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Unit 1 · Chapter 1Management: Concept, Principles, Roles and Skills

What management is

  • Management is getting work done through and with people. Koontz and Weihrich: designing and maintaining an environment in which people in groups efficiently accomplish selected aims.
  • Effective: doing the right things, so the goal is met. Efficient: doing things right, with the least waste.
  • Nature: goal-oriented, continuous, universal, a group activity, intangible, multidisciplinary, both art and science; many marks of a profession, but no licence.
  • Levels: top (objectives, policy, strategy), middle (plans and coordination), first-line (day-to-day work).

Remember: Right things (effective), done right (efficient), through people.

Fayol's 14 principles

  • Fourteen principles in four groups: work and authority; direction and organisational interest; structure and order; people and team spirit.
  • Unity of command: one boss for each person. Unity of direction: one plan and one head for each objective.
  • Scalar chain: an unbroken line of authority. The gang plank lets equals deal directly, with their superiors' knowledge.
  • Six groups of activities: technical, commercial, financial, security, accounting and managerial.
  • The principles are flexible guides, and they can pull against each other (Simon's "proverbs" criticism).

Remember: Command: one boss. Direction: one plan. Gang plank: a shortcut with permission.

Taylor's scientific management

  • Seven elements: science not rule of thumb, harmony, scientific selection and training, functional foremanship, differential piece-rate, standardisation and simplification, time and motion study.
  • Functional foremanship: eight specialist foremen, four in planning and four on the shop floor. It breaks unity of command.
  • Differential piece-rate: a higher rate for meeting the standard, a lower rate for falling short.
  • Taylor starts from the task; Fayol from the whole organisation. Criticism: workers seen mainly as responding to pay.

Remember: Fayol manages the organisation. Taylor optimises the work.

Katz's three managerial skills

  • Technical skill: knowing the work. It weighs most at the first line.
  • Human skill: working with and through people. It matters at every level, most of all in the middle.
  • Conceptual skill: seeing the organisation as a whole. It weighs most at the top.
  • Design skill is not one of Katz's three; Koontz and Weihrich added it later.

Remember: Lower: technical. Middle: human (a balance). Top: conceptual.

Mintzberg's managerial roles

  • Mintzberg watched five chief executives and found brief, varied and fragmented work (The Nature of Managerial Work, 1973).
  • Interpersonal: figurehead, leader, liaison. Informational: monitor, disseminator, spokesperson.
  • Decisional: entrepreneur, disturbance handler, resource allocator, negotiator.
  • Authority gives contacts, contacts give information, and information is what the manager decides with.

Remember: Relate, inform, decide: 3, 3 and 4.

Don’t confuse it with

  • What management is: Don't confuse effectiveness with efficiency. Effectiveness asks whether the goal was reached; efficiency asks what it cost to reach it.
  • Fayol's 14 principles: Don't confuse unity of command with unity of direction. Unity of command is about a person: one boss each. Unity of direction is about an activity: one plan and one head for each group of activities with the same objective. A firm that makes both scooters and tractors keeps each line under its own head and its own plan.
  • Taylor's scientific management: Don't confuse time study with motion study. Motion study removes needless movements from a job. Time study then times the improved job to set the standard output. Also note the clash exams like: functional foremanship gives a worker eight bosses, which breaks Fayol's unity of command.
  • Katz's three managerial skills: Don't add a fourth skill to Katz's list. Design skill is not one of Katz's three. Koontz and Weihrich later added it: the ability to solve problems in ways that benefit the enterprise. Katz's three are technical, human and conceptual.
  • Mintzberg's managerial roles: Don't mix up the three informational roles. Direction tells them apart: the monitor brings information in, the disseminator passes it around inside, and the spokesperson sends it outside. Likewise, the leader role faces subordinates, while the liaison role faces people outside one's own chain of command.

Key terms

Administrative Principles (Fayol)
Henri Fayol's framework of general management principles such as division of work and the scalar chain, focused on top-down organisational efficiency.
Authority & Responsibility
Fayol's principle that the power to give orders must be matched by an equal obligation to accept accountability for the outcomes.
Conceptual Skills
In Katz's model, the ability to see the organisation as a whole and connect strategy to its parts; most important for top managers.
Decisional Roles
Mintzberg's entrepreneur, disturbance handler, resource allocator and negotiator roles, in which a manager makes choices.
Differential Piece-Rate System
Taylor's wage system paying a higher rate per piece to workers who meet the standard output and a lower rate to those who fall short, linking pay to output.
Effectiveness
Doing the right things: the degree to which goals are actually reached.
Efficiency
Doing things right: reaching goals with the least waste of time, money and effort.
Esprit de Corps
Fayol's principle of promoting team spirit and unity to strengthen organisational cohesion.
Fayol's 14 Principles
Henri Fayol's foundational set of administrative principles covering organisational structure, direction, and personnel management.
Functional Foremanship
Taylor's concept of supervision by multiple task-specialist foremen rather than a single generalist supervisor.
Gang Plank
Fayol's exception to the scalar chain: two people at the same level may deal with each other directly, with their superiors' knowledge, when the chain is too slow.
Human Skills
Robert Katz's managerial skill category involving the ability to lead, motivate and resolve conflict among people.
Informational Roles
Mintzberg's monitor, disseminator and spokesperson roles, in which a manager gathers and passes on information.
Interpersonal Roles
Mintzberg's category of managerial roles — figurehead, leader, liaison — focused on relationships and status.
Levels of Management
Top management sets objectives and policy, middle management turns policy into plans and coordinates, and first-line management directs day-to-day work.
Management
The process of getting things done through and with people, using an organisation's resources to reach its goals effectively and efficiently.
Motion Study
Taylor's technique of analysing worker movements to eliminate wasteful actions and set efficiency standards.
Order (Fayol's Principle)
Fayol's principle that resources — materials and people — should be systematically arranged in their proper place.
Robert Katz's Managerial Skills
A framework identifying Technical, Human and Conceptual skills as the components of managerial competence.
Scalar Chain
Fayol's principle establishing a clear, unbroken line of authority from top management down to the lowest levels.
Scientific Management
F.W. Taylor's approach of applying scientific methods — time and motion study, standardisation — to maximise shop-floor efficiency.
Technical Skills
In Katz's model, knowledge of methods, tools and procedures for the work itself; most important for first-line managers.
Time & Motion Study
Taylor's technique of breaking tasks into steps, analysing movements and time, and setting output standards.
Unity of Command
Fayol's principle that each employee should receive orders from only one superior, to avoid confusion.
Unity of Direction
Fayol's principle that one plan and one leader should guide all activities sharing the same objective.

Unit 1 · Chapter 2Functions of Management

The functions of management

  • Fayol: plan, organise, command, co-ordinate, control. Gulick: POSDCORB. Terry: plan, organise, actuate, control.
  • Koontz and O'Donnell's five, the most widely used list: planning, organising, staffing, directing, controlling.
  • Controlling corrects the gap, and its findings feed the next round of planning.
  • Coordination runs through all five: the essence of management, not a separate step.

Remember: Plan, organise, staff, direct, control, then round again.

Planning

  • Planning is the primary function: goal-oriented, all-pervasive, forward-looking, continuous and a matter of choice.
  • Types by level, by focus (strategic, tactical, operational, contingency) and by time.
  • Eight steps: need, objectives, premises, alternatives, evaluation, selection, supporting plans, implementation.
  • A forecast estimates what will happen; a plan decides what to do about it.

Remember: Think first, then act; plan first, then everything else.

Organising

  • Organising brings together physical, financial and human resources (Allen: identify and group the work, delegate, establish relationships).
  • