this case also a problem situation is simulated by asking
the employee to assume the role of a particular person in the situation.
The participant interacts with other participants assuming d ifferent
roles. The whole play will be recorded, and trainees get an opportunity
to examine their own performance.
4. In-basket method: The employees are given information about an
imagina ry company, its activi ties and products, HR employed, and all
data rela ted to the firm. The trainee (employee under trainin g) has to
make notes, delegate tasks and prepare schedules within a specified
time. This can develop situational judgments and quick decision -
making skills of employees.
5. Business games: According to this m ethod the trainees are divided into
groups and each group has to discuss various activities and functions
of an imaginary organization. They will discuss and decide about
various subje cts like production, promotion, pricing etc. This results in
co-operativ e decision -making process.
6. Grid training: It is a con tinuous and phased program lasting for six
years. It includes phases of planning development, implementation and
evaluation. The gri d takes into consideration parameters like concern
for people and concer n for people.
7. Lectures: This will be a suitable metho d when the numbers of trainees
are quite large. Lectures can be very helpful in explaining the concepts
and principles very clearly, and face to face interaction is very much
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51 8. Simulation: Under t his method an imaginary situation is created, and
trainees are asked to act on it. For e.g., assuming the role of a
marketing manager solving the marketing problems or creating a new
strategy etc.
9. Management education: At present universities and management
institutes give great emphasis to management educat ion. For e.g.,
Mumbai University has started bachelors and postgraduate degree in
Management. Many management Institutes provide not only degrees
but also hands on experience having collaboration with bus iness
concerns.
10. Conferences: A meeting of several peo ple to discuss any subject is
called a conference. Each par ticipant contributes by analyzing and
discussing various issues related to the topic. Everyone can express
their own viewpoint.
3.7 PERFORMANCE APPRAISAL
Performance appraisal is a process for eva luating and documenting how
well an employee is carrying out his or her job . It is part of a company's
performance management system . Performance appraisals are based on
the employee's progress against go als set once a year with his or her
manager.
A perfo rmance appraisal used in the organization is a regular review of
employees’ performance to verify their contribution to the company. It is
also known as an annual review or performance evaluation. It eval uates
the skills, growth, achievement, or failure of the employees. The
performance appraisal is often used to justify the decisions related to
promotions, pay hikes, bonuses, and termination of the employee .
Performance Appra isal definitions:
Edwin B. Flippo “Performance appraisal is a systematic, periodic and so
far as humanly possible, an impartial rati ng of an employee's excellence in
matters pertaining to his present job and to his potentialities for a better
job.”
Gomej -Mejia “Performance Appraisal involves the identification,
measure ment and management of human performance in organisation.”
Slabbert and Swanepoel “Performance appraisal is a formal and
systematic process by means of which the relevant strengths and
weaknesses of the employees are identified, measured, recorded and
deve loped.”
Methods of Performance Appraisal
Employee performance appraisal has two types of methods namely
traditional methods and modern methods used by various organizations.
The traditional methods are quite simple and quick to execute while the
modern me thods are more focused on covering the overall well -being of
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(Management Applications ) Traditional Methods of Employee Performance Appraisal
 Rating Scales: In this scale, factors such as attitude, initiative,
dependability, etc are quantified. A range of excellent to poor is
provided to the rater and based on the rating the performanc e of the
employee is calculated.

 Checklist: A check list form of performance appraisal consist of a
column of ‘Yes’ and ‘No’ for different employee traits. The rater has
to put a tick mark based on if the traits exist or do not exist in the
employee.

 Forc ed Choice Method : In this method, different statemen ts about the
performance of the employee are provided to the rater and he/she is
forced to answer the ready -made statements as true or false. Further
evaluation of performance is carried on by the Human
Resource department based on the answers of the rater.

 Forced Distribution Method : In this method, it is assumed that the
performance of an employee conforms to a bell-shaped curve . Thus,
the rater has to put employees on provided points on the scale.

 Critical Incidents Method : Here the critical behavior of the employee
is considered by the supervisor while evaluating the performance.

 Behaviorally Anchored Rating Scale : Different statements which are
descriptive in nature are prepared about the behavior of the employee.
These behaviors a re put on the scale points and the rater has to indicate
the points whic h explain the employee behavior in a more exact way.

 Field Review Method : In this method, the reviewer of the
performance is generally someone outside the department. The people
from the HR department or corporate office do the performance
evaluation of t he employee based on the records and interviews.

 Performance Tests and Observations : This is a kind of oral test that
is conducted to test the skills and knowledge of the employees in their
respective fields. The employees sometimes receive a situation an d are
asked to demonstrate their skills and then the ir performance is
evaluated based on that presentation.

 Confidential Reports : Often the government departments follow this
method o f performance evaluation. The employees are evaluated based
on the param eters such as leadership quality, teamwork, integrit y,
technical ability, attendance, etc. The reviewer sends a confidential
review to the concerned authority about the performance of the
employee.

 Essay Method: Under this method, the detailed description of the
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53 employee, his relations with other Co -workers, requirements
of training and development programs, strengths and w eaknesses of
the employee etc. are some of the point s that are included in the essay.
The efficiency of this traditional method of performance appraisal
depends on the writing skills o f the rater.

 Cost Accounting Method : It is a simple method in which the
performance of the employee is linked with the mone tary benefits of
the organization. The rater checks about the cost to the company to
keep the employee and the contribution of the e mplo yee in terms of
monetary business.

 Comparative Evaluation Approache s: This approach includes a
comparison of the perfor mance of co -workers with each other. It is of
two types namely the ranking method and paired comparison method.
It is a quite popula r method of employee performance appraisal in the
corporate world.
Moder n Methods of Employee Performance Appraisal
 Manageme nt by Objectives : In this method, the performance of the
employee is assessed based on the targets achieved by him/her. The
manageme nt at the beginning of the financial year conveys the set
goals to the e mployees, at the end of the year the performance of the
employee is compared with the set goals and evaluated for the
appraisal.

 Psychological Appraisals : Psychologists are invited t o the companies
for the performance appraisal of the employees. Here the performance
is in the context of the potential futu re performance. Psychological
tests, in -depth interviews, reviews, and discussions with the managers
are the methods used for the ev aluation of the performance.

 Assessment Centers : A series of exercises are conducted at the
assessment center of the compan y to actually evaluate the performance
of the employee. The exercises include discussions, role -playing,
computer simulations, and m any more. The employees are evaluated
in terms of communication skills, mental alertness, emotional
intelligence, confidence , and administrative abilities. The rater
observes the event and evaluates the performance of the employee at
the end.

 360-Degree Feedb ack: It is particularly a 360-degree
feedback method in which the information about the performance of
the employee is collected from supervisors, pee rs, group members, and
self-assessment. All the remarks are considered t o evaluate the overall
work performance of the emplo yee.

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(Management Applications ) 3.8 EMPLOYEE RETENTION
Employee retention is the organizational goal of keeping productive and
talented workers and reducing tu rnover by fostering a positive work
atmosphere to promote engagement, sh owing appreciation to employees,
providing competiti ve pay and benefits, and encouraging a healthy work -
life balance.
Employee retention is defined as an organization’s ability to
prevent employee turnover , or the number of people who leave their job in
a certain period, either voluntarily or involuntarily. Increasing employee
retenti on has a direct impact on business performance and success.
Benefits of Employee Retention
As businesses compete for top tal ent, employee reten tion is crucial . While
some experts suggest that a 90% retention rate i s a good goal, the reality
is, it varies across diff erent companies and industries. However, the ability
to retain employees is universally beneficial for many reasons.
1. Cost reduction . U.S. employers spend hundreds of millions of dollars
every year recrui ting and training new workers. Those costs are sunk if
an employee leaves prematurely. Productivity, team cohesiveness and
morale also take a hit — which also has a financial impact. T otal
replacement costs for each employee can range from 90% of a
worker’s salary for an entry -level employee to 2 00% or more for
tenured professionals and leaders.
2. Recruitment and train ing efficiency. By focusing on employee
retention, c ompanies reduce recruiting costs and enjoy greater returns
on employee training. Recruiting costs include fees paid to recruiters
or to advertise the position, interview -related travel and possible
signin g bonuses. Next comes training, which can also be co stly. If the
employee leaves prematurely after being hired, that money is wasted.
3. Increased productivity. Employee turnover sets bac k pr oductivity
because it takes time for a new worker to get up to speed and produce
at a comparable level as their predeces sor. It also takes a toll on
remaining staff, who have to take on additional work and may produce
lower -quality output as a result. Conv ersely, high -retention workplaces
tend to have more engaged workers who, as a result, are more
productive.
4. Improved empl oyee morale. Organizations with successful employee
retention programs foster greater connectedness and engagement,
which helps mora le and, in turn, boosts retention. Conversely, a steady
stream of depart ures has a dampening effect on workplace morale,
with side effects that include a decrease in work quality and more
workers who decide to leave.
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55 5. Experienced employees. It stands to rea son that the longer employees
remain at an organization, the more engage d, knowledgeable and
skillful they are. They have al so forged valuable relationships with
customers and co -workers. When an employee departs, the company
incurs an opportunity cost in the potential value the employee could
have delivered.
6. Better customer e xperience. Inexperienced and less adept new hires
may be more prone to missteps that negatively impact a customer’s
experience with the company. Satisfied, longer -term employees are
often more skilled in dealing with customers and may have strong
relations hips with them. This is as true during all the stage s leading to
a signed contract as it is post -sales, when a customer might reach out
to customer service. A better customer experienc e can also be a key
brand differentiator.
7. Improved employee satisfaction and experience. A symbiotic
relationship exists bet ween retention and both employee satisfaction
— worker happiness and fulfillment — and employee eng agement , the
level of commitment workers bring to t heir roles. Satisfied and
engaged employees are often more likely to stay in an organization,
and organizations with high retention rates often experience greater
employee satisfaction and engagement.
8. Stronger corporate culture. Corporate culture develops over time,
based on employees’ cumulative traits and interactions. When engaged
employees who are aligned with an organization’s cul ture stay, they
strengthen the organizational ethos. A strong corporate culture also
improves productivity and performance.
9. Increased revenue. Employee retention is not just about cutting costs;
anecdotal evidence shows it can have a positive impact on rev enue as
well. Employers with better retention rates deliver a better cus tomer
and employee experience , hold on to experienced top talent and are
more productive — each of which can boost growth.
3.9 SUMMARY
HRM is a multifaceted function t hat plays a critical role in managing an
organization's most valuable asset —its people. By aligning HR practices
with organizational goals and fostering a positive work environment,
HRM contributes to the overall success and sustainability of the
organizat ion.
3.10 QUESTIONS
Que:1 Human resource management emphasisa. Development of p eople
b. Punishment of people
c. Adoption of people
d. None of these
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56 Management - II
(Management Applications ) Que:2 Huma n resource management is amalgam ofa. Job analysis,
recruitment and selection
b. Social behaviour and business ethics
c. Organisational behaviour, personal management a nd industrial relation
d. Employer and employees
Ans: c
Que: 3 Training process is
a. Short term
b. Medium term
c. Long term
d. None of these
Ans: a
Que: 4 OJT stands for
a. On the job training
b. On the job technique
c. On the job technology
d. Off the job t raining
Ans: a
Que: 5 On the job training includes
a. Coaching
b. Conference
c. Understudy
d. All of these
Ans: d

Que: 6 Relative worth of a job is known by
a. Job design
b. Job analysis
c. Job evaluation
d. Job change
Ans: c
Que: 7 Methods of job evaluation are
a. Qualitative method
b. Quantitative method
c. Both (a) and (b)
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57 Que: 8 ------- is the systematic, periodic and impartial rating of an
employe e excellence in matters pertaining to his present job and his
potential for a better job.
a. Performance appr aisal
b. Compensation and motivation
c. Training and De velopment
d. Performance indicator
Ans: a
Que: 9 Traditional method of performance appraisa l includes
a. Confidential reports
b. Paired comparison method
c. Free form or easy method
d. All of these
Ans: d
Que: 1 0 Modern method of performance appraisal are :
a. Assessment centre method
b. Management by objectives
c. BARS ( Behaviourally anchored r ating scale)
d. All of these
Ans: d


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58 4
HUMAN RESOURCE MANAGEMENT - II
Unit Structure:
4.0 Objective
4.1 Introduction
4.2 Leadership Traits
4.3 Styles of Leadership
4.4 Motivation
4.5 Maslow's Hierarchy o f Needs of Motivation
4.6 Douglas Mcgregor’s Theory X and Theory Y
4.7 HRM Case Study 1
4.8 Summary
4.9 Questions
4.0 OBJECTIVE
On successful completion of the module students will be able to learn
and demonstrate a range of competencies and skills including :
1. Leadership competencies
2. Motivation strategies
3. Team Building and Managem ent
4. Decision making skills
5. Conflict resolution
6. Self-awareness and emotional intelligence
4.1 INTRODUCTION
Studying leadership and motivation strategies can provide individuals with
a range of valuable skills and insights that are applicable in various
personal and professional contexts . Leadership and motivation are integral
components in the realm of management and organizational behavior.
Both play pivotal roles in influencing individuals and teams to achieve
common goals and maximize performance. Let's d elve into an
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59 4.2 LEADERSHIP TRAITS
Leadership traits are the people management skills, personal qualities and
technical expertise a person requires to lead effectively in the workplace.
1. Integrity : Integrity is an e ssential leadership trait for the individual
and the organization. It’s especially important for top -level executives
who are charting the organization’s course and making countless other
significant decisions. Our research has found that integrity may
actually be a potential blind spot for organizations , so make sure your
organization reinforces the importance of hon esty and integrity to
leaders at various levels.
2. Delegation: Delegating is one of the core responsibilities of a leader,
but it can be tricky to delegate effectively. The goal isn’t just to free
yourself up — it’s also to enable your direct reports to grow , facilitate
teamwork, provide autonomy, and lead to better decision -making. The
best leaders build trust in the workplace and on their teams through
effec tive delegation .
3. Communication: Effective leadership and effective communication
are intertwined . The best leaders are skilled communicators who ar e
able to communicate in a variety of ways, from transmitting
information to inspiring others to coaching direct reports. And you
must be able to listen to, and communicate with, a wide range of
people across roles, geographies, social identities, and more . The
quality and effectiveness of communication among leaders across your
organization directly affects the success of your business strategy, too.
4. Self-Awareness: While this is a more inwardly focused trait, self -
awareness and humility are paramount for leadership. The better you
understand yourself and recognize your own strengths and
weaknesses, the more effective you can be as a leader. Do you know
how other people view you or how you show up at work? Take the
time to learn about the 4 aspects of self -awareness and how to
strengthen each component .
5. Gratitude: Being thankful can lead to higher self -esteem, reduced
depression and anxiety, and better sleep. Gratitude can even make you
a better leader. Yet few people regularly say “thank you” in work
settings, even though most people say they’d be willing to work harder
for an appreciative boss. The best leaders know how to show gratitude
in the workplace .
6. Learning Agility: Learning agility is the ability to know what to do
when you don’t know what to do. If you’re a “quick study” or are able
to excel in unfamiliar circumstances, you might already be learning
agile. But anybody can foster and increase learning agility through
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(Management Applications) 7. Influence: For some people, “influence” feels like a dirty word. But
being able to convince people through the influencing tactics of
logical, emotional, or cooperative appeals is an important trait of
inspiring, effective leaders. Influence is quite different from
manipulation, and it needs to be done authentically and transpare ntly.
It requires emotional intelligence and trust.
8. Empathy : Empathy is correlated with job performance and is a
critical part of emotional intelligence and leadership effectiveness . If
you show more inclusive leadership and empathetic behaviors toward
your direct reports, our research shows you’re more likely to be
viewed as a better performer by your boss. Plus, empathy and
inclusion are imperatives for improving workplace conditions for those
around you.
9. Courage : It can be hard to speak up at work, whether you want to
voice a new idea, provide feed back to a direct report, or flag a concern
for someone above you. That’s part of the reason courage is a key trait
of good leaders. Rather than avoiding problems or allowing conflicts
to fester, having courage enables leaders to step up and move things in
the right direction. A workplace with high levels of psychological
safety and strong conversational skills across the organization will
foster a coaching culture that sup ports courage and truth -telling .
10. Respect : Treating people with respect on a daily basis is one of the
most important things a leader can do. It will ease tensions and
conflict, create trust, and improve effectiveness. Creating a culture of
respect is about more than the absence of disrespect. Respectfulness
can be shown in many different ways, but it often starts with
simply being a good listener who truly seeks to understand the
perspectives of others.
Even the strongest leaders need dedicated teams to complete projects. To
be an effective leader, you must know how to encourage teamwork and
collaboration, inspire team members to contribute their best work and
motivate colleagues to accomplish seemingly impossible tasks.
4.3 STYLES OF LEADERSHIP
1. Authoritarian or autocratic leadership style
Autho ritarian —also referred to as autocratic —leaders have clear
command and control over their peers. Decision -making is centralized,
meaning there is one person making the critical decisions. An
authoritarian leader has a clear vision of the bigger picture, bu t only
involves the rest of the team on a task -by-task or as -needed basis.
Authoritarian leaders will be personal when giving others praise or
criticism but clearly separate themselves from the group. While you might
assume an authoritarian leader would b e unpleasant, this isn’t typically
true. Rarely are they openly hostile. Instead, they’re typically friendly or,
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61 2. Participative leadership style
Participative or democratic leaders welcome everyone’s opinions and
encourage collabor ation. While they might have the final say, these
leaders distribute the responsibility of making decisions to everyone.
Participative leaders are part of the team. They invest their time and
energy in their colleagues' growth because they know it will, in turn, help
them reach the end goal. If you excel in collaborative group environments,
this might be your leadership style.
3. Delegative or laissez -faire leadership style
Lewin’s third style is delegative or laissez -faire leadership. Delegative
leaders offer very little guidance to the group. They allow team members
complete freedom in the decision -making process.
Delegative leaders separate themselves from the group and choose not to
participate or interrupt the current trajectory of a project. Their co mments
are infrequent. Group members might even forget what this leader looks
like by the time they finish the project.
4. Visionary leadership style
Visionary leadership is comparable to Lewin’s authoritative leadership
style. Visionary leaders have clea r, long -term visions, and are able to
inspire and motivate others.
his type of leadership is best used when there is a big change in the
company or a clear direction is needed. In this case, people are looking for
someone they trust to follow into the unkn own.
It is less successful when other team members are experts who have
differing ideas or opinions than that of the leader. These team members
won’t want to blindly follow a leader they don’t agree with.
5. Coaching leadership style
A coaching leader is able to identify other team members’ strengths and
weaknesses and coach them to improve . They are also able to tie these
skills to the company’s goals.
Coaching leadership is succe ssful when the leader is creative, willing to
collaborate, and can give concrete feedback. It’s also important that the
coach knows when to step back and give the person autonomy.
If you’ve ever had a bad coach, you know that coaching isn’t for
everyone. When done poorly, coaching leadership can be seen
as micromanaging .
6. Affiliative leadership style
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(Management Applications) build and foster relationships within the workplace which leads to a more
collaborative and positive work environment.
An affiliative leader is helpful when creating a new team or when in crisis,
as both of the se situations require trust. This leadership style can be
harmful when the leader focuses too much on being a friend and is less
concerned with productivity and company goals.
4.4 MOTIVATION
Motivation is a psychological process through which a person act s or
behaves towards a particular task or activity from start to completion.
Motivation drives or pushes a person to behave in a particular way at that
point in time.
Factors Influencing Motivation

Keeping employees motivated is the biggest challenge fo r companies to
ensure that they give a high productive output at work and help in
achieving company goals. A positive motivation amongst employees helps
drive the business positively & enhances creativity.
Explanation of the factors influencing motivation
1. Salary : Monetary compensation & benefits like gross salary, perks,
performance bonuses etc. are the biggest motivation factors. The better
the salary and monetary benefits, the higher is the motivation level &
passion of a person towards a job.
2. Recognition : Rewards, recognition, accolades etc. are important for
ensuring high enthusiasm levels for an employee. If the hard work of
an individual is appreciated, it keeps them motivated to perform better.
3. Work Ethics: Ethical working environment, honesty etc. ar e
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63 4. Transparency with Leadership : The leadership in an organization
helps in employee motivation if there are transparent discussion and
flatter hierarchies. Senior management must ensure that all
subordinates are happy, focused & motivated.
5. Culture at Work: A good, vibrant, positive culture at the workplace
is always an important factor.People from different backgrounds,
religions, countries etc. working together helps create a social bond at
workplace.
6. Learning and Development: Another factor influencing is the
training and development opportunities that a person gets. L&D helps
individuals develop more skills and have better opportunities in the ir
professional career.
7. Work Life Balance: Having a good quality of work life (QWL) helps
in the motivation of people. A good work life balance ensures that a
person can give quality time to both office work as well as family.
8. Career Growth Opportunities: Career development opportunities
have a positive influence on the motivation of any person. If a person
knows their future & career path is secure, they tend to work with
more passion.
9. Health Benefits: Health benefits, insurance & other incentives act as
a source of motivation for people. If the medical bills, hospitalization
charges etc. are taken care of by the company, it helps build a strong
trust.
10. Communication: positive& transparent communication between
managers and subordinates gives a sense of bel onging and adds to the
employee’s motivation. Discussion related to work as well as personal
life helps make a friendly bond at workplace.
4.5 MASLOW'S HIERARCHY OF NEEDS THEORY OF
MOTIVATION
Abraham Maslow's hierarchy of needs is one of the best -known the ories of
motivation. Maslow's theory states that our actions are motivated by
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The main goal of this need hierarchy theory is to attain the highest
position or the last of the needs, i.e. need for self -actualization.
Levels of Hierarchy
The levels of hierarchy in Maslow’s need hierarchy theory appear in the
shape of a pyramid, where the most basic need is placed at the bottom
while the most advanced level of hierarchy is at the top of the
pyramid.Maslow was of the view that a person can only move to the
subsequent level only after fulfilling the needs of the current level. The
needs at the bottom of the pyramid are those which are very basic, and the
most complex needs are pl aced on the top of the pyramid.
1. Physiological needs: The physiological needs are regarded as the
most basic of the needs that humans have. These are needs that are
very crucial for our survival. The examples of physiological needs are
food, shelter, warmth , health, homeostasis and water, etc.
2. Safety Needs: Once the basic needs of food, shelter, clothing, etc. are
fulfilled, there is an innate desire to move to the next level. The next
level is known as the safety needs. Here the primary concern of the
indiv idual is related to safety and security.Safety and security can be
regarding many things like a stable source of income that provides
financial security, personal security from any kind of unnatural events,
attacks by animals and emotional security and phy sical safety which is
safety to health.
3. Social Needs (Also known as Belonging Needs): It is that stage
where an individual having fulfilled his physiological needs as well as
safety needs seeks acceptance from others in the form of love,
belongingness. In this stage, human behavior is driven by emotions
and the need for making emotional relationships is dominant here for
e.g. friendship, family, intimacy, social group etc.
4. Esteem needs: It is related to the need of a person being recognized in
the society. It deals with getting recognition, self -respect in the
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65 has fulfilled their need for love and belongingness.In addition to
recognition from others, there is a need for the person to deve lop self -
esteem and personal worth.
5. Self-actualization needs: This is the final level of the theory of
hierarchy of needs as proposed by Maslow. It is the highest level of
needs and is known as the self -actualization needs. It relates to the
need of an ind ividual to attain or realize the full potential of their
ability or potential.At this stage, all individuals try to become the best
version of themselves. It is the journey of personal growth and
development.
4.6 DOUGLAS MCGREGOR’S THEORY X AND
THEORY Y
The concept of Theory X and Theory Y was developed by social
psychologist Douglas McGregor. It describes two contrasting sets of
assumptions that managers make about their people: Theory X – people
dislike work, have little ambition, and are unwilling to tak e responsibility .
Theory X
According to McGregor, Theory X management assumes the following:
 Work is inherently distasteful to most people, and they will attempt to
avoid work whenever possible.
 Most people are not ambitious, have little desire for respons ibility, and
prefer to be directed.
 Most people have little aptitude for creativity in solving organizational
problems.
 Motivation occurs only at the physiological and security levels of
Maslow’s hierarchy of needs.
 Most people are self -centered. As a resu lt, they must be closely
controlled and often coerced to achieve organizational objectives.
 Most people resist change.
 Most people are gullible and unintelligent.
Essentially, Theory X assumes that the primary source of employee
motivation is monetary, wit h security as a strong second. Under Theory X,
one can take a hard or soft approach to getting results.
Theory Y
The higher -level needs of esteem and self -actualization are ongoing needs
that, for most people, are never completely satisfied. As such, it is these
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(Management Applications) strong contrast to Theory X, Theory Y management makes the following
assumptions:
 Work can be as natural as play if the conditions are favorable.
 People will be self -directed and cr eative to meet their work and
organizational objectives if they are committed to them.
 People will be committed to their quality and productivity objectives if
rewards are in place that address higher needs such as self -fulfillment.
 The capacity for creati vity spreads throughout organizations.
 Most people can handle responsibility because creativity and ingenuity
are common in the population.
 Under these conditions, people will seek responsibility.
Under these assumptions, there is an opportunity to align p ersonal goals
with organizational goals by using the employee’s own need for
fulfillment as the motivator. McGregor stressed that Theory Y
management does not imply a soft approach.
McGregor recognized that some people may not have reached the level of
maturity assumed by Theory Y and may initially need tighter controls that
can be relaxed as the employee develops.
4.7 HRM CASE STUDY 1
Sumit and Hardik both of them are postgraduates in management under
different streams from the same B -School. Both of them are close to each
other from the college days itself and the same friendship continues in the
organization too as they are placed in the same company, Hy -tech
technology solutions. Sumit placed in the HR department as employee
counsellor and Hartik in the finance department as a key finance
executive. As per the grade is concerned both are at the same level but
when responsibility is concerned Ratik is holding more responsibility
being in core finance.
By nature, Sumit is friendly in nature and ready to he lp the needy. Hardik
is silent in nature ready to help if approached personally and always a bit
egoistic in nature. They have successfully completed 4 years in the
organization. And management is very much satisfied with both of them
as they are equally t alented and constant performers.
Sumit felt that now a day’s Hardik is not like as he uses to be in the past.
He noticed some behavioral changes with him. During general
conversations, he feels that Hardik is taunting him that he is famous
among the employ ees in the organization, on the other hand, he is not even
recognized by fellow employees.
One morning Mr. Mehta General Manager Hy -tech technology solutions
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67 resignation. Mr. Mehta called Sumit immediately and discussed the same
as he is close to Hardik.On hearing the news Sumit got stunned and said
that he does not know this before he also revealed his current experience
with him. Mr. Mehta who does not want to lose both of them promised
him that he will handle this and he won’t allow Hardik to resign.
In the afternoon Mr. Metha took Hardik to the Canteen to make him
comfortable after some general discussion he starts on the issue. Hardik,
after some hesitation, opened his thinking in front of Mr. Mehta. The
problem of Hardik is
1) when he comes alone to the canteen the people from others don’t even
recognize him but if he is accompanied by Sumit he gets well treated
by others.
2) one day Both of them entered the company together the security in t he
gate wished them but the next day when he came alone the same
security did not do so.
3) Even in meetings held in the office, the points raised by Sumit will get
more value so many times he keeps silent in the meeting.
Questions for HRM Case Studies: Case Study 1
Find the reason that Mr. Mehta would have given to Hardik.
Solution for HRM Case Study 1
Mr. Mehta listening to this case understood the situation and realized the
reason behind the partial response given by the employees towards
Franklin and Harsh a. As Franklin said both Harsha and Franklin are
passed out from the same college in the same year. Both of them joined
the company together both have the same experience. Even in
performance -wise, both stands in the same level i.e. both are constant
perfo rmers and good performers.
Franklin analyzed all the above -said similarities between him and Harsha.
He also stated that he holds more responsibility than that of Harsha. One
thing Franklin did not notice or analyzed is the job profile of Harsha. It is
true that Franklin holds more responsibility than that of Harsha but when it
comes to direct interaction with employees Harsha wins the employees’
attention in this aspect. Harsha being a counsellor in HR she faces the
employees every day. She developed good rapport among the employees
due to her friendly nature. She is always remembered by the employees
whenever they face any problem as she gives good counselling and most
of the time she suggests the best solutions for such issues.
Franklin though holding a k ey position in finance his profile does not
allow him to interact with the employees. Though he has a helping
tendency he does only when someone approached him personally. As the
employees of other departments do not have any relation with him th ey
never a pproach him for help. Mr. Mehta having a good experience
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(Management Applications) Later he relates each situation, explained by Franklin with the above said
reasons and made Franklin understood the reality.
Mr. Mehta said that the security in the gate or the employees in the
canteen who recognized Harsha and not Franklin would have interacted
with her during counselling or approached her for any issues. And as
usual, she would have counselled well or solved th e issues of them that is
the reason why they treat her and wish her whenever where ever they meet
her. When it comes to the case of Franklin they would have hardly met
him or interacted with him.
When it comes to the point that even in -office meetings Hars ha, points are
valued so Franklin keeps mum. For this, Mr. Mehta replied that the points
put forward by her would be related to employees or from the employees’
point of view which actually the management wants to know so they give
value to her points. And as quoted Fraklin after, one or two such incidents
keep silent in the meeting. He never made an attempt to raise some
suggestions so management does not have any option to listen to that
suggestion.
After listening to all the explanations given by Mr. Meh ta Franklin
realized his mistake and felt proud of the Rapport developed by Harsha
among the employees. He said to Mr. Mehta that he will take back his
resignation. And rushed to Harsha to make an apology and to meet her as
a friend as like his college day s.
HRM Case Study 2
Watson Public Ltd Company is well known for its welfare activities and
employee -oriented schemes in the manufacturing industry for more than
ten decades. The company employs more than 800 workers and 150
administrative staff and 80 mana gement -level employees. The Top -level
management views all the employees at the same level. This can be clearly
understood by seeing the uniform of the company which is the Same for
all starting from MD to floor level workers. The company has 2 different
cafeterias at different places one near the plant for workers and others near
the Administration building. Though the place is different the amenities,
infrastructure and the food provided are of the same quality. In short, the
company stands by the rule of Employee Equality.
The company has one registered trade union. The relationship between the
union and the management is very cordial. The company has not lost a
single man day due to strike. The company is not a paymaster in that
industry. The compensatio n policy of that company, when compared to
other similar companies, is very less still the employees don’t have many
grievances due to the other benefits provided by the company. But the
company is facing a countable number of problems in supplying the
materials in the recent past days. Problems like quality issues, mismatch in
packing materials (placing material A in the box of material B) incorrect
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69 The management views the case as there are loopholes in the system of
various departments and hand over the responsibility to the HR
department to solve the issue. When the HR manager goes through the
issues he realized that the issues are not relating to the system but it relates
to the employees . When investigated he come to know that the reason
behind the casual approach by employees in work is
 The company hired new employees for a higher -level post without
considering the potential internal candidates.
 The newly hired employees are placed with higher packages than that
of existing employees in the same cadre.
Questions:
1. Narrate the case with a suitable title for the case. Justify your title.
Solution for HRM Case Case Study 2
Employee Equality is not the need for every hour. In the above -said ca se,
Watson Ltd had provided all facilities to employees at each grade in an
equal manner. But still, the employees started creating certain issues like
materials are meeting the quality supply schedule is not met etc. And the
HR manager said that the polic y of hiring new employees for the higher
post without considering old potential employees is the major problem.
“Employee recognition VS Employee equality ”. As the HR manager
states that employees are not been recognized for the potential rather the
compan y has gone for new recruitment. Because of which the company
faces problems.
2. The points rose by the HR manager as the reason for the latest issues
in the organization is justifiable or not. Support your answer with
Human resource related concepts.
Yes, the points raised by the HR manager is justifiable because “Human
beings are social Animals as popularly” said by many Human resources
Scholars. So human minds demand social recognition, self -respect,
consideration, etc for their work and performance.
In the above -said case, even the company provides and stands by the
concept of employee equality when it fails to recognize the potential
talents of existing employee they felt dissatisfaction towards the
organization and they showed in the way of quality issues and slow down
production.
4.8 SUMMARY
Studying leadership and motivation strategies is not only about theoretical
knowledge but also about practical application. The application of these
skills can lead to improved leadership effectiveness, increased team
satisfaction and productivity, and overall success in various professional
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(Management Applications) 4.9 QUESTIONS
1. ___________ is increasing Leadership rapidly:
A. Strategy
B. Command
C. Control
D. Getting others to follow
Answer – D
2. Regarding leadership, which statem ent is false?
A. Leadership does not necessarily take place within a hierarchical
structure of an organisation
B. When people operate as leaders their role is always clearly
established and defined
C. Not every leader is a manager
D. All of the above
Answer – B
3. ______ ____ are the approaches to the study of leadership which
emphasise the personality of the leader:
A. Contingency theories
B. Group theories
C. Trait theories
D. Inspirational theories
Answer - C:
4. The effectiveness of a leader is dependent upon meeting _______
areas of need within the workgroup:
A. One
B. Three
C. Five
D. None of the above
Answer – B
5. Needs, setting standards and maintaining discipline, and appointing
sub-leaders according to Adair’s approach, called as:
A. Work functions
B. Task functions
C. Individual functions
D. Team functi ons
Answer – D
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71 6. Which of the following is an assumption in Maslow’s hierarchy of
needs?
A. Needs are dependent on culture and also on social class
B. Lower -level needs must be at least partially satisfied before higer
needs can affect behaviour.
C. Needs are not pr ioritized or arranged in any particular order.
D. Satisfied needs are moitvators, and new needs emerge when
current needs remain unmet
Answer – B
7. The motivational process and not the motivators as such is associated
with
A. Need hierarchy theory
B. Two factor theor y
C. Berg theory
D. Expectancy theory
Answer - A


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72 5
FINANCIAL MANAGEMENT
Unit Structure :
5.0 Objectives
5.1 Meaning and Definition of Financial Management
5.2 Functions / Goals of Financial Management
5.3 Capital Budgeting - Introduction
5.4 Need and Importance of Capital Budgeting
5.5 Types of Capital Budgeting Decisions
5.6 Process of Capital Budgeting
5.7 Capital Structure Theories
5.8 Factors affecting Capital Structure
5.9 Meaning and importance of Capital Market
5.10 Constituents in theCapital Market
5.11 Functions of Capital Market
5.12 Fundame ntal Analysis
5.13 Technical Analysis
5.14 Venture Capital
5.15 Demat Account
5.16 Futures and Options
5.17 Case Study
5.18 Summary
5.19 Exercise
5.0 OBJECTIVES
After studying the unit the students will be able to :
 Understand the concept of Finance and Financial Management
 Know the types of Financial Decisions
 Apprehend the Functions of Financial Management
 Analyse the concepts of Capital Budgeting
 Understand the need and importance of Capital Budgeting
 Discuss the various types of Capital Budgeting decisions
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73  Explain the concept of Capital Structure Theories
 Analyse the Factors affecting Capital Structure
 Realize the meaning and importance of Capital Market
 Describe the different Constituents in the Capital Ma rket
 Analyse the various Functions of Capital Market
 Describe Fundamental Analysis
 Know the various methods of Technical Analysis
 Understand the concept of Venture Capital
 Describe Demat Account
 Analyse the different Futures and Options
 Apprehend the above concepts and solve the Case Study
5.1 MEANING AND DEFINITION OF FINANCIAL
MANAGEMENT
5.1.1 : MEANING OF FINANCE
Finance is the soul of every business entity and nobody can imagine
theworld without finance. When we mention ‘Finance’, usually it means
money, but it is merely not the money, it is a vast concept which is
concerned with money and its flow or we can say, it is the source of
providing funds for a particular activity. The word ‘Finance’ is a French
word which means ‘Management of Money’.
Financ e is such a powerful medium that, it performs an important role
toOperate, co -ordinate and controlthe various economic activities of the
business enterprise. Finance is also limited resource like other resources
and a business entity needs tomanage its fin ances resourcefully,
effectively and efficiently.
5.1.2 : DEFINITION OF FINANCE
Finance is defined in numerous ways by different groups of people.
Though it is difficult to give a perfect definition of Finance following
selected statements will help to de duce its broad meaning.
In General sense, "Finance is the management of money and other
valuables, which can be easily converted into cash."
According to John J. Hampton, the term finance can be defined as ‘The
management of the flows of money through an o rganization, whether it
will be a corporation, school, bank or government agency.’
In the words of F.W.Paish, “Finance may be defined as the position of
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74 Management - II
(Management Applicat ions) Howard and Upton says, “Finance may be defined as that administrative
area or set of administrative functions in an organization which relates
with the arrangement of each and credit so that the organization may have
the means to carry out the objectives as satisfactorily as possible.
According to Bonneville and Dewey, Fin ancing consists in the raising,
providing, managing of all the money, capital or funds of any kind to be
used in connection with the business.
According to Experts, "Finance is a simple task of providing the necessary
funds (money) required by the business of entities like companies, firms,
individuals and others on the terms that are most favorable to achieve their
economic objectives."
The Encyclopedia Britannica defines finance as “the act of providing the
means of payment.” It is thus the financial aspe ct of corporate planning
which may be described as the management of money.
According to Entrepreneurs, "Finance is concerned with cash. It is so,
since, every business transaction involves cash directly or indirectly."
According to Academicians, "Finance is the procurement (to get,obtain) of
funds and effective (properly planned) utilization offunds. It also deals
with profits that adequately compensate for thecost and risks borne by the
business."
Finance therefore represents the resources by way funds ne eded for a
particular activity. Thus 'finance' is only referred in relation to a proposed
activity. Finance goes with commerce, business, banking etc. Finance is
also referred to as "Funds" or "Capital", when referring to the financial
needs of a corporate body.
Therefore Finance is essential for expansion, diversification,
modernization, as well as for establishment of new projects, viz. The
financial policy of any organization mainly determines not only its
existence and survival but also the performance and success of that
organization. Finance is required for investment purposes and also to meet
substantial capital expenditure projects.
5.1.3 : FINANCIAL MANAGEMENT
As finance is a scarce resource, it must be systematically raised form the
cheapest source of funds and must be judiciously utilized for the
development and growth of the organization.
Financial Management is a managerial process that is concerned with the
planning, organizing, directing and controlling of financial resources.
It also helps in monitoring the effective deployment of funds in fixed
assets and in working capital.
It aims at ensuring that adequate cash is on hand to meet the required
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75 capital is procured at th e minimum cost to maintain adequate cash to meet
any requirementswhichmight arise in the future. It enhances market value
of the firm through efficient and effective financial management.
Financial management helps in ascertaining and managing not only
current requirements but also future needs of an organization. It influences
the profitability of a firm.Financial management is very much required for
the survival, growth, expansion and diversification of business. It is
required to ensure purposeful resour ce allocation.
The financial manager is concerned with the efficient allocation of funds.
He plays vital role in investment and financing decisions of the business
enterprise.
It is concerned with providing solutions to problems like investment,
financing and dividend decisions of the financial activities of an
organization.
Capital Budgeting and capital structure designing of an organization is one
of the important functions of Financial Management.
5.1.4 : DEFINITIONS OF FINANCIAL MANAGEMENT
“Financial m anagement is the activity concerned with planning, raising,
controlling and administering of funds used in the business.” – Guthman
and Dougal
“Financial management is that area of business management devoted to a
judicious use of capital and a careful sel ection of the source of capital in
order to enable a spending unit to move in the direction of reaching the
goals.” – J.F. Brandley
“Financial management is an application of general managerial principles
to the area of financial decision -making”. - Howard and Uptron
“Financial management is an area of financial decision making,
harmonizing individual motives and enterprise goal”. - Weston and
Brighem
“Financial management is concerned with the efficient use of an important
economic resource, namely capital funds” - Solomon Ezra & J. John
Pringle.
“Financial Management is the operational activity of a business that is
responsible for obtaining and effectively utilizing the funds necessary for
efficient operations” - Joseph & Massie
“Financial Management is c oncerned with managerial decisions that result
in the acquisition and financing of long -term and short -term credits of the
firm. As such, it deals with the situations that require selection of specific
assets (or combination of assets), the selection of sp ecific liability (or
combination of liabilities) as well as the problem of size and growth of an
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76 Management - II
(Management Applicat ions) inflows and outflows of funds and their effects upon managerial
objectives”. - Phillippatu s.
5.1.5 : TYPES OF FINANCIAL DECISIONS
The modern approach of Financial Management takes a broad view of the
term Financial Management and provides an analytical and conceptual
framework for financial decision making. As such, the finance function
include s both the acquisition and allocation of funds. Apart from the issues
involved in acquiring external funds, the primary goal of financial
management is the efficient and prudent allocation of funds to various
uses.
In a broader context, it is regarded as an essential component of overall
management.
The new method is an analytical way of looking at a company's financial
problems like:
What is the total amount of funds that an enterprise should commit?
What specific assets should a company purchase?
How should the necessary funds be raised?
These are the main aspects of this method.
Alternatively, the following are the main components of the modern
approach to financial management:
1. How large should an enterprise be, and how quickly should it grow?
2. In what form should assets be held?
3. How should its liabilities be structured?
The three questions raised above cover the major financial issues
confronting a company. In other words, according to the new approach,
financial management is concerned with the resolution of three major
problems relating to a firm's financial operations, pertaining to the three
questions of investment, financing, and dividend decisions.
Financial decisions refer to decisions concerning financial matters of a
business firm. T here are many kinds of financial management decisions
that the firm makes for maximizing shareholders’ wealth, like types of
assets to be acquired, pattern of capitalisation, distribution of firm’s
income, etc.
These decisions can be classified into four major groups:
1. The Investment Decision;
2. The Financing Decision;
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77 It is concerned with providing solutions to problems like investment,
financing and dividend decisions of the financial activities of an
organization.
1) Investment Decisions / Capital Budgeting Decisions :
Investment Decisions relates to the determination of total amount of assets
to be held in the firm, the composition of these assets and the business risk
complexities of the firm a s perceived by the investors. It is concerned with
the selection of both long -term and short -term assets in which a firm's
funds will be invested. Long -term assets or fixed assets will generate a
return over time; whereas short -term assets, or currentasset s, are those that
can be converted into cash within a financial period, such as a year.
It is the most important financial decision. Since funds involve cost and
are available in a limited quantity, its proper utilization is very necessary
to achieve the g oal of wealth maximisation.
The investment decisions can be classified under two broad groups:
1. Long -term investment decision and
2. Short -term, investment decision.
The long -term investment decision is referred to as the Capital Budgeting
and the sho rt-term investment decision as Working Capital Management.
It is concerned with the selection of both long -term and short -term assets
in which a firm's funds will be invested. Long -term assets, or fixed assets,
will generate a return over time, whereas sh ort-term assets, or current
assets, are those that can be converted into cash within a financial period,
such as a year.
Capital budgeting refers to long -term investment decisions, while working
capital management refers to short -term investment decisions. Capital
budgeting can also refer to long -term planning for allocating funds among
various investment options. Risk and uncertainty analysis is a critical
component of capital budgeting decisions. Because the return on
investment proposals can be derived f or a longer period of time in the
future, the capital budgeting decision should be weighed against the risk
associated with it. This method aids in determining the assets' 'Net Present
Value.'
The financial manager, on the other hand, is also in -charge of the efficient
management of current assets, also known as working capital
management. Working capital is an essential component of financial
management. These decisions include whether to invest funds in
inventory, cash, bank deposits, or other short -term investments. They have
a direct impact on the liquidity and performance of the business.

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78 Management - II
(Management Applicat ions) 2) Financing Decisions :
Once the firm has taken the investment decision and committed itself to
new investment, it must decide the best means of financing these
commitments. Since, firms regularly make new investments; the needs for
financing and financial decisions are on going, hence, a firm will be
continuously planning for new financial needs. The financing decision is
not only concerned with how best to finance new asset, but also concerned
with the best overall mix of financing for the firm.
A finance manager has to select such sources of funds which will make
optimum capital structure. The important thing to be decided here is the
proportion of various source s in the overall capital mix of the firm. The
debt-equity ratio should be fixed in such a way that it helps in maximising
the profitability of the concern. The raising of more debts will involve
fixed interest liability and dependence upon outsiders. It ma y help in
increasing the return on equity but will also enhance the risk. The raising
of funds through equity will bring permanent funds to the business but the
shareholders will expect higher rates of earnings. The financial manager
has to strike a balanc e between anxious sources so that the overall
profitability of the concern improves. If the capital structure is able to
minimise the risk and raise the profitability then the market prices of the
shares will go up maximising the wealth of shareholders.
These decisions deal with the mode offinancing or mix of equity capital
and debt capital.
Finance acquisition decisions must be made by the finance manager.It
must be decided whether the entire required capital should be raised inthe
form of equity capital o r whether the amount should be from the loanfund.
Even the timing of capital acquisition should be well defined. In afirm's
financing decisions, there is a conflict between return and risk.
As aresult, the financial manager must strike a balance between r isk and
returnby maintaining the proper balance of debt and equity capital. On the
otherhand, it is also the financial manager's job to identify an
appropriatecapital structure. The ideal capital structure would always
maximizewealth.
3) Dividend Decisions :
The third major financial decision relates to the disbursement of profits
back to investors who supplied capital to the firm. The term dividend
refers to that part of profits of a company which is distributed by it among
its shareholders. It is the rewa rd of shareholders for investments made by
them in the share capital of the company. The dividend decision is
concerned with the quantum of profits to be distributed among
shareholders. A decision has to be taken whether ail the profits are to be
distribut ed, to retain all the profits in business or to keep a part of profits
in the business and distribute others among shareholders. The higher rate
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79 wealth of shareholders. The firm should also consider the question of
dividend stability, stock dividend (bonus shares) and cash dividend.
The decision will be based on the shareholder's preferences,
investmentopportunities within the firm, and opportunities for future
growth of the firm. The d ividend payout ratio must be determined in light
of the goal ofincreasing the share's market value. As a result, the dividend
decision hasbecome a critical component of the financing decision.
Dividend decision -makingmust be evaluated with respect to the f irm's
financing decisions todecide the part of retained earnings to be used as
direct financing for thecompany's future expansions.
These decisions determine the division of earnings between payments to
shareholders and reinvestment in the company.
4) Liqu idity Decisions :
Liquidity and profitability are closely related. Obviously, liquidity and
profitability goals conflict in most of the decisions. The finance manager
always perceives / faces the task of balancing liquidity and profitability.
The term liqu idity implies the ability of the firm to meet bills and the
firm’s cash reserves to meet emergencies whereas profitability aims to
achieve the goal of higher returns. As said earlier, striking a proper
balance between liquidity and profitability is a diffi cult task. Profitability
will be affected when all the bills are to be settled in advance. Similarly,
liquidity will be affected if the funds are invested in short term or long
term securities. That is the funds are inadequate to pay -off its creditors.
Lack of liquidity in extreme situations can lead to the firm’s insolvency.
5.2 FUNCTIONS / GOALS OF FINANCIAL
MANAGEMENT
Financial Management is a managerial process that is concerned with the
planning, organizing, directing, and controlling of financial reso urces.
Initially, financial management was concerned only with the collection of
funds. Later on, proper utilization of funds also became an important
aspect of Financial Management. In today's world, Financial Management
examines all financial issues of a company.
Financial Management involves functions like :
 Fund procurement
 Working capital management
 Capital budgeting and capital structure designing of an organization
 Controlling and managing an organization's financial assets
 Making strategies related to expansion, diversification, joint venture,
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(Management Applicat ions) Following are the important goals of financial management :
1. Profit Maximization :
The objective of making profit is an important motive of every
commercial business entity. Profit generation is essential for survival and
growth of the business. Profit generation is also regarded as a measure of
success of the business. Profit is an important yardstick for measuring the
economic efficiency of any firm. Any business would be making t he use
of economic and human resources available to generate profits. The cost
of these resources is required to be met of the revenue generated from the
use of these resources and the surplus remaining would be needed for the
growth and expansion of the c ompany.
It is only an efficiently run business which can afford to meet the cost of
resources and generate profits. Therefore, the survival and growth of any
business depends upon its ability in earnings profits. It is therefore
contended that profit maxi mization is one of the primary goals of the
organization without which the survival of the organization itself is
threatened.
2. Wealth Maximisation :
According to this objective, the owners of the company i.e. the
shareholders are more interested in maxim izing their wealth rather than in
profit maximization. Maximization of the wealth of the shareholders
means maximizing the net worth of the company for its shareholders. This
reflected in the market price of the shares held by them. Therefore, wealth
maxim ization means creation of maximum value for company’s
shareholders which mean maximizing the market price of the share.
Wealth maximization refers to the gradual increase in value of the net
assets of the organization. Profit generation adds to the increa se in the
value of the net assets of the organization. With greater profits, the EPS
(earnings per share) goes up; resulting an increase in the value of the net
assets belonging to the shareholders of the company.
The market price of the shares is an impor tant indicator of the wealth
maximization of the organization. Wealth maximization is the net present
value of a financial decision. Net present value is the difference between
the gross present value of the revenue generated from such decision and
the cos t of such decision. A financial action with a positive net present
value creates wealth and therefore is desirable. The total cash inflows over
the years in terms of present value must be greater the outflows of cash
invested for generating such cash inflo ws. This results in financial
advantage leading to increase in the value of net assets. The increase in the
value of net wealth should in turn help in generating greater volume of
profits. This action results in financial gains to the shareholders increasi ng
the earnings per share.

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81 Therefore, the goal of wealth maximization implies a long term
perspective of the goal. The interest of the management in maximizing the
market price of the share is compatible with that of the shareholders’
interest. This help s the management in allocating the resources in the best
possible manner balancing the risks and the returns.
3. Other goals or functions of Financial Management :
i. To ensure adequate returns to the shareholders which should be fair in
the given market c onditions.
ii. To contribute to the operational efficiency of all other areas of
management.
iii.To infuse financial discipline in the organization.
iv. To build up a strong financial base so that the enterprise can fall back
upon its reverses during lean years and withstand the shocks of the
business.
5.3 CAPITAL BUDGETING - INTRODUCTION
5.3.1 : MEANING OF BUDGET
The word ‘Budget’ is derived from the Old French term“Bougette” (little
bag).
The first pronunciation of the term 'Budget' was done by Sir Rober t
Walpole (British Prime Minister and Chancellor of the Exchequer) during
his annual financial statement in the year 1733.He said to “open” his
budget, i.e. the container of documents and accounts.
The term ‘Budget’ is specifically used in the Government d epartments,
businesses and individuals along with people and households at any
income level. Budget means to plan for future. A budget is the total
amount of money allocated for a particular purpose during a particular
period of time. A budget is a financi al or spending plan based on your
income or revenue. It estimates the amount of money you'll spend based
on how much you make in a given period.
During the early years Budgetary Control hasbecome a very popular
technique of cost control. Now a day s it exi sts in almost all the
organizations in various forms. Capital Budget is one of theforms of
Budgeting.
5.3.2 : MEANING OF CAPITAL EXPENDITURE
A ‘Capital Expenditure’ is an expenditure incurred for acquiring or
improving the fixed assets, the benefits of whi ch are expected to be
received over a number of years in future. The capital expenditures means
the expenditures incurred on acquiring or for extension of the long -term
asset. Capital Asset or a Long -term asset may be a new building, a new
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82 Management - II
(Management Applicat ions) The following are some of the examples of capital expenditure.
i) Cost of acquisition of permanent assets such as land & buildings, plant
& machinery, goodwill, etc.
ii) Cost of addition, expansion, diversification, improvement or alteration
in the fixed assets.
iii) Cost of replacement and modernization of permanent assets in case of
Obsolescence and Wear and Tear of the old equipments.
iv) Research and Development project cost for Product and for improving
the productivity, etc.
v) Capital expenditure involve s non -flexible long term commitment of
funds.
5.3.3 : MEANING OF CAPITAL BUDGETING
The final Objective of each organization is to earn more and more profit.
Hence to plan and control the capital expenditure to achieve the targeted
profitis the significant function of every business enterprise.
Capital Budget relates to the investment decisionsin capital expenditures.
Capital expenditure decisions include current (expenditures), the benefits
of which are expected to be received over a long period of time ex ceeding
one year. The term Capital Budget is used interchangeable with Capital
Expenditure Decision , Long Term Investments Decision.
The Finance Manager has to study and assess the profitability of various
future long term projects before committing the f unds. The investment
proposals should be evaluated in terms of itsexpected profitabilitythrough
the systematic investment programme viz. costs involved and the risks
associated with the projects. That is the main role of Capital Budgeting.
As per firm’s ca sh flows and availability of funds Capital Budgeting
should be essentially done.
Capital Budgeting involves the preparation of Cost and Revenueestimates
for all the possible projects, an examination of the merits anddemerits of
each and every possibility a nd finally selection of the projectgiving the
highest return on investment. The Capital Budget includes theplanning and
utilization of available capital to increase the profitability ofthe business
organization.
Capital Budgeting means planning for capital assetsand management of
fixed assets.It is a complex process as it involves decisions relating to the
investment of current funds for the benefit to be achieved in future.
Capital Budgeting is budgeting for capital projects.
Capital Budgeting refers to lo ng-term investment decisions. Capital
Budgeting can also refer to long -term planning for allocating funds
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83 Capital Budgeting is the decision -making process concerned with whether
or not :
(i) The firm should invest funds in long term projectto make profit and
(ii) How to choose among competing projects.
The long -term activities are those activities that influence firms’ operation
beyond the one year period. The basic features of Capital Budgeting
decisions are:
(a) There is a n investment in long term activities
(b) Current funds are exchanged for future benefits
(c) The future benefits will be available to the firm over series of years.
5.3.4 : DEFINITION OF CAPITAL BUDGETING
1. “Capital Budgeting is long -term planning for makin g and financing
proposed capital outlay”. - Charles T. Horngreen.
2. “The Capital Budgeting generally refers to acquiring inputs with long -
term returns”. – Richards &Greenlaw.
3. “Capital Budgeting involves the planning of expenditure for assets, the
returns fr om which will be realized in future time periods”. - Milton H.
Spencer.
5.4 NEED AND IMPORTANCE OF CAPITAL
BUDGETING
5.4.1 : NEED OF CAPITAL BUDGETING
According to Joel Dean (American Economist), “The capital expenditure
budget holds a company’s plans for replacing, improving and adding to its
capital equipment.” These words show that Capital Budgeting is
ainevitable function of management. Capital Budgeting is significant for
survival and growth of the organization as it is related to the decisions of
long-term investment.
The investment decision is important not only for the setting up of new
units but also for the expansion of present units, replacement of permanent
assets, research and development project costs and reallocation of funds, if
investments made earlier do not bring result as per the expectations.
Capital Budgeting decisions are very important in financial decisions,
because efficient allocation of capital resources is one of the most crucial
decisions of financial management.The right decisi on made by the process
of Capital Budgeting will help thecompany to maximize the shareholder
value which is the primary goal of any business.
The overall objective of Capital Budgeting is to maximize the profitability
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84 Management - II
(Management Applicat ions) It is significant because it deals with right kind of evaluation of projects.
In Capital Budgeting decisions a project is accepted if it has positive net
cash flows.
Positive cash flow means Excess of present Value of Cash inflows overthe
Present investment value.
E.g. A Co. Planning to buy a Machinery for ` 1,00,000 and its useful lifeis
5 years cash flow expected from these investment is ` 22,000 Per year.
Here,
Particulars Amount ( `)
Total Cash Inflow :
(22000 X 5 Years) 1,10,000

Less: Total
Investment (1,00,000)

Net Cash flow
(Positive) 10,000


Capital Budgeting involves identification of all cash outflows ( Capital
Investment, expenses related to capital investment) & all Cash Inflows
(Receipts from employment of capital Assets &all othe r receipts from
Capital Assets e.g. scrap value on sale of capital asset.)
5.4.2 : IMPORTANCE OF CAPITAL BUDGETING
i) For Careful Investment Decisions -
As the capital investment is a long -term investmentwhere involvement of
investment is huge and benefits are expected in future years.Hence if once
thedecision has been taken, it becomes very difficult to reverse it. Evenany
modification or alternation becomes impossible.Capital Budgeting helps in
taking careful capital expenditure decisions.
ii) For overcoming Risk & Uncertainty -
Capital investment decisions involve risk anduncertainty due to huge
investment. The future Cash Inflows are justestimated cash inflows and
not the actual cash inflows. Therefore cautious and thoughtful Capital
Budgeting decisions become si gnificant for overcoming Risk &
Uncertainty.
iii) For avoiding over and under investment -
Capital Budgeting includes the decisions about acquisition of assets andan
estimation of earnings from of such assetsduring its life span. An
incorrectdecision in this mat ter leads to over or under investment. Both munotes.in

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85 thesituations are risky from the profitability point of view. Hence
properplanning of capital expenditure is essential.
iv) For avoiding unnecessary blockingof funds -
The main feature of Capital Budgeting is to ensu re the proper timing of
acquisition of assets. If the assets are not acquired on proper time, it is
theunessential blocking of funds. It results into loss of revenue.
v) For arranging the necessary finance in time -
Capital Budgeting means the estimation of ca pital investment
decisions.Therefore it enables the organization to arrange the necessary
fundsin time for long -term investment.
vi) For looking into the various aspects and alternatives -
Capital Budgeting decisions may have positive or negative impacts on
business entity, industry and on economy at large. In -depth study/ analysis
of various projects, proposals and their various aspects is a significant
stagein the process of Capital Budgeting. It ensures that the investment
will bemade in the most profitable p roject or proposal. Capital Investment
proposals if properly analysed and selected can result in increase in
profitability and Sales. It increases the productivity of the business entity
and finally the overall economy of the country.Alternatively it will result
in increasing the wealth of the investors/shareholders.
vii) Foranalysing and evaluating the technological changes -
For facing cut -throat competition,analysis of technological changes
isnecessary. To explore and evaluate the technological changes is
theimportant function of Capital Budgeting. The cost
ofproductiondecreases thorough exploration,evaluation and application of
advanced techniques as well as it increases the probability which enables
the business entityfor facing the cut -throat competition.
5.5 TYPES OF CAPITAL BUDGETING DECISIONS
The overall objective of Capital Budgeting is to maximize the profitability
of a firm or the Return On Investment (ROI). This objective can be
achieved either by increasing the revenues or by reducing costs. Thus,
Capital Budgeting decisions can be broadly classified into two categories:
I. Investment Decisions which Increases Revenues :
It means the decision are taken in expectation of increasing the revenue of
the firm through expansion of the production capacity or si ze of operations
by adding new capital assets or new plant or introducing new product line.
II. Investment Decisions which Reduces Cost :
It means the decision are taken in expectation of increasing the revenue of
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86 Management - II
(Management Applicat ions) of obsolete, outmoded or worn out assets or old asset or old plant. In such
cases, a firm has to decide whether to continue with the same asset or
replace it. Such a decision is taken by the firm by evaluating the benefit
from r eplacement of the asset in the form of reduction in operating costs
and the cost/expenditures (outlay) needed for replacement of the asset
which ultimately reduces the cost.
Both categories of above decisions involve investment in fixed assets but
the basi c difference between the two decisions lies in the fact that
Increasing Revenue Investment Decisions are subject to more uncertainty
as compared to Cost Reducing Investment Decisions.
Further, in view of the investment proposals under consideration, Capit al
Budgeting decisions may also be classified as:
1. Accept / Reject Decisions
2. Mutually Exclusive Project Decisions
3. Capital Rationing Decisions
1) Accept / Reject Decisions :
Accept / Reject decisions relate to independent project/ proposal which do
not compete with one another. Such decisions are generally taken on the
basis of minimum Return On Investment (ROI). All those proposals which
yield a rate of return higher than the minimum required Rate Of Return
(ROR) or the Cost Of Capital (CoC) are accept ed and the rest are rejected.
If the proposal is accepted, the firm makes investment in it and if it is
rejected the firm does not invest in the same.
2) Mutually Exclusive project Decisions :
Such decisions relate to projects/ proposals which compete with o ne
another in such a way that acceptance of one automatically exclude the
acceptance of the other. Thus, one of the proposals is selected at the cost
of the other.
For example, a company may have the option of buying a new machine or
a second hand machine or taking an old machine on hire or selecting some
machinesfrom more than one brand available in the market. In such a case,
the company may select one best alternative out of the various options by
adopting some suitable technique or method of Capital Bu dgeting. Once
one alternative is selected the others are automatically rejected.
3) Capital Rationing Decisions :
A firm may have several profitable investment proposals but only limited
funds to invest. In such case, these various investments compete for
limited funds and thus the firm has to ration (Allotment in appropriate
share or portion accordingly) them. The firm effects the combination of
proposals that will yield the greatest profitability by ranking them in
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87 5.6 PROCESS OF CAPITAL BUDGETING
5.6.1 : PROCESS OF CAPITAL BUDGETING
The important steps involved in the Capital Budgeting process are :
1. Project Generation
2. Project Analysis
3. Project Selection
4. Project Execution.
5. Monitoring and Evaluation
1) Proj ect Generation :
In a dynamic and progressive firm there is a continuous flow of profitable
investment proposals. Investment proposals of various types may originate
at different levels within a firm. Investment proposals may be either
proposals to add new product to the product line or proposals to expand
capacity in existing product lines. Moreover, proposals designed to reduce
costs of the output of existing products without changing the number of
operations.
2) Project Analysis :
Project Analysis involve s two steps:
i) Estimation of benefits (cash flows or profits) and costs (outlays or
expenditures) and
ii) Selection of an appropriate criterion to judge the desirability of the
projects.
All the project proposals are analyzed by forecasting their cash flows to
determine expected profitability of each project.The analysis of projects
should be done by an unbiased group. The criterion selected must be
consistent with the firm’s objective of maximizing its market value.
3) Project Selection :
Once the profita ble projects are shortlisted, they are prioritized according
to the available company resources, a timing of the cash flows of the
project and the overall strategic plan of the company. There is no uniform
selection procedure for investment proposals. Sinc e Capital Budgeting
decisions are of vital importance, the final approval of the projects rest on
the top management.
4) Project Execution ;
After the final selection of investment proposals which fits the company’s
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88 Management - II
(Management Applicat ions) of project execution should be spent in accordance with appropriations
made in the capital budget.
5) Post completion Monitoring and Evaluation(with Post -Auditing) :
Monitoring the execution of projects is also a vital stag e in the process of
Capital Budgeting. The thorough follow -up on the actual execution of the
project includes the comparison of actual results of the project with
forecasted results and arrives at deviation if any. Systematic errors in cash -
flows are recog nized in the post -audit. The deviations and errors are
evaluated and corrections are done for future benefits from it.
5.6.2 : PROJECT EVALUATION / INVESTMENT EVALUATION
Capital Budgeting is a dual -purpose technique that analyses investment
opportunities a nd cost of capital simultaneously while evaluating
worthiness and viability of a project. A wide range of criteria has been
suggested to judge the usefulness of investment projects. Capital projects
need to be evaluated in -depth with their costs and benefi ts. The costs of
capital projects include the initial investment at the commencement of the
project. Initial investment made in land, building, plant, machinery,
equipment, furniture, fixtures, etc. generally contributes to the installed
capacity.
5.6.3 : CRITERIA FOR EVALUATION OF PROJECT /
INVESTMENT
The Capital Budgeting process begins with collecting of investment
proposals of different departments of a firm. The departmental head will
have numerous alternative projects available to meet his demands. H e has
to select the best alternative from the competing proposals. This selection
is made after estimating return (profit or yield) on the projects and
comparing the same with the Cost of Capital (CoC). Investment proposal
which gives the highest net margi nal return will be chosen.
Following are the steps involved in the evaluation of an investment:
1) Estimation of cash flows
2) Estimation of the required rate of return
3) Application of a decision rule for making the choice
5.6.4 : FEATURES ESSENTIAL FOR INVESTMENT
EVALUATION CRITERIA
A comprehensive appraisal technique should be used to measure the
economic worthiness of an investment project. Porter field, J.T.S. in his
book, ‘Investment Decisions and Capital Costs’, has outlined some of the
features w hich must exist in comprehensive investment evaluation criteria.
i) It should consider all cash flows to determine the true profitability of
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89 ii) It should provide an objective and definite technique of separating
good projects from bad projects.
iii) It should help ranking of projects according to their true profitability.
iv) It should recognize the fact that bigger cash flows are preferable to
smaller ones and early cash flows are preferable to later ones.
v) It should help to choose among mutually exclusive pr ojects which
maximize the shareholders’ wealth.
vi) It should be a criterion which is applicable to any conceivable
investment project independent of others.
5.6.5 : TYPES OF EVALUATION TECHNIQUES


I. Traditional / Non -Discounte d Cash -Flow Criteria (Techniques) :
Traditional techniques are also called ‘Non time adjusted’or ‘Non -
Discounted Cash -Flow’ techniques because it does not consider time value
of money.
II. Discounted Cash -Flow Criteria (Techniques) :
Discounted cash flow T echniques arealso called ‘Time adjusted’
techniques because it considers time value ofmoney. Traditional /
Non-Discounted Cash -Flow
Techniques Time -Adjusted /
Discounted Cash -Flow
Techniques Types of EvaluationTechniques
1) Discounted Pay -back Period
Method
2) Net Present Value (NPV)
Method
3) Benefit -Cost Ratio
(Profi tability Index)
4) Internal Rate of Return
(IRR) Method
5) Modified Internal Rate of
Return Method
1) Pay -back Period Method
2) Average or Accounting
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(Management Applicat ions) You will learn the different Evaluation Techniques of ‘Capital
Budgeting’in detail with illustrations and solved problems in Module
no. 2 : ‘Capital Budgeting’ of the subject : Financial Management – II in
the same semester of your course.
5.7 CAPITAL STRUCTURE – MEANING
5.7.1 : CAPITAL STRUCTURE THEORIES – INTRODUCTION
A company can raise the required finance through two principal sources,
namely equity and de bt.
Therefore, a question should arise - what should be the proportion of debt
and equity in the capital structure of the company? This can be put in a
different manner – what should be the financial leverage of the company?
The company should decide as to how to divide its cash flows into two
broad components – a fixed component earmarked to meet the debt
obligation and the balance portion that genuinely belongs to the equity
shareholders.
Any financial management should ensure maximization of the
sharehol ders’ wealth. Therefore an important question that should be
raised and answered is what is the relationship between capital structure
and value of the firm? Or what is the relationship between capital structure
and cost of capital?
As cost of capital and firm value are inversely related, this assumes greater
importance. If the cost of capital is very low, then the value of the
company is maximized and if the cost of capital is very high, then the
value of the company is minimized.
A firm has to maintain an optimum capital structure with a view
tomaintain financial stability. The optimum capital structure can be
obtainedwhen the market value per share is the maximum. Therefore, the
objectiveof the firm should be taken to select a financing of debt equity
mix whichwill maximise the value of the firm, optimum leverage can be
the mix ofdebt -equity which maximises the value of a company.
In order to achievethis goal, the finance manages has to follow the theories
of capitalstructure of corporate enterprises.
There are four major theories whichexplain the relationship between
capital structure, cost of capital and valueof the firm.
These are as follows:
1. Net Income Approach.
2. Net Operating Income Approach.
3. Modigliani -Miller Approach (MM).
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91 However, in order to understand this relationship, following
assumptionsare made:
i) The firm employs only two types of capital i.e. debt and equity
capital.
ii) Taxes are not considered.
iii) The firm pays its earnings in full as dividend. There is no
return edearnings.
iv) The firm’s total assets are given and there is no change in the assets.
v) The firm’s total financing remains constant. The firm can change
itscapital structure by interchanging the source of finance.
vi) The operating profit is not expected to change .
vii) The business risk remains constant and it is independent of
capitalstructure and financial risk.
viii) The firm has a perpetual life. It means the business is a going
concernand it has long life.
ix) All the investors has the same subjective probability distributi on of
thefuture expected operating profit for a given firm.
5.7.2 : MEANING OF CAPITAL STRUCTURE
Capital structure is the mix of different securities to a firm’s capital.It is a
part of a company’s financial structure. It represents the mix ofdifferent
sources of long term funds, in the capital of the company.
The long term sources of raising capital are issue of shares, debentures
orbonds and long -term borrowings. The Share Capital is an owned capital
and Debentures and bonds are borrowed capital. The cap ital structure of
acompany is to be determined initially, at the time of formation of
thecompany.
The term capital is used with reference to the total long term funds raised
by acompany.
The decisions regarding the form of financing, their requirementsand their
relative proportions in the total capital of a company are knownas ‘capital
structure decisions’.
The choice of capital structure depends upon a number of factors such as
nature of business,regularity of earnings, conditions of the financial
markets and attitudes ofthe investors. A capital structure will be
considered appropriate if itpossesses profitability, solvency, flexibility,
conservatism and control.
Capital structure refers to the mix of a firm’s capitalization andincludes
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92 Management - II
(Management Applicat ions) share, and retained earnings. The decision regardingthe forms of financing
their requirements and their relativeproportions in total capitalization are
known as capital structuredecision.
A firm has the c hoice to raise capital for financing itsproject from different
sources in different proportions as follows:
i) Exclusive use of equity capital
ii) Use of equity and preference capital
iii) Use of equity and debt capital
iv) Use of equity, preference and debt capital
v) Use of a combination of debt, equity and preference capital in
different proportions.
The choice of combination of these sources is called capitalstructure mix.
5.7.3 : OPTIMUM CAPITAL STRUCTURE
The theory of optimal capital structure deals with the issue of r ightmix of
debt and equity in the long term capital structure of a firm.This theory
states that if a company takes on debt the value ofthe firm increases up to
a point, beyond that point if debt continuesto increases then the value of
the firm will start t o decrease. if thecompany is unable to repay the debt
within the specified period,then it will affect the goodwill of the company
in the market .
Therefore, the company should select its appropriate capitalstructure with
due consideration to the factors of debt and equity.
Policymakers should choose a capital structure that reflects thedesired mix
of equity and debt capital. There are some debt -equityratio standards that
must be followed in order to reduce the risks ofexcessive loans. For
example, public se ctor organizations have a1:1 ratio, while private sector
firms have a 2:1 ratio. It may differfrom industry to industry.
Thus companies will prefer to go after debt capital for the following
reasons :
i) Tax deductibility of interest (availability of tax shie ld)
ii) Higher return to shareholders due to gearing
iii) Complicated, time consuming procedure for raising equity capital
iv) No dilution of ownership and control
v) Equity results in permanent commitment than debt.
5.7.4 : DECIDING CAPITAL STRUCTURE
The Capital structur e of an enterprise refers to the kind and proportion of
different securities for raising funds. After deciding about the requirement
of funds, the kind and proportion of various sources of capital should be
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93 Even if gestation period is longer, then share capital may be most suitable.
Long -term funds should be raised. The decisions regarding an ideal mix of
equity and debt as well as short -term and long -term debt ratio will have to
be ta ken in the light of the cost of raising finance from various sources, the
period for which the funds are required. Long -term funds should be
employed to finance working capital also, if not wholly then partially.
Care should be taken to raise sufficient lo ng-term capital in order to
finance the fixed assets as well as the extension programme of the
enterprise in such a wise manner as to strike an ideal balance between the
own funds and the loan funds of the enterprise.
Entirely depending upon overdrafts and cash creditors for meeting
working capital needs may not be suitable. A decision about various
sources for funds should be linked to the cost of raising funds. If cost of
raising funds is very high then such sources may not be useful for long.
The capital structure decision centres on the allocation between debt and
equity in financing the business needs. An efficient mixture of capital
reduces the price of capital. The Lesser cost of capital increases net
economic returns which ultimately increase busines s value.
5.8 FACTORS AFFECTING CAPITAL STRUCTURE
5.8.1 : FACTORS AFFECTING CAPITAL STRUCTURE
Following are the factors which mainly influence in the decision of the
perfect capital Structure:
1) Business Risk :
Business risk refers to the variability of a company's earnings and the
potential for financial loss. Industries with higher business risk, such as
technology or biotechnology, may prefer to have a lower proportion of
debt in their capital structure. This is because high levels of debt can
amplify t he impact of fluctuations in earnings, leading to financial distress.
2) Cost of Capital :
The cost of capital is the cost a company incurs to raise funds. It includes
the cost of equity and the cost of debt. Companies aim to minimize their
overall cost of capital to maximize shareholder value. The relative costs of
equity and debt financing influence the proportion of each in the capital
structure.
3) Financial status of the enterprise :
Financial status or health is the ability of a company to adapt to ch anges in
its operating environment. A balanced capital structure provides financial
flexibility, allowing a company to fund new projects or navigate
challenging economic conditions. Having a mix of equity and debt ensures
that the company can access differ ent sources of capital as needed.
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94 Management - II
(Management Applicat ions) 4) Prevailing Tax regime :
Interest on debt is tax -deductible, providing a tax shield for companies.
This makes debt financing more cost -effective compared to equity
financing from a tax perspective. As a result, companie s in higher tax
brackets may choose to use more debt in their capital structure to reduce
their taxable income.
5) Market situations :
Economic and market conditions impact a company's ability to raise
capital. During economic downturns, credit may be les s available, leading
companies to be more conservative in their use of debt. In contrast, in
favourable economic conditions, companies may be more willing to take
on debt to fund expansion and growth opportunities.
6) Size of the company and product life c ycle :
Smaller and younger companies may have limited access to debt markets
and may rely more on equity financing to fund their operations. As a
company grows and matures, it may have better access to debt markets
and may use debt to take advantage of tax benefits and leverage.
7) Shareholders’ preferences :
Investor preferences play a role in shaping a company's capital structure.
Some investors, such as conservative institutional investors or those
focused on income generation, may prefer companies with lower levels of
debt due to the lower risk of financial distress. Other investors, including
those seeking higher returns, may be more comfortable with companies
that use more debt.
8) Financial Ratios :
Financial Ratios as the debt -to-equity ratio, provid e insights into a
company's financial risk. A higher debt -to-equity ratio indicates a higher
level of financial leverage and risk. Companies carefully consider these
ratios to ensure that the capital structure aligns with their risk tolerance
and financial objectives.
9) Statutory and Regulatory requirements :
Industries and companies are subject to various regulations that may
impact their capital structure decisions. Regulatory constraints, such as
limits on the amount of debt that can be used, influence the financing
options available to companies. Regulatory changes can also affect the
attractiveness of certain financing instruments.
10) Credit Rating :
A company's credit rating reflects its creditworthiness and influences its
ability to obtain debt fina ncing. Higher credit ratings result in lower
interest rates and better terms for debt. Maintaining a good credit rating is
crucial for companies that rely on debt financing, as it enhances their
ability to access capital at favorable terms.
As such, capita l structure decisions involve a careful consideration of
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95 company, its industry, and the prevailing economic and regulatory
conditions. A well -balanced capital structure is essential for a chieving
financial stability and flexibility while optimizing the cost of capital.
5.8.2 : CAPITAL STRUCTURE DETERMINANTS IN PRACTICE
The capital structure determinants in practice may involve considerations
in addition to the concerns about earning per s hare, value of the company
and cash and funds flow.
A company may have enough debt servicing ability but it may not have
assets to offer as collateral. Management of companies may not willing to
lose their grip over the control and hence they not be taking up debt capital
even if they are in their best interest.
Some of the very important considerations are briefly covered below:
1) Growth potential :
Companies with growth opportunities may probably find debt financing
very expensive in terms of interest to be paid and this may arise due to
non-availability of adequate unencumbered collateral securities. This may
result in losing the investment opportunities.
High growth companies may prefer to take debts with lower maturities to
keep interest rates down and to retain the financial flexibility since their
performance can change unexpectedly at any point of time. They would
also prefer unsecured debt to have flexibility.
Strong and mature companies have tangible assets and stable profits. Thus
they may have lo w costs of financial distress. These companies would
therefore raise debts with longer maturities as the interest rates will not be
high for them and they have a lesser need of financial flexibility since
their performance is not expected to be altered sud denly. They would also
be availing the interest tax shields which in turn will enhance the value of
the companies.
2) Assets :
The assets and the form of assets held by the companies are very
important determinants of their capital structure.
Tangible une ncumbered fixed assets serve as a collateral security to debt.
In the event of any unforeseen financial distress, the creditors can have
recourse to these assets and they may be able to recover their debt by
foreclosing such assets.
Companies with large ta ngible assets will have very less financial distress
and costs and they will be preferred by the creditors.
Companies with intangible assets will not have any such advantages .

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96 Management - II
(Management Applicat ions) 3) Non debt and debt tax shields :
The tax provisions provide for deduction o f interest paid on debt and
therefore the debt capital can increase the company’s after tax free cash
flows. Therefore this interest shield increases the value of the company.
This tax advantage of debt implies that companies will employ more debt
to redu ce tax liabilities and increase value. In practice this is not always
true as is evidenced from many empirical studies.
Companies also have non debt tax shields like depreciation, carry forward
losses, etc. This implies that companies that have larger non debt tax
shields would employ low debt as they may not have sufficient taxable
profit to have the benefit of interest deductibility.
However, there is a link between non debt tax shields and the debt tax
shields because companies with higher depreciation would tend to have
higher fixed assets, which serve as collateral against debt
4) Financial flexibility :
Companies will normally have a low level of threat or insolvency
perception even though their cash and funds flows are comfortable.
Despite this, the companies may exercise conservative approach in their
financial leverages since the future is very much uncertain and it may be
difficult to consider all possible scenarios of adversity. It is therefore
prudent for the companies to maintain financial flexi bility as this will
enable the companies to adjust to any change in the future events.
5) Loan agreements :
The creditors providing the debt capital would insist for restrictive
covenants in the long term loan agreements to protect their interest.
Such cov enants may include distribution of dividends, new additional
external finances (other than equity issue) for existing or new projects,
maintain working capital requirements at a particular level. These
covenants may therefore restrict the companies’ invest ment, financing and
dividend policies. Violation of these covenants can lead to serious adverse
consequences. To overcome these restrictive covenants, the companies
may ask for and provide for early repayment provisions even with
prepayment penalty provisi ons in the loan agreements.
6) Control :
In designing a suitable capital structure, the management of the companies
may decide and desire to continue control over the companies and this is
true particularly in the case of first generation entrepreneurs. Th e existing
management team not only wants control and ownership but also to
manage the company without any outside interference. Widely held and
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97 7) Issue costs :
Issue or floatation costs are incurred when a company decides to raise debt
capital in the market. These debt issue costs are normally expected to be
lower than equity issue costs. This alone will encourage the companies to
pursue debt c apital. Retained earnings do not involve issue costs. The
source of debt also influences the issue costs. Regulations like stamp duty
on commercial paper or certificate of deposits may also jack up the issue
cost for the companies.
You will learn the diffe rent ‘Capital Structure theories’ in detail with
illustrations and solved problems in Module no. 3 : ‘Capital Structure
Theories’ of the subject : Financial Management – II in the same semester
of your course.
5.9 CAPITAL MARKET – MEANING AND
IMPORTANCE
5.9.1 : CAPITAL MARKET – INTRODUCTION
Capital Market is a market for long -term sources of financeto the
industrial and corporate sector. The development of a nation depends upon
the rapid growth of industrialization of a country.
Asset formation is the cr ucial factor for prosperity of nation. Theasset
creation is based on supply of capital and technology. Capitalalone will
not create prosperity. The prosperity is the combination ofTechnology,
Capital and Human Resources towards developed nation.
5.9.2 : DEFINITIONS OF CAPITAL MARKET
According to Arun K. Datta the Capital Market may bedefined as, "the
Capital Market is a complex of institutionsinvestment and practices with
established links between thedemand for and supply of different types of
capital gains ".
According to F. Livingston the Capital Market may be definedas, "In a
developing economy, it is the business of the capitalmarket to facilitate the
main stream of command over capital to thepoint of the highest yield. By
doing so, it enables, control ov erresources to pass into the hands of those
who can employ themmust effectively thereby increasing production
capacity and spellingthe national dividend."
5.9.3 : IMPORTANCE OF CAPITAL MARKET
Capital Market deals with long -term funds. These funds are subje ct to
uncertainty and risk. It supplies long and medium termfunds to the
corporate sector. It provides the mechanism forfacilitating capital fund
transactions. It deals in ordinary shares,bond debentures and stocks and
securities of the government.
Inthis market the funds flow will come from savers. It converts financial
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98 Management - II
(Management Applicat ions) the form of interest or dividend to theinvestors. It leads to capital
formation.
The following factors play an important role in the growth of the Capital
Market :
i) A strong and powerful Central Government
ii) Financial dynamics
iii) Speedy industrialisation
iv) Attracting Foreign Investment
v) Investments from NRIs
vi) Speedy Implementation of policies
vii) Regulatory changes
viii) Globalisation
ix) The level of savings and investment pattern of the householdsectors
x) Development of financial theories
xi) Sophisticated technological advances
5.10 CONSTITUENTS IN THE CAPITAL MARKET
Constituents in the Capital Market can be studied with the help of
financia l system of India.
5.10.1 : FINANCIAL SYSTEM OF INDIA
Following chart depicts the Indian Financial System with its constituents :


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99 5.10.2 : CONSTITUENTS IN THE CAPITAL MARKET
Capital Market is a market for long -term funds. It r equires awell -
structured market to enhance the financial capability of thecountry. The
market consists of a number of players. They arecategorised as:
1. Companies
2. Financial Intermediaries
3. Investors
1) Companies :
Generally every public company can a ccess the capitalmarket. The
companies which are in need of finance for theirprojects can approach the
market. The Capital Market provides funds from the savers of the
community. The companies can mobilize the resources for their long -term
needs such as pr ojectcost, expansion and diversification of projects and
otherexpenditure items.
In India, the companies should get the priorpermission from the SEBI
(Securities Exchange Board of India) toraise the capital from the market.
The SEBI is the most powerfulorg anization to monitor, control and guide
the Capital Market . It classifies the companies for the issue of share
capital as newcompanies, existing, and unlisted existing listed companies.
According to its guidelines a company is a new company, if itsatisfies all
the following conditions:
i. The company shall not have completed 12 months ofcommercial
operations.
ii. Its audited operative results are not available.
iii. The company may set -up by entrepreneurs with or without
trackrecord.
A company can be treated as existin g listed company, if itsshares are listed
in any recognised stock exchange in India. A company is said to be an
existing listed company if it is a closelyheld or private company.
2) Financial Intermediaries :
Financial intermediaries are those who assist i n the processof converting
savings into capital formation in the country. A strongcapital formation
process is the oxygen to the corporate sector. Therefore, the intermediaries
occupy a dominant role in the capitalformation which ultimately leads to
the gr owth of prospering to thecommunity. Their role in this situation
cannot be neglected. Thegovernment should encourage these
intermediaries to build astrong financial empire for the country. They can
also be called asfinancial architectures of the Indian dig ital economy.
Their networkcannot be ignored. Their financial capability cannot be
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100 Management - II
(Management Applicat ions)

The majorintermediaries in the Capital Market are:
i. Brokers
ii. Stock -brokers and sub -brokers
iii. Merchant Banke rs
iv. Underwriters
v. Registrars
vi. Mutual Funds
vii. Collecting agents
viii. Depositories
ix. Agents
x. Advertising agencies
3) Investors :
The Capital Market consists of many numbers of investors. Alltypes of
investor's basic objectives are to get good returns on theirinvestment.
Every fund owner may desire to take away the fundafter a specific period.
Therefore, safety is the most important factorwhile considering the
investment proposal. The investors comprisethe financial and investment
companies an d the general publiccompanies. Usually, the individual
savers are also treated asinvestors.
Return is the reward to the investors. Risk is thepunishment to the
investors who wrongly made investmentdecision. Return is always chased
by the risk. An intellig ent investormust always try to escape the risk and
capture the return. Allrational investors prefer return, but most investors
are risk averse.They attempt to get maximum capital gain. The return can
be madeavailable to the investors in two types and they are in the form
ofrevenue or capital appreciation. Some investors will prefer forrevenue
receipt and others prefer capital appreciation. It depends upon their
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101 Theinstitutions and companies raise the reso urces from the market
bydesigning various schemes to meet the needs and convenience ofthe
investors. They schemes can be framed to attract all types ofinvestors,
who are selling in the Capital Market . The main objectiveof any type of
investor is safety, pr ofitability, liquidity and capitalappreciation.
5.10.3 : COMPONENTS OF THE CAPITAL MARKET
In a Capital Market , banks and financial institutions are theimportant
components. They act as catalysts in the economicdevelopment of any
country. These institutions mobilise financial savings from household,
corporate and other sectors of theeconomy and channelize the into
productive investments. They act as a Reservoir of resources of Financial
Markets and form thebackbone of the economic and financial system. The
Bankingindustry has undergone a sea change during the last threedecades.
After the modernisation of banks, they not only lend forthe Social and
Economic causes but also participated in thedevelopment programmes of
Central Government and StateGovernment.
The main components of the Capital Market in India are:

1. New -issue Market (Public issues) (Primary Market)
2. Secondary Market (Stock Market)
The Indian Capital Market is regulated by TheSecurities and Exchange
Board of India (SEBI).
5.10.4 : STRUCTURE OF THE CAPITAL MARKET IN INDIA
The structure of the Capital Market has undergone vastchanges in recent
years. The Indian Capital Market has transformedinto a new appearance
over the last four and half decades.
Now itcomprises an impressive network of fina ncial institutions
andfinancial instruments. The market for already issued securities
hasbecome more sophisticated in response to the different needs ofthe
investors. The specialised financial institutions were involved inproviding
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(Management Applicat ions) long-term credit to the corporate sector. Therefore, the premier financial
institutions such as ICICI, IDBI, UTI, LIC and GIC constitute the largest
segment.
A number of new financialinstruments and financial intermediaries have
emerged in the Capital Market.
Usually the Capital Market s are classified in twoways:
1. On the basis of issuer.
2. On the basis of instruments.
1) On the basis of issuer the Capital Market s can be classified again into
two types :
i. Corporate (Industrial) securities market.
ii. Government securities ma rket.

2) On the basis of financial instruments the Capital Market s areclassified
into two kinds:
i. Equity Market
ii. Debt Market
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103 Recently there has been a substantial development of theIndian Capital
Market. It comprises various sub -markets.
Equity ma rket is more popular in India. It refers to the market for
equityshares of existing and new companies. Every company shall
approach the market for rising of funds.
The equity market can bedivided into two categories:

1. Primary Market
2. Secondary Marke t.
Debt Market represents the market for long -term financialinstruments such
as debentures, bonds etc.
5.10.5 : INDUSTRIAL SECURITIES
A] Industrial Securities Market :
As the very name suggests, it is a market for industrialsecurities namely:
1. Equity sha res or ordinary shares
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(Management Applicat ions) 2. Preference Shares
3. Debentures or bonds.
It is a market where industrial concernsraise their capital or debt by
issuing appropriate instruments.
It can be further divided into :
A. Primary Market or New Issue Market
B. Secondar y Market or Stock Exchange.
A) Primary Market :
Primary Market is a market for new issues or new financialclaims. Hence,
it is also called New Issue Market. The primarymarket deals with these
securities which are issued to the public forthe first time.
There are three ways by which a company may raisecapital in a primary
market.
They are:
i. Public issue
ii. Rights issue
iii. Private Placement
The most common method of raising by new companies isthrough sale of
securities to the public. It is called publi c issue.
When an existing company wants to raise additional capital,securities are
first offered to the existing shareholders on a pre -emptivebasis. It is called
rights issue. Private placement is a wayof selling securities privately to a
small group of in vestors.
B) Secondary Market :
Secondary Market is a market for secondary sale ofsecurities. In other
words, securities which have already passedthrough the new issue market
are traded in this market.
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105 Generally,such securities are quoted in the Stock Exch ange and it provides
acontinuous and regular market for buying and selling of securities.This
market consists of all stock exchanges recognised by theGovernment of
India. The stock exchanges in India are regulatedunder the Securities
Contracts (Regulation) Act, 1956. The Bombay
Stock Exchange is the principal stock exchange in India which setsthe
tone of the other stock markets.
Secondary Market, also known as the aftermarket, is theplace where goods
which are already used by someone are soldand/or bought. Thus we can
define secondary market as "thefinancial market where previously issued
securities and financialinstruments such as stocks, bonds, futures and
options aremanoeuvred from one investor into another." Secondary
marketprimarily deals with used prod ucts or an alternative use of
anexisting product or assets where the customer base is the secondmarket.
For example, rice is primarily known as food item so thefood market is the
first or primary market for rice. Broken rice is theby -product in rice mills
and is used for producing liquid glucose.About 90% of liquid glucose
produced in India is used inconfectionary industry. Thus it can be said that
confectionaryindustry is the secondary market for rice which is in the form
ofliquid glucose.
Secondary Marke t can be divided into three parts. These are:
I. Equity Market
II. Debt Market
III. Derivative Segment
I) Equity Market :
Shares of a company which are also termed as equities make the person or
organisation holding them as the shareholderof the company. M ost of the
investors prefer to invest in thembecause equities have the proven track
record of outperformingother forms of the investments. The value of most
of the equities tends to increase over a period of time.
Dividend is a percentage of theface value of a share that a company
returns to the shareholdersfrom its annual profits.
Indian Equity Markets depend mainly on monsoons, globalfunds flowing
into equities and the performance of variouscompanies. Indian Equity
Market is almost majorly dominated byth e two oldest and biggest stock
exchanges of the country. These are BSE and NSE. The benchmark
indices of the two exchangesare Nifty for NSE and Sensex for BSE are
closely followed.
II) Debt Market :
Debt Market is that part of secondary market whereinvesto rs buy and sell
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106 Management - II
(Management Applicat ions) where fixed income securities are issuedand traded. For a developing
economy like India, debt markets arecrucial source of capital funds. Indian
Debt Market is almost th irdlargest in the world and one of the largest in
Asia. It includes government securities, public sector undertakings,
othergovernment bodies, financial institutions, banks and companies.
Total size of the Indian Debt Market is in the range of $92 billion
to$100billion i.e. approximately 30% of GDP.
A] Classification of the Indian Debt Market :
Indian Debt Market can be broadly classified in two categories:
1. Government Securities Market
2. Bond Market
1) Government Securities Market :
In G -sec (Government Sec urities) market securities are issued by the
Governments ofthe state and centre for the purpose of taking loans.
2) Bond Market :
Bond Market link issuers, i.e. governments, state ownedinstitutions, local
bodies and corporate having financing needs, withth e investors having
investible funds. In an efficient bond marketrequirements of both the
issuers and investors are met effectivelyat a price (interest rates)
determined competitively and priceadjustment to some new information is
seamless.
Bond Market cons ists of the following:
i. Corporate Bonds
ii. Public Sector Unit Bonds
iii. Banks and Financial Institutions Bonds
i) Corporate Bonds and Debentures :
Have maturities beyond 1 year and generally up to 10 years. Corporate
also issue short term commercial paper with mat urityranging from 15 days
to 1 year.
ii) Public Sector Unit Bonds :
PSU Bonds are generally treated as surrogates of sovereignpaper,
sometimes due to explicit guarantee of Government, andoften due to
comfort of public ownership. As compared to G -Secs,corpo rate bonds
carry higher risks, which depend upon thecorporation, the industry where
the corporation is currentlyoperating, the current market conditions and
the rating of thecorporation.

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107 iii) Banks and Financial Institutions Bonds :
Most of the instituti onal bonds are in the form of promissorynotes
transferable by endorsement and delivery. They arenegotiable certificates
issued by the Financial Institutions such asthe IDBI/ICICI/IFCI or by the
commercial banks. These instruments have been issued both the regular
income bonds and asdiscounted long term instruments (deep discount
bonds).
B] Participants in Debt Market :
Given the large size of trades, Debt Market is predominantlya wholesale
market, with dominant institutional investorparticipation. The inves tors in
debt market are mainly banks, financial institutions, mutual funds,
provident funds, insurance companies and corporate.
In order to understand the participants and products dealt indebt market
following table can be studied.
Issuer Instrument Matur ity Major Investors
Central
Government Dated
Securities
Treasury Bills 2-30 years 91/364 days RBI, Banks, Insurance Companies, Provident Funds, PDs, Individuals.
State
Government Dated
Securities 5-10 years Banks, Insurance Companies, Provident Funds
PSUs Bonds 5-10 years Banks, Insurance Companies, Corporate, Provident Funds,
Mutual Funds,
Individuals
Corporate
Debentures Bonds and
Commercial
Paper 1-12 year Banks, Mutual
Funds, Individual
PDs
Commercial
Paper 15 days to 1 year Banks, Corporate, Financial year Institutions, Mutual Funds, Individuals.
Banks Bonds issued of tier II
Capital Certificates of Deposits Minimum 5 years 3 months to 1 year Banks, Corporate


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108 Management - II
(Management Applicat ions) III) Derivative Segment :
Financial markets are well known for their volatile natu re andhence risk
factor is an important factor for financial agents. Toreduce this concept of
derivatives comes into picture. Derivativesare product whose values are
derived from one or more basicvariables called bases. These bases can be
underlying assets (forexample FOREX, equity etc.) bases or reference
rates. For examplerice farmers may be willing to sell their harvest at a
future date toeliminate risk of changes in the price by that date. The
transactionin this case will be called derivative, while spo t price of the
wheatwould be underlying assets. Derivatives were introduced in
theIndian Stock Market to enable the investors to hedge theirinstruments
against adverse volatile price movements. However, they are now
commonly being used for taking speculati ve positions.
A] Classification of the Derivative Market :
Derivatives Market can broadly be classified in twocategories, those that
are traded on the exchange and those thatare traded one to one or ‘over the
counter’.
They are hence known as :
i. Exchange traded derivatives
ii. OTC Derivatives (Over The Counter)
i) Exchange traded Derivatives :
They are the most common and popular kind of derivativestraded
normally on the exchanges.
ii) OTC Equity Derivatives :
They have long history in India in OTC Market. Op tions ofvarious kinds
were available (called Teji, Mandi and Fatak) in unorganized markets and
were traded in Mumbai as early as 1900.
However, SCRA banned all kind of option in 1956 and this can waslifted
in 1995.
B] Participants in Derivatives Market :
(a) Hedgers – They use futures or option markets to reduce oreliminate
the risk associated with price of assets.
(b) Speculators - They use futures and options contract to get
extraleverage in betting on future (b) movements in price of an asset.
Theycan in crease both the potential gains and potential losses by usageof
derivatives in a speculative venture.
(c) Arbitrageurs – Theseare in business to take advantage of
adiscrepancy between prices in two different markets. If, for exampleif
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109 price, they will take offsetting positions in the two marketsto lock in
profit.
C] Types of Derivatives :
i) Forwards :
A forward contract is customised contract between twoentities, where
settleme nt takes place on a specific date in futureon today's pre -agreed
price.
ii) Futures :
A future contract is an agreement between two parties to buyor sell an
asset at a certain time in future at a certain price. Theyare special kind of
forwards contracts in the sense that former arestandardised exchange
traded contracts.
iii) Options :
Options are of two types - calls and put option. Call optiongives the buyer
the right but not the obligation to buy a givenquantity of the underlying
asset, at a given price o n or before agiven future date. On the other the put
option gives the buyer theright, but not the obligation to sell a given
quantity of the underlyingasset at a given price on or before a given future
date.
iv) Warrants :
Options generally have life of on e year, the majority ofoptions traded on
options exchange having a maximum maturity of nine months. Longer
dated options are called warrants and aregenerally traded over the counter.
v) LEAPS :
Long term Equity Anticipation Securities are options havingmat urity of 3
years.
vi) Baskets :
Baskets options are options on portfolios of underlying asset.The
underlying asset is usually a moving average or a basket ofasset. Equity
index options are form of basket options.
vii) Swaps :
Swaps are private agreements b etween two parties toexchange cash flows
in the future according to a prearrangedformula. They can be regarded as
portfolios of forward contracts.


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(Management Applicat ions) The two most commonly used swaps are:
(a) Interest Rate Swaps :
They involve swapping only interest relate d cash flowsbetween the parties
in the same currency.
(b) Currency Swaps :
They involve swapping of both the principal and interestbetween the
parties, with cash flows in one direction being in adifferent currency than
those in the opposite direction.
viii) Swaptions :
Swaptions are options to buy or sell a swap that will becomeoperative at
the expiry of the option. Thus, it can be said thatSwaption, is an option on
a forward swap. Rather than having callsand puts, the swaptions market
has receiver swaption s and payerswaptions. A receiver swaption is an
option to receive fixed and payfloating, on the other a payer swaptions is
an option to pay fixedand receive floating.
5.10.6 : INSTRUMENTS OF SECONDARY MARKET
A] Classification of Shares :















Non- Cumulative Preference Equity Deferred Shares
Participatin
g or Non -
Participating Convertible
or Non -
Convertible
Redeemable or
Irredeemable Cumulative Participatin
g or Non -
Participating Convertible
or Non -
Convertible
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111 Following are the main instruments or products dealt in SecondaryMarket:
1. Shares
2. Debentures
3. Bonds
4. Mutual Funds
1) Shares :
"A share in the share capital of the company and includes stock except
where a distinction between stock and share isexpressed or impli ed." For
example, if the capital of the company is 10, 000 and is divided into
1000 units of 10/ - each then eachunit of 10/ - shall be called share of
the company.
Chart of Classification of Shares is depicted on the earlier page.
2) Debentures :
A debenture is a unit of loan amount. When a company intends to raise the
loan amount from the public it issuesdebentures and the person holding
debenture or debentures iscalled the debenture holder. A debenture holder
is the creditor ofthe company. Debentures bear a fixed rate of interest on
them andthe same is paid on some pre specified date on half yearly basis.
The bond amount is paid on a particular date on the redemption ofthe
bond. Debentures are normally secured against the assets ofthe company
in the favour of the debenture holder.
As per Section 2(12 ) of Companies Act 1956, "Debenture includes
debenture stock, bond and any other securities of thecompany whether
constituting a charge on the company's assets ornot."
3) Bonds :
Bond is a negotiable certificate evidencing indebtness. It isnormally
unsecur ed. A debt security is generally issued by acompany, government
agency or municipality.
4) Mutual Funds :
Mutual Fund can be described as a common pool of moneywhere many
small and retail investors put in their money. Thismoney is allocated
towards some ob jective which is predefined.
Thus it can be said that ownership of the fund is joint or mutual, asthis
belongs to all those investors who have contributed to it.
Ownership of an investor is in same proportion as the contributionmade by
him bears toot the t otal pool (amount) of the fund created .
You would have learnt the ‘Capital Market’ in detail in Module no. 2 :
‘Financial Markets’ of the subject : Foundation Course in Commerce
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5.11 FUNCTIONS OF CAPITAL MARKET
Capital Market plays a vital role in the development bymobilizing the
savings to the needy corporate sector. In recentyears there has been a
substantial growth in the Capital Market.
The Capital Market involves in various function s and significance.
They are as below:
i. Co -ordinator
ii. Motivation to savings
iii. Transformation to investments
iv. Enhances economic growth
v. Stability
vi. Advantages to the investors
vii. Barometer
i) Co-ordinator :
The Capital Market functions as coordinator between saversand investors.
It mobilizes the savings from those who have surplusfund and divert them
to the needy persons or organizations.
Therefore, it acts as a facilitator of the financial resource. In thisway it
plays a vital role in tran sferring the surplus resources todeficit sectors. It
increases the productivity of the industry whichultimately reflects in GDP
and national income of the country. It increases the prosperity of the
nation.

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113 ii) Motivation of Savings :
The Capital Market p rovides a wide range of financialinstruments at all
times. India has a vast number of individualsavers and the crores of rupees
are available with them. Theseresources can be attracted by the Capital
Market with nature. Thebanks and non -banking financial i nstitutions
motivate the people tosave more and more. In less developed countries,
there is noefficient Capital Market to tap the savings. In
underdevelopedcountries there are very little savings due to various
factors. Inthose countries they invest mostly in unproductive sector.
iii) Transformation of Investment :
The Capital Market is a place where the savings aremobilized from
various sources, is at the disposal of businessmen and the government. It
facilitates lending to the corporate sectorand the gove rnment. It diverts the
savings amount towards capitalformation of the corporate sector. It creates
assets by helping theindustry. Thus, it enhances the productivity and leads
toindustrialization. The industrial development of the country depends
upon the d ynamic nature of the Capital Market . It also provides facilities
through banks and non -banking financial institutions. Thedevelopment of
financial institutions made the way easy to capitalmarket. The capital has
become more mobile. The interest rate fall lead to an increase in the
investment.
iv) Enhances economic growth :
The development of the Capital Market is influenced bymany factors like
the level of savings with the public, per capitaincome, purchasing
capacity, and the general condition of theeconom y. The Capital Market
smoothens and accelerates theprocess of economic growth.
The Capital Market consists of variousinstitutions like banking and non -
banking financial institutions. It allocates the resources very cautiously in
accordance with thedevelop ment of needs of the country. The balanced
and properallocation of the financial resources leads to the expansion of
theindustrial sector. Therefore, it promotes the balances
regionaldevelopment. All regions should be developed in the country.
v) Stability :
The Capital Market provides a stable security prices in thestock market. It
tends to stabilize the value of stocks and securities.It reduces the
fluctuations in the prices to the minimum level. Theprocess of stabilization
is facilitated by providing fun ds to theborrowers at a lower interest rate.
The speculative prices in thestock market can be reduced by supply of
funds. The flow of fundstowards secondary market reduces the prices at
certain level.
Therefore, the Capital Market provides funds to the sto ck market ata low
rate of interest.
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(Management Applicat ions) The investors who have surplus funds can invest in long -termfinancial
instruments. In Capital Market, a number of long -termfinancial
instruments are available to the investor at any time .
Hence, the investors can lend their money in the Capital Market
atreasonable rate of interest. The Capital Market helps the investorsin
many ways. It is the coordinator to bring the buyer and seller atone place
and ensure the marketability of investments . The stockmarket prices are
published in newspapers everyday which enablesthe investor to keep track
of their investments and channelize theminto most profitable way. The
Capital Market safeguards the interestof the investors by compensating
from the stoc k exchangecompensating fund in case of fraud and default.
vii) Barometer:
The development of the Capital Market is the indicator of thedevelopment
of a nation. The prosperity and wealth of a nation depends, upon the
dynamic Capital Market . It not only refl ects thegeneral condition of the
economy but also smoothen andaccelerates the process of economic
growth. It consists a numberof institutions, allocates the resources
rationally in accordance withthe development needs of the country. A
good allocation ofre sources leads to expansion of trade and industry. It
helps bothpublic and private sector.
5.12 FUNDAMENTAL ANALYSIS
A] Introduction :
The intrinsic value of an equity share depends on a multitude of factors.
The earningsof the company, the growth rate and the risk exposure of the
company have a direct bearingon the price of the share. These factors in
turn rely on the host of other factors like economicenvironment in which
they function, the industry they belong to, and finally companies’own
performance.
The fundamental school of thought appraised the intrinsic value of shares
through
1. Economic Analysis
2. Industry Analysis
3. Company Analysis
B] Economy -Industry -Company Analysis Framework :
The analysis of economy, industry and company fundamentals constitute
the mainactivity in the fundamental approach to security analysis. In this
era of globalization wemay add one more circle to the diagram to
represent the international economy.
The logic of this three tier analysis is that the company performance
depends noto nly on its own efforts, but also on the general industry and
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115 operates within the economy. As such, industry andeconomy factors affect
the performance of the company.
The multitude of factors affecting the performance of a company can be
broadlyclassified as:
(1) Economy -wide factors - Such as growth rate of the economy,
inflation rate, foreignexchange rates, etc. which affect all companies.
(2) Industry -wide factors - Such as demand -supply ga p in the industry,
the emergence ofsubstitute products, changes in government policy
relating to the industry, etc. thesefactors such as the age of its plant, the
quality of management.
(3) Company specific factors - Such as the age of its plant, the quali ty of
managementbrand image of its products, its labour -management relations,
etc. these factors arelikely to make a company’s performance quite
different from that of its competitorsin the same industry.
Fundamental analysis thus involves three steps:
I. Economy Analysis
II. Industry Analysis
III. Company analysis
Let us see what each of these analyses implies.
I) Economy Analysis :
The performance of a company depends on the performance of the
economy. If theeconomy is booming, incomes rise, demand for go ods
increases, and hence the industriesand companies in general tend to the
prosperous. On the other hand, if the economy is inrecession, the
performance of companies will be generally bad.
Investors are concerned with those variables in the economy which affect
theperformance of the company in which they intend to invest. A study of
these economicvariables would give an idea about future corporate
earnings and the payment of dividendsand interest part of his fundamental
analysis.:
1. Growth Rates of National Income
2. Inflation
3. Interest Rates
4. Government Revenue, Expenditure and Deficits
5. Exchange Rates
6. Infrastructure
7. Monsoon
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(Management Applicat ions) 9. Economic Forecasting
10. Forecasting Techniques
11. Anticipatory Surveys
12. Barometric or Indicator Approach
13. The US Dep artment of Commerce, through its Bureau of Economic
Analysis, hasprepared a short list of the different indicators. Some of
them are given below for illustrative purpose.
i. Leading Indicators
ii. Coincidental Indicators
iii. Lagging Indicators
Of the thr ee types of indicators, leading indicators are more useful for
economicforecasting because they measure something that foreshadows a
change in economic activity.
II) Industry Analysis :
An industry is a group of firms that have similar technological struct ure
ofproduction and produce similar products. For the convenience of the
investors, the broadclassification of the industry is given in financial
dailies and magazines. Companies aredistinctly classified to give a clear
picture about their manufacturing p rocess and products.
The table gives the industry wise classification given in Reserve Bank of
India Bulletin.
Industry Groups :
Industries
S/N Type of industry
1 Food Products
2 Beverages, Tobacco and Tobacco products
3 Textiles
4 Wood and wood prod ucts
5 Leather and leather products
6 Rubber and plastic products
7 Chemical and chemical products
8 Non-metallic mineral products
9 Basic metals, alloys and metal products
10 Machinery and Machine tools
11 Transport equipment and parts
12 Other Miscellaneous manufacturing industries
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117 The table shows that each industry is different from the other. Textile
industry is entirely different from the steel industry or the power industry
in its product and process.
These industries can be classifi ed on the basis of the business cycle i.e.,
classifiedaccording reactions to the different phases of the business cycle.
They are classified into :
a) Growth,
b) Cyclical,
c) Defensive and
d) Cyclical Growth Industry.
A] Industry Life Cycle :
The industry life cyc le theory is generally attributed to Julius Grodensky.
The lifecycle of the industry is separated into four well defined stages such
as :
 Pioneering stage
 Rapid growth stage
 Maturity and stabilization stage
 Declining stage
Apart from industry life cycle an alysis, the investor has to analyse some
other factors too. They are as listed below
 Growth of the industry
 Cost structure and profitability
 Nature of the product
 Demand for the Product
 Nature of the competition
 Government policy
 Labour rules
 Research and development
 Strength, Weakness, Opportunity & Threat

III) Company analysis :
In the company analysis the investor assimilates the several bits of
informationrelated to the company and evaluates the present and future
values of the stock. The riskand retur n associated with the purchase of the
stock is analysed to take better investmentdecisions. The valuation process
depends upon the investors’ ability to elicit informationfrom the
relationship and inter -relationship among the company related variables.
The present and future values are affected by a number of factors and they
are given in figure below:


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(Management Applicat ions)


a) The Competitive Edge of the Company :
Major industries in India are composed of hundreds of individual
companies. Thein the information technology industry even though the
number of companies is large,few companies like Tata InfoTech, Satyam
computers, Infosys, NIIT etc., control the majormarket share. Like -wise in
all industries, some companies rise to the position of emi nenceand
dominance. The large companies are successful in meeting the
competition. Once thecompanies obtain the leadership position in the
market, they seldom lose it. Over the timethey would have proved their
ability to withstand competition and to have a sizeable sharein the market.
The competitiveness of the company can be studied with the help of :
 The market share
 The growth of annual sales
 The stability of annual sales
 Sales Forecast
 Earnings of the Company
The investor should be aware that income of the company may vary due to
thefollowing reasons.
 Change in sales
 Change in costs
 Depreciation method adopted
 Depletion of resources in the case of oil, mining, forest products,
gas etc.
 Inventory accounting method
 Replacement cost of inven tories a) Competitive edge
Earnings
b) Capital structure
c) Management
d) Operating efficiency
e) Financial performance Factors a) Historic price of stock
b) P/E ratio
c) Econom ic condition
d) Stock market condition Share Value
Future Price Present Price
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119  Wages, salaries and fringe benefits
 Income taxes and other taxes.
b) Capital Structure :
The equity holders’ return can be increased manifold with the help of
financialleverage, i.e., using debt financing along with equity financing.
The effect of f inancialleverage is measured by computing leverage ratios.
The debt ratio indicates the position ofthe long term and short term debts
in the company finance. The debt may be in the form ofdebentures and
term loans from financial institutions.
 Preference Sh ares
 Debt
i) Earnings Limit of Debt
ii) Assets Limit to Debt
c) Management :
Good and capable management generates profit to the investors. The
managementof the firm should efficiently plan, organize, actuate and
control the activities of thecompany. The b asic objective of management
is to attain the stated objectives of companyare achieved, investors will
have a profit.
d) Operating Efficiency :
The operating efficiency of a company directly affects the earnings of a
company. Anexpanding company that maint ains high operating efficiency
with a low break -even pointearns more than the company with high break -
even point. If a firm has stable operatingratio, the revenues also would be
stable.
Efficient use of fixed assets with raw materials, labour and managemen t
would leadto more income from sales. This leads to internal fund
generation for the expansion of thefirm. A growing company should have
low operating ratio to meet the growing demand forits product.
e) Financial performance :
The best source to understan d the financial performance of a company is
through its own financial statements. This is a primary source of
information for evaluating the investment prospects in the particular
company’s stock.
Financial statement analysis is the study of a company’s f inancial
statement from various viewpoints. The statement gives the historical and
current information about the company’s operations.
Historical financial statement helps to predict the future. The current
information aids to analyse the present status o f the company.
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(Management Applicat ions) The two main statements used in the analysis are:
i. Balance sheet
ii. Profit and loss account
(i) The Balance Sheet :
The balance sheet shows all the company’s sources of funds (liabilities
andstockholders’ equity) and uses of funds at a given po int of time.
(ii) The Profit and Loss Account :
Analysis of the financial condition of the company requires a report on the
flow offunds too. The income statement reports the flow of funds from
business operations that take place in between two points of t ime. It lists
down the items of income and expenditure.
The difference between the income and expenditure represents profit or
loss for the period.
It is also called income and expenditure statement.
f) Analysis of Financial Statement :
The analysis of fin ancial statements reveals the nature of relationship
betweenincome and expenditure, and the sources and application of funds.
The investor determines the financial position and the progress of the
company through analysis. The investor is interested in the yield and
safety of his capital. He cares much about the profitability andthe
management’s policy regarding the dividend.
For that he can use the following simple analysis :
 Comparative financial statements
 Trend analysis
 Common size statements
 Fund flow analysis
 Cash flow analysis
 Ratio analysis
5.13 TECHNICAL ANALYSIS
5.13.1 : INTRODUCTION
Technical analysis concentrates on demand andsupply of securities and
prevalent trend in share price mean byvarious market indices in the stock
market.
The technical analysis is based on the doctrine given byCharles H. Dow in
1884, in the Wall Street Journal. He wrote aseries of articles in the Wall
Street Journal A.J. Nelson, a closefriend of Charles Dow formalized the
Dow Theory for economicforecasting. The analysts used charts of
individual stocks and moving averages in the early1920’s. Later on, with munotes.in

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121 the aid ofcalculators and computers, sophisticated techniques came
intotrend.
It is a process of identifying trend reversals at an earlierstage to formulate
the buying and selling strategy. With the help ofseveral indicators they
analysed the relationship between price -volume and supply -demand for
the overall market and theindividual stock. Volume is favourable on the
upswing i.e. thenumber of shares traded is greater than before and on
thedownside the number of shares traded dwindles If it is the otherway
round, trend reversals can be expected.
5.13.2 : DIFFERENT CHARTING TECHNIQUES
1) Line Chart s :
The most basic of the four charts is the line chart because itrepresen ts only
the closing prices over a set period of time. The lineis formed by
connecting the closing prices over the time frame.
2) Bar Charts :
Bar Charts are one of the most popular forms of stockcharts and were the
most widely used charts before the introd uctionof candlestick charts. Bar
charts are drawn on a graph that plotstime on the horizontal axis and price
levels on the vertical axis.
These charts provide much more information than line charts asthey
consists of a series of vertical barsthat indicate various price data for
eachtime -frame on the chart.
This data can be either the open price, the high price, thelow price and the
close price, making it an OHLC bar chart, or the high price, the low price
and the closeprice, making it an HLC bar chart.
3) Japanese Candlestick Charts :
Japanese candlestick charts form the basis of the oldestform of technical
analysis. They were developed in the 17th centuryby a Japanese rice trader
named Homma and was introduced tothe rest of the world in Steve Nison's
book, Japanese CandlestickCharting Techniques. Candlestick charts
provide the sameinformation as OHLC bar charts, namely open price, high
price, lowprice and close price, however, candlestick charting also provide
avisual indication of market psychology, market sentiment, andpotential
weakness, making it a rather valuable trading tool.
4) Point and Figure (P&F) Charts :
Point and Figure (P&F) charts date back to at least 1880'sand differ from
other charts as it does not plot price movement fromleft to right withi n
fixed time intervals. It also does not plot thevolume traded. Instead it plots
unidirectional price movements inone vertical column and moves to the
next column when the pricechanges direction.
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(Management Applicat ions) 5.13.3: DIFFERENT CHART PATTERNS
The two basic elements of technical analysis and the studyof chart patterns
in particular, are the concepts of support andresistance and trend lines. It is
based on support and resistance and states that amarket is in an uptrend
when it makes higher highs and higherlows, and is in a downtrend when it
makes lower lows and lowerhighs.
I) Support and Resistance (S/R) Lines :
Support and Resistance lines are often confusedwith trend lines.
However, supportand resistancelines are horizontallines drawn underthe
minor lows andabove the hig hsrespectively. Theyindicate where previous
rally met resistances that drove the price back down andwhere a previous
decline met support that pushed the price backup.
II) Trend Lines :
Trend lines are key elements of chart patterns as theyindicate signific ant
price levels. Thus an understanding of trend lines and what they represent
are important for successfultechnical analysis.
III) Head and Shoulders :
The Head andShoulders patternis one of the mostreliable trendreversal
patternsand is usuallyseen in upt rends, where it is alsoreferred to asHead
andShoulders Top , though they canappear in downtrends as well, where
they are also referred to asHead and Shoulders Bottom or Inverse Head
and Shoulders. Asthey are trend reversal patterns, the Head and Shoulders
patternsrequires the presence of an existing trend.
IV) Double Top and Double Bottom Patterns :
The double tops and double bottoms patterns are tworelated chart patterns
that are some of the easiest trend reversalpatterns to identify that appear on
line, ba r, candlestick charts, andPoint -and-Figure charts.
V) Triangles :
(i) Ascending Triangles :
The ascending trianglepattern is similar to thesymmetrical triangleexcept
that its upper trendline is a horizontalresistance line. Ascendingtriangles
are generallyb ullish in nature and aremost reliable when theyappear as a
continuationpattern in an uptrend. Inthese patterns, buyersslightly
outnumber sellers.
(ii) Descending Triangles :
The descending triangle pattern is similar to the symmetrical triangle
except that its lower trend line forms a horizontal support line.
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123 VI) Flag Pattern :
The flag pattern is one of the short -term continuationpatterns. It is quite
similar to the pennant pattern with the "flag"representing a relatively short
consolidation period follow ing asharp price movement and marks the mid -
point of a longer pricemovement. It is not a reversal pattern.
You will learn the ‘Fundamental Analysis’, ‘Technical Analysis’, etc. in
detail in Modules no. 3 & 4 : ‘Fundamental Analysis’ and ‘Technical
Analysi s’ resp. of the subject : Security Analysis and Portfolio
Management in semester VI of your course.
5.14 VENTURE CAPITAL
5.14.1 : INTRODUCTION
Generally, the corporate sector requires funds not only formeeting their
long-term requirements of funds for t heir new projectsmodernization,
expansion and diversification programme but alsofor covering their
operational needs.
Therefore, their requirement ofcapital is classified as given below:
a. Long -term capital
b. Short -term capital
c. Venture capital
d. Export capital
Venture capital is the capital which is invested in highly riskyventures. It
is also known as seed capital. It is a quite recententrant in the Capital
Market . It has great significance in helpingtechnocrat entrepreneurs at the
commencement stage of theconc ern. It has technical expertise. But it lacks
finance.
Venture capital is a funding or capital generation process in which the
venture funding companies manage the funds of the investors who want to
invest in new businesses which have the potential for hig h growth in
future. The venture capital funding firms provide the funds to start ups in
exchange for the equity stake. Such a startup is generally one that
possesses the ability to generate high returns. However, the risk for
venture capitalists is high.
5.14.2 : STAGES OF VENTURE FUNDING
There are five stages of venture funding as follows :
Stage 1 - Seed Capital
Stage 2 - Startup Capital
Stage 3 - Early Stage / Second Stage Capital
Stage 4 - Expansion Stage
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(Management Applicat ions) Stage 1 - Seed Capital :
In this first stage of venture funding, the venture or the startup company in
need of the funds contacts the venture capital firm or the investor. The
venture firm shall share its idea of business with the investors and
convince them to invest in the project. The investor or venture capital firm
shall then conduct research on the business idea and analyze its future
potential. If the expected returns in future are good, the investor (Venture
capitalist) shall invest in the business.
Stage 2 - Startup Capital :
Startup capital is the second stage of venture funding. If the venture is able
to attract the investor, the idea of the business of the venture is brought
into reality. A prototype product is developed and fully tested to know the
actual pot ential of the product. Generally, a person from the venture
capital firm takes a seat in the management of the business to monitor the
operations regularly and keep a check that every activity is done as per the
framed plan. If the idea of business meets t he requirement of the investor
and has sufficient market in the trail run, the investor agrees to participate
in the future course of the business.
Stage 3 - Early Stage / Second Stage Capital :
After the startup capital stage comes the early/first/second stage capital. In
this stage, the investor significantly increases the capital invested in the
venture business. The capital increase is mainly towards increasing the
production of goods, marketing or other expansion say building a network
etc. The compan y with higher capital inflow moves towards profitability
as it is able to reach a wide range of customers.
Stage 4 - Expansion Stage :
This is the fourth stage of venture funding. In this stage, the company
expands its business by way of diversification a nd differentiation of its
products. This is possible only if the company is earning good profits and
revenue. To reach up to this stage the company needs to be operational for
at least 2 to 3 years. The expansion gives the venture new wings to enter
into u ntapped markets.
Stage 5 - Bridge / Pre IPO Stage :
This is the last stage of venture funding. When the company has
developed substantial share in the market with its products, the company
may opt for going public. One main reason for going public is that the
investors can exit out of the company after earning profits for the risks
they have taken all the years. The company mainly uses the amount
received by way of IPO for various purposes like merger, elimination of
competitors, research and development, etc.
You would have learnt ‘Venture Capital’ in detail in Module no. 3 :
‘Financial Services and its Mechanism’ of the subject : Innovative
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125 5.15 DEMAT ACCOUNT
5.15.1 : INTRODUCTION
A Demat Account is a bit like a bank account for your share certificates
and other securities that are held in an electronic format. Demat Account
is short for dematerialisation account and makes the process of holding
investments like shares, bonds, government securities, Mu tual Funds,
Insurance and ETFs easier, doing away the hassles of physical handling
and maintenance of paper shares and related documents.
The Demat full form stands for a Dematerialised Account. Demat is a
form of an online portfolio that holds a customer’ s shares and other
securities. It has negated the necessity of holding and trading physical
share certificates.
Today, there’s no paperwork involved, and physical certificates are no
longer issued. So when you buy shares of Company X, all you get is an
entry in electronic form, in your Demat Account. So this is what a Demat
Account is .
A Demat account is used to hold shares and securities in an electronic
(dematerialised) format. These accounts can also be used to create a
portfolio of one’s bonds, ETFs, mutual funds, and similar stock market
assets.
Demat trading was first introduced in India in 1996 for NSE transactions.
As per SEBI regulations, all shares and debentures of listed companies
have to be dematerialised in order to carry out transactions in an y stock
exchange from 31st March 2019.
A Demat account is used to hold shares and securities in an electronic
(dematerialised) format. These accounts can also be used to create a
portfolio of one’s bonds, ETFs, mutual funds, and similar stock market
assets .
Demat trading was first introduced in India in 1996 for NSE transactions.
As per SEBI regulations, all shares and debentures of listed companies
have to be dematerialised in order to carry out transactions in any stock
exchange from 31st March 2019.
5.15.2 : FEATURES OF DEMAT ACCOUNT
Some of the key features to understand Demat account are as follows :
i) Easy Access :
It provides quick & easy access to all your investments and statements
through net banking.

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(Management Applicat ions) ii) Easy Dematerialization of Securities :
The depository participant (DP) helps to convert all your physical
certificates to electronic form and vice versa.
iii) Receiving Stock Dividends & Benefits :
It uses quick & easy methods to receive dividends, interest or refunds. It is
all auto -credited i n the account. It also uses Electronic Clearing Service
(ECS) for updating investors’ accounts with stock splits, bonus issues,
rights, public issues, etc.
iv) Easy Share Transfers :
Transfer of shares has become much easier and time -saving with the use
of a Demat account.
v) Liquidity of Shares :
Demat Accounts have made it simpler, faster and more convenient to get
money by selling shares.
vi) Loan Against Securities :
After opening a Demat account, one can also avail of a loan against the
securities held in your account.
vii) Freezing Demat Account :
One can freeze a certain amount or type of their Demat account securities
for a certain period of time. This eventually will stop the transfer of money
from any debit or credit card into your account.
5.15.3 : BENEFITS OF A DEMAT ACCOUNT
There are various benefits of opening a Demat Account and they are as
follows:
i) No requirement of paper certificates :
Prior to the existence of Demat Accounts, share used to exist as physical
paper certificates. Once you pu rchased shares, you had to store several
paper certificates for the same. Such copies were vulnerable to loss and
damage, and also come attached with lengthy transfer processes. Demat
Account turned all of it electronic, saving you much hassle.
ii) Ease of Storage :
With a Demat Account you can store as many shares as you need to. This
way, you can trade in volumes and keep track of the shares in your
account. You can also rely on your Demat Account to execute quick
transfer of shares.
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127 iii) Varietyof Instr uments:
Apart from stock market shares, you can also use your Demat Account to
hold multiple assets including mutual funds, Exchange Traded Funds
(ETFs), government securities, etc. Thus, with a Demat Account, you can
approach your investment plans more ho listically and easily build a
diverse portfolio.
iv) Easy Access:
Accessing your Demat Account is super easy. You can do so with the help
of a smartphone or laptop and manage your investments from anywhere, at
any time. A Demat Account truly makes investin g for a financially secure
future more easy and accessible than it has ever been before.
v) Nomination:
A Demat Account also comes with a nomination facility. The process of
nomination is to be followed as has been prescribed by the depository. In
case the investor passes away, the appointed nominee receives the
shareholding in the account. This feature enables you to make plans for
future eventualities and avoid legal disputes.
5.15.4 : DEMAT AND TRADING ACCOUNTS
A Demat Account is usually accompanied by a Trading Account, which is
required for buying and selling shares on the stock market. HDFC Bank,
for example, has a 3 in 1 Account that combines bank account s like a
Savings Account, a Demat Account and a Trading Account.
Sometimes, people are confused between Demat and Trading Accounts.
They are not the same. A Demat Account contains the details of the shares
and other securities in your name. To purchase and sell shares, you need to
open a Trading Account. Many banks and brokers offer Trading Accounts
with online trading facilities, which make it easier for ordinary investors to
participate in the stock market.
5.15.5 : WORKING OFDEMAT ACCOUNTS DURING TRADING
In general, Demat Accounts are used to hold the purchased shares by an
individual -
 If a person intends to buy or sell a certain company's share, the first
step is to log in to the Demat and Trading Account that is linked to the
bank's account.
 When he/she places a 'Buy/Sell' request in a trading account, the DP
forwards the same to the stock exchange immediately.
 Let's assume a 'Buy' order was placed. The stock exchange will run a
search for a seller who inte nds to sell his/her shares. If the price
matches, it will be taken forward to the clearance houses to get it
debited from the seller's Demat and credited to the buyer's materialized
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(Management Applicat ions) A significant thing to note here is that the buyer and seller may hold a
Demat account with DPs associated with different depositories.
5.15.6 : DEMAT ACCOUNT NUMBER AND DP ID
Demat Account number - It is known as ‘beneficiary ID’ if under CDSL.
It is a mix of 16 characters.
DP ID - The ID is given to the depository par ticipant. This ID makes a
part of your Demat Account number.
POA number - This is part of the Power of Attorney agreement, where an
investor permits the stockbroker to operate his/her account as per the
given instructions.
Investors are also issued a DP ID , or Depository Participant ID, by their
preferred broking firm or other financial institutions. DP ID forms a part
of one’s account number, as this ID denotes the first eight -digit of the
account number.
Both depository and depository participants use thi s data when an investor
converts physical shares to Demat, transfers shares from one Demat
account to another, or transfers money from a Demat account to a bank
account.
5.15.7 : TYPES OF DEMAT ACCOUNTS :
Now that we’ve understood Demat Account definition let’s look at the
types of Demat Account. There are mainly three types:
i) Regular Demat Account - This is for Indian citizens who reside in the
country.
ii) Repatriable Demat Account - This kind of Demat Account is for non -
resident Indians (NRIs), which e nables money to be transferred abroad.
However, this type of Demat Account needs to be linked to a NRE bank
account.
iii) Non-Repatriable Demat Account - This again is for the NRIs, but
with this type of Demat Account, fund transfer abroad is not possible.
Also, it has to be linked to an NRO bank account.
5.15.8 : CHARGES INCURRED ON ACCOUNT OF DEMAT
ACCOUNTS :
Although any investor can open a free Demat account, there are certain
charges that are levied on that account to ensure its smooth operations.
Each brokerage firm (including banks) comes with its unique brokerage
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129 Some of those are as follows :
i) Annual Maintenance Charges :
Almost every firm levies a fee as an annual maintenance charge for Demat
account. Depositories follow specific guid elines to calculate the fee
applicable for each investor.
SEBI has implanted a revised rate for Basic Services Demat Account, or
BSDA, from 1st June 2019. According to the revised guidelines, no annual
maintenance charge will be applicable for debt securit ies of up to Rs.1
lakh, while a maximum of Rs.100 can be levied on holdings of Rs.1 lakh
to Rs.2 lakh.
ii) Custodian Fees :
Depository partners charge a custodian fee as a one -time or annual basis.
The sum is paid directly to the depository (NDSL or CDSL) by the
company.
iii) Demat and Remat charges :
Such expenses are levied as a percentage of the total value of shares
purchased or sold to cover all digitisation or physical print costs of
securities.
Other than the above -mentioned fees, an investor is also liable to pay fees
like credit charges, applicable taxes and CESS, rejected instruction
charges, etc.
5.16 FUTURES AND OPTIONS
5.16.1 : INTRODUCTION
Derivative is a financial instrument, whose value depends on the values of
basic underlying variable. In the sense, derivatives is a financial
instrument that offers return based on the return of some other underlying
asset, i.e. the return is derived from another instrument. For example,
derivatives, that can be structured around any uncertainty. Stock pric es are
uncertain - Lot of forwards, options or futures contracts are based on
movements in prices of individual stocks or groups of stocks; Prices of
commodities are uncertain - There are forwards, futures and options on
commodities; Interest rates are unc ertain - There are interest rate swaps
and futures; Foreign exchange rates are uncertain - There are exchange
rate derivatives; and Weather is uncertain - There are weather derivatives,
and so on.
Financial derivatives are financial instruments whose price s are derived
from the prices of other financial instruments. Although financial
derivatives have existed for a considerable period of time, they have
become a major force in financial markets only since the early 1970s. In
the class of equity derivatives, futures and options on stock indices have
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(Management Applicat ions) institutional investors, who are major users of index -linked derivatives.
Even small investors find these useful due to high correlation of the
popular indices with various portfolios and ease of use. Derivative
contracts have several variants. Depending upon the market in which they
are traded, derivatives are classified as:
1) Exchange traded and
2) over the counter.
The most common variants are forwards, futures, options and swaps.
Here we are going to cover Futures and Options only.
5.16.2 : FUTURES
A] Introduction:
Futures refer to financial contracts thatobligate a seller to sell an asset or a
buyer to buy an asset at apredetermined price and at a predetermined time
in the future.
Today, most common assets which are traded in the futures marketare
equities, commodities like metals (gold, silver, platinum),agriculture
products (wheat, soya bean, cotton etc.), and stockindex and so on.
The futur e contract is an agreement between two partieswhere each party
agrees to transact with respect to an underlyingasset at a predetermined
price (future price) and at a specifiedfuture date. They are traded on future
exchange; so, the exchangebecomes counter party. Future contract
includes the settlementdate, description of asset on which futures are sold,
size of contractand settlement cycle. Future contracts are marked to
market and sothe settlement cycle is on daily basis.
A futures contract is an agreement between two parties tobuy or sell a
particular asset on a specified future date. These are traded on recognised
exchanges like NCDEX, MCX, NSE and BSEetc. The terms and
conditions of a futures contract like contract size (quantity/ amount of the
asset), p rice and price limits, delivery terms(delivery place and time) and
position of a trader (long or short) arestandardized by the exchanges where
they trade. Thus, futures arean exchange traded derivatives.
Trading of futures commenced from June 2000, and Int ernet trading was
permitted in February 2000.
In a futures contract, the terms ofthe contract are determined by the
exchange which initiates the contract. The price is determined by the
parties to the contract. A futures contract is standardized as to quan tity,
quality and delivery terms.

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131 B] Definition :
1. “Futures are exchange traded contracts to sell or buyfinancial
instruments or physical commodities for futuredelivery at an agreed
price” - Website of Bombay Stock Exchange .
2. “Futures contracts are organiz ed/ standardized contracts,which are
traded on the exchange -www.derivativesindia.com
C] Types of Futures Contract :










D] Examples :
On 1st January, Miss Pranali enters into a Future contractto buy 500 shares
of ‘SwabhavLtd.’ at an agreed price of ` 150/- per sharein April. If on
maturity date(as determined by the Stock Exchangeduring the month of
December), the price of the Equity share rise to ` 170/-per share, Miss
Pranali will receive `20 per share andotherwise if the price of share falls
to `110/-, Miss Pranali will pay `40/- per share.
Let’s explain the concept with one more example:
Suppose, currently in summer, onions are being sold at ` 12 / Kg. Rekha is
sure thatdue to bad weather in monsoon, t he prices might go up during
Diwali vacations, when she is willing to host her house warming function.
So she will need a lot of onions for the function. Henceshe enters into a
contract with a farmer in Lasalgaon, Nashik to buy 20kg onions during
Diwali va cations at `12 per kg.
Now during Diwali vacations, the price of onions would either be `10 or
`14 / Kg. In any case she paysfarmer `12 per kg (because farmer and she
enteredinto a futures contract) and he delivers 20kg onions to her.
If during Diwali vaca tionsthe price of onions is `10 / Kg, she has saved
`2 / Kg or overall `40. Future Contracts CommodityFutures Financial Contracts Interest Rates Stock Index Currency munotes.in

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132 Management - II
(Management Applicat ions) If during Diwali vacationsthe price of onions is `14 / Kg, she has lost `2 /
Kg or overall `40.
Let’s elaborate with another realistic example :
 FUTIDX NIFTY 27 Feb 2020 is a fut ures contract on the Nifty index
that expires on 27 Feb 2020.

 It is trading at ` 12000, which means buyers and sellers agree to
buy/sell Nifty for a delivery value of ` 12000 on a future date (27 Feb
2020).

 It is available to trade from the date it is in troduced by the exchange
till its expiry date on 27 Feb 2020.

 On expiry, the settlement price at which this future contract will be
settled may be higher or lower than 12000. If it is higher, the buyer
who bought the future contract at a price of 12000 wo uld make a profit
and a seller who sold the futures contract at 12000 would make a loss.
If the settlement price is lower, then the situation is reversed for the
buyer and seller.
5.16.3 : OPTIONS
A] Introduction:
Options are derivative contracts, which sp lice up the rights and obligations
in a futurescontract. The buyer of an option has the right to buy (in case of
“call”) or sell (in case of“put”) an underling on a specific date, at a
specific price, on a future date. The seller of anoption has the obliga tion to
sell (in case of “call”) or buy (in case of “put”) an underlying ona specific
date, at a specific price, on a future date. An option is a derivative contract
thatenables buyers and sellers to pick up just that portion of the right or
obligation, on a futuredate.
An option is a special type of contract which gives its holder the right (but
not obligation) to buy or sell an asset at a fixed price at some future price
at some future date. There are only two basics types of options, i.e., Call
option and Put Options .
A call option is the right to buy an underlying asset at a specified price
over a given time period, while a put option is a right to sell an underlying
asset at a specified price over a given time period. According to the
language of optio n contract, the owner who obtains (buys) the right to
trade (buy/sell) an asset is known as option holder. The counterparty who
grants (sells) the right as option writer.
A buyer of an option has the right to buy (in case of call) or sell (in case of
put) theunderlying at the agreed price. He is however not under obligation
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133 The seller of a call option has to complete delivery as per the terms
agreed. For granting thisright to the buyer, the seller collects a small
upfront payment, c alled the option premium,when he sells the option.
A call option represents a right to buy a specific underlying on a later date,
at a specific pricedecided today. A put option represents a right to sell a
specific underlying on a later date, ata specific price decided today.
The Securities Contracts (Regulation) Act, 1956 was amended in 1995 -96
for introduction of options trading.
Conceptually, the option contract is shown below:
i) Right to Buy Option :
Parties Buyer of the Asset Seller of the Asset
Status Option Holder Option Writer
Right Yes No
Obligation No Yes

ii) Right to Sell Option :
Parties Buyer of the Asset Seller of the Asset
Status Option Writer Option Holder
Right No Yes
Obligation Yes No

Thus, the option holder is the buyer of the o ption and theoption writer is
the seller of the option.
B] Definition :
1. Option is a financial derivative that represents a contractsold by one
party (option writer) to another party (option holder).The contract
offers the buyer the right, but not obligatio n to buy(call) or sell (put) a
security or other financial asset at an agreedupon price (the strike
price) during a certain period of time or on aspecified date.
2. “An option is a derivative contract or instrument that givesthe option
holder the right, but n ot obligation, to trade an underlyingasset for a
specific price on or before a specified time price.
C] Types / Classification of Options Contract :
Options may be classified on the basis of right to tradewithout obligation,
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134 Management - II
(Management Applicat ions)

i) Types of Option on the Basis of Right :
On the basis of “right to trade without obligation”, optionsmay be
classifies as call options and put options:
Conceptually, these two types of options are shown below:
Option type Buyer of the right Seller of the right
Call Right to buy at the
specified price Obligation to sell at the
specified price.
Put Right to sell at the
specified price Obligation to buy at the
specified price.

ii) Types of Option on the Basis of nature of Trading :
There are two types of option trading, i.e., Exchange tradedoptions and
Over the Counter traded options.
The option can be traded on an organised or on the over thecounter (OTC)
market. An exchange traded option contract is verysimilar with futures
while an OTC opt ion is like a Forward Contract.


Call
Option Put
Option Exchange
Traded
(ET) Over the Counter (OTC) Nature of trading On the basis of Classification of Options
Style of Exercise Right to trade
without obligation
Right to buy Right to sell American
Option European
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135 iii) Types of Option on the Basis of Style of Exercise :
In finance, the style of an option denotes the date on whichthe option may
be exercised. Depending on when an option can beexercised, it is
classified in to the fol lowing two categories :
(a) American Style Option or American Option - In this style, theoption
can be exercised by the option holder during any timeduring the life of the
contract i.e., on or before the expiration date.
Thus, in an American style, the opt ion holder has right to exercisehis right
to buy/ sell any time before the expiry date.
(b) European style Option or European option - In this style, theoption
may be exercised only on the expiry date of an option, i.e. ata single pre -
defined point of time .
D] Examples :
Shekhar buys a call option on the Nifty index from Krunal, to buy the
Nifty at a value of `11,900, one month from today. Shekhar pays a
premium of `110 to Krunal.
What does this mean?
 Shekhar is the buyer of the call option.
 Krunal is the s eller or writer of the call option.
 The contract is entered into today, but will be completed one month
later on thesettlement date.
 ` 11,900 is the price Shekhar is willing to pay for Nifty, one month
from today. This is calledthe strike price or exercise price.
 Shekhar may or may not exercise the option to buy Nifty at ` 11,900
on the settlementdate.
 But if he exercises the option, Krunal is under obligation to sell the
Nifty at ` 11,900 toShekhar.
 Shekhar pays Krunal `110as the upfront payment. This is c alled the
option premium. Thisis also called as the price of the option.
 On settlement date, Nifty is at ` 12,200. This means Shekhar’s option
is “in the money.” He can buy the Nifty at ` 11,900 by exercising his
option.
 Krunal earned `110as premium, but l ost as he has to sell Nifty at
` 11,900 to meet hisobligation, while the market price is ` 12,200.
 On the other hand, if on the settlement date, the Nifty is at ` 11,800,
Shekhar’s option willbe “out of the money.”
 There is no point paying ` 11,900 to buy the Nifty, when the market
price is ` 12,200. Shekharwill not exercise the option. Krunal will
retain the ` 109 he collected as premium.
After necessary approvals from SEBI, derivative contracts in Indian stock
exchanges begantrading in June 2000 , when index futures were introduced
by the BSE and NSE. In 2001,index options, stock options and futures on
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136 Management - II
(Management Applicat ions) world where futures on individual stocks are traded. Equity indexfutures
and options are among the largest traded products in derivative markets
world over.
You will learn the ‘Futures and Options’ in detail in Modules no. 1 & 2 :
‘Derivatives - Futures’ and ‘Derivatives – Options’ resp. of the subject :
International Finance in the same semester of your course.
5.17 CASE STUDY
A speculator believes that the stock price of a particular company will go
up from ` 200 to ` 250 in the next three months and wants to act on this
belief by taking a longposition in that stock. Alterna tively, he can take a
long position in that stock through futures market as well.
Suppose he buys a three months futures contract of that stock (1 lot of 100
shares), he neednot pay the full amount today itself and pays only the
margin amount today. If the marginrequired for this stock is 10%, then he
needs ` 200 x 100 x 10% = ` 2000 to take this longposition in futures
contract.
If there isdifference in returns between the spot position and futures
position, it is due to the leverageprovided by the future s contracts. This
leverage makes the derivatives a preferred productof speculators.
However, the same leverage makes the derivatives products highly risky.
Ifthe market had moved against his prediction, the losses that investor
would have incurredwould hav e been many times the loss on the spot
market position.
Questions :
1) If he buys 100 shares of this company in spot market (delivery), how
much amount he will need to enter into this position?
2) If his prediction comes true andthe stock price moves up ` 250, h ow
much profit will he gain per share andtotal amount of profit orhow
much loss per share andtotal amount of loss will he incur?
3) If he gains profit, how much would be the return on investment?
Explain.
5.18 SUMMARY
Finance comprises of blend of knowledge of credit, securities, financial
related legislations, financial instruments, financial markets and financial
system.
Capital Budgeting is budgeting for capital projects. It analyses investment
opportunities and cost of capital simultaneously while evalu ating
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137 Capital Budgeting is the most important decision for a finance manager.
As it involves buying expensive assets for long term use, Capital
Budgeting decisions may have a role to play in the future success of the
company.
Capit al Budgeting is the process of evaluating capital projects which has
cash flows more than one year. It involves huge investment in capital
assets hence it becomes necessary to make in depth analysis of the options
available to the finance manager of the bu siness. In Capital Budgeting
decisions a project is accepted if it has positive net cash flows. Positive
cash flow means Excess of present Value of Cash inflows over the Present
investment value.
The process involves ascertaining or estimating cash inflows and outflows,
matching the cash inflows with the outflows appropriately and evaluation
of desirability of the project. It is a managerial technique of meeting
capital expenditure with the overall objectives of the firm. Capital
Budgeting means planning fo r capital assets.
Capital Budgeting provides useful tool with the help of which the
management can reach judicious investment decision. Capital projects
involve huge outlay and long years.
The overall objective of Capital Budgeting is to maximise the pro fitability
of a firm or the return on investment. This objective can be achieved either
by increasing the revenues or by reducing costs. Thus, Capital Budgeting
decisions can be broadly classified into two categories: a) those which
increase revenue, and b ) those which reduce costs.
It is significant because it deals with the vital decision of evaluation and
selection of efficient project. Many criteria has been suggested to judge
the worth commendability of investment projects. Capital projects need to
be thoroughly evaluated as to costs and benefits.
The Capital Budgeting process begins with collecting innumerable
alternative investment proposals or projects from different departments of
a firm which would meet the requirements of the business concern. Th e
best alternative from among the conflicting proposals is selected using
appropriate Capital Budgeting techniques. This selection is made after
estimating return on the projects and comparing the same with the cost of
capital. Investment proposal which gi ves the highest net marginal return
will be chosen.
Following are the steps involved in the evaluation of an investment:
1) Estimation of cash flows, 2) Estimation of the required rate of return
and 3) Application of a decision rule for making the choice. A sound
appraisal technique should be used to measure the economic worth of an
investment project.
Further, in view of the investment proposals under consideration, Capital
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138 Management - II
(Management Applicat ions) Decisions , ii) Mutually Exclusive Project Decisions and iii) Capital
Rationing Decisions.
The various techniques of investment appraisal methods include : Non -
discounted Cash Flow Criteria includes (i) Pay -back period, (ii)
Discounted pay -back period and (iii) Acco unting rate of return (ARR).
Discounted Cash Flow (DCF) Criteria includes (i) Net present value
(NPV), (ii) Profitability index (PI) and (iii ) Internal Rate of Return (IRR)
Investment decisions : These decisions involve the profitable utilization of
firm' s funds especially in long -term projects (capital projects). Since the
future benefits associated with such projects are not known with certainty,
investment decisions necessarily involve risk. The projects are therefore
evaluated in relation to their expe cted return and risk.
The second critical function is financial decision -making. It is concerned
with a company's capital – mix, financing – mix, or capital structure. The
proportion of debt capital and equity capital is referred to as capital
structure. A firm's financing decision is related to the financing – mix.
The dividend policy decision is the third major function. Decisions on
dividend policy are concerned with the distribution of a company's profits
to its shareholders, how much of the profits sho uld be distributed as
dividends, specifically, the dividend pay -out ratio, etc.
Capital structure refers to the composition of capital. Funds can be
collected from various sources such as by issue of shares, debentures,
fixed deposits, obtaining loans from banks and financial institutions and so
on. It is necessary to have a right blend of various funds, which will ensure
liquidity, flexibility, economy and stability. Financial management aims at
bringing about a proper balance between the various sources o f funds.
Capital Market is a market for long -term sources of finance to the
industrial and corporate sector. Capital Market deals with long -term funds.
These funds are subject to uncertainty and risk. It supplies long and
medium term funds to the corporate sector. It provides the mechanism for
facilitating capital fund transactions. It deals in ordinary shares, bond
debentures and stocks and securities of the government.
In this market the funds flow will come from savers. It converts financial
assets into productive physical assets. It provides incentives to savers in
the form of interest or dividend to the investors. It leads to capital
formation.
Capital Market plays a vital role in the development by mobilizing the
savings to the needy corporate sector. In recent years there has been a
substantial growth in the Capital Market.
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139 Capital Market is a market for long -term funds. It requires a well -
structured market to enhance the financial capa bility of the country. The
market consists of a number of players. They are categorized as:
1. Companies
2. Financial Intermediaries
3. Investors
The Indian financial system is both developed and integrated today.
Integration has been through a participato ry approach in granting loans as
well as in saving schemes. The expansion in size and number of 59
institutions has led to a considerable degree of diversification and increase
in the types of financial instruments in the financial sector which are
wholly owned by the government. In a Capital Market , banks and
financial institutions are the important components. They act as catalysts
in the economic development of any country. The main components of the
Capital Market in India are:
1. New -issue Market (Publ ic issues) (Primary Market)
2. Secondary Market (Stock Market)
The Indian Capital Market is regulated by The Securities and Exchange
Board of India (SEBI).
The Capital Markets consist of a number of individuals and institutions.
The Government is also an important player in the Capital Market . The
players in the Capital Market channelize the supply and demand for the
long-term capital. The constituents of the Capital Market s are, the stock
exchange, commercial banks, cooperative banks, saving banks,
develo pment banks, insurance companies, investment trusts and
companies etc.
Fundamental analysis is the study of economic factors, industrial
environment and the factors related to the company.
The state of the economy determines the growth of gross domestic pr oduct
and investment opportunities.
An economy with favorable savings, investments, stable prices, balance of
payments, and infrastructure facilities provides a best environment for
common stock investment.
The leading, coincidental and lagging indicators help to forecast the
economic growth. A rising stock market indicates a strong economy
ahead.
Industrial growth follows a pattern. Buying of shares beyond the
pioneering stage and selling of shares before the stagnation stage are ideal
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140 Management - II
(Management Applicat ions) The cost structure, research and development and the government policies
regarding the industries influence the growth and profitability of the
industries. SWOT analysis reveals the real status of the industry.
The competitive edge of the company could be m easured with the
company’s market share, growth and stability of its annual sales.
Technical Analysis analyses the behaviour of the security pricesthrough
different charting techniques and different chart patterns.
According to the technical analyst’s thei r method is simple andgives an
investor a bird’s eye on the future of security price bymeasuring the past
moves of prices. They predicted the stockprices through Line Chart, Bar
Chart, And Candlestick Charts andother. Technical analysis includes the
study of various chartpatterns such as Support and Resistance, Head and
Shoulders,Triangles and Flag Pattern which helps to predict the upward
anddownward swing in the market. Following are few concepts used
incharting techniques:
 Resistance — a price level that may prompt a net increase ofselling
activity
 Support — a price level that may prompt a net increase ofbuying
activity
 Trending — the phenomenon by which price movement tends topersist
in one direction for an extended period of time
 Average true range — averaged daily trading range, adjusted forprice
gaps
 Chart pattern — distinctive pattern created by the movement
ofsecurity prices on a chart
 Momentum — the rate of price change
 Point and figure analysis — a priced -based analytical
approachemploying numerica l filters which may incorporate
timereferences, though ignores time entirely in its construction.
 Cycles - time targets for potential change in price action (priceonly
moves up, down, or sideways)
A Demat account is an Indian term for a Dematerialized account that
holds financial securities (equity or debt) d igitally and to trade shares in
the share market. In India, Demat accounts are maintained by two
depository organizations: the National Securities Depository Limited and
the Central Depository Services Limited .
A depository participant (DP), such as a bank, acts as an intermediary
between the investor and the depository. In India, a DP is described as an
agent of the depository. The relationship between the DPs and the
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141 Depositories Act. The Demat account number is quoted for all transactions
to enable electronic settlements of trades to take place. Access to the
dematerialized account requires an interne t password and a transaction
password which allows the transfers or purchases of securities .
Demat accounts play a crucial role in stock market investments, as it is
one of the most common methods of investing in the stock market.
However, recently, several online platforms provide the benefit of online
trading without such accounts.
Futures : A futures is a contract for buying or sel ling a specific underlying,
on a future date, at a price specified today, and entered into through a
formal mechanism on an exchange. The terms of the contract (such as
order size, contract date, delivery value and expiry date) are specified by
the exchang e.
Future Contracts are exchange traded contracts between two parties to
trade ( buy/ sell) standardized financial instruments or physical
commodities. The terms of the contracts such as quality, quantity, delivery
time and delivery place and settlement pr ocedure are standardized by an
Exchange.
A futures contract can be bought or sold on the exchange in the derivative
segment of the market. Orders placed by buyers and sellers on the
electronic trading screen are matched.
The price of the futures contract m oves based on trades, just as it does in
the cash or spot market for stocks.
Options : Options are derivative contracts, which splice up the rights and
obligations in a futures contract. The buyer of an option has the right to
buy (in case of “call”) or se ll (in case of “put”) an underling on a specific
date, at a specific price, on a future date.
An option is the right to buy or sell a particular asset for a limited time at a
specified rate. These contracts give the buyer a right, but do not impose an
obligation, to buy or sell the specified asset at a set price on or before a
specified date.
An option is a special type of contract between two parties where one
party grants the other party the right to buy or sell a specific asset or
commodity (or instrumen t) at a specified price within a specific time
period. There are only two basic type of option i.e., call option and put
option.
Call option means right to buy without obligation while put option means
right to sell without obligation. To get the right, th e buyer has to pay
premium to the seller of the option. The buyer of the option is known as
option holder while the seller of the option is known as writer. There are
two distinctive styles of option contract. i..e. European style and American
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(Management Applicat ions) 5.19 EXERCISE
Q. 1) Fill in the blanks with appropriate words :
1. Capital Market is a market for long -term finance to the ------------- and
--------------- sectors. (Industrial, banking, retailing,corporate)
2. Capital Market supplies ----------------- and --------- --- terms fundsto
the corporates. (long, short, medium, very -long)
3. The role of money market is creation of ------------------- (liquidity,time
deposits, term deposits, foreign exchange).
4. Long -term capital represents the amount of capital invested inthe for m
of ------------ . (fixed assets, immovable assets,movable assets, money
markets)
5. Short -term capital represents the amount of capital invested in ----------- assets. (fixed, current, movable, immovable)
Q. 2) State with reason whethe r the following statements are True or
False :
1. Capital Budgetingissameasfinancingdecision
2. Capital Budgetingdecisionsarereversibleinnature.
Answers :
1. False :Capital Budgeting is same as investment decision.
2. False : Capital Budgeting decisions are irreversib le in nature as huge
investment is involved and reversing decisions would involve
additional costs and losses
Q. 3) Answer the following :
1) What is Capital Budgeting?
2) Explain the significance of budgeting.
3) What are the various kinds of Capital Budgeting de cisions?
4) What is meant by Capital Budgeting process?
5) Analyse the importance steps involved in Capital Budgeting.
6) Explain need for investment decisions.
7) Explain the process involved in Capital Budgeting.
8) Explain the functions of Capital Market.
9) Who are th e players in Capital Market?
10) Explain the structure of Capital Market. munotes.in

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143 11) Comment on the co nstitue nts of Capital Market .
12) Elaborate the f unctions of Capital Market .
13) Elucidate the components of Fundamental analysis.
14) Explain the Technical analysis and its assumpt ions.
15) What are the charts? How are they interpreted in technicalanalysis?
16) Explain the different types of charting techniques.
17) Explain the different chart patterns.
18) Explain the meaning and working of Demat account.
19) Enumerate the stages of Venture Capital.
20) Explain the working of Demat account.
21) Which are the types of Futures?
22) Elucidate Futures with example.
23) Which are the types of Options?
24) Elucidate Options with example.

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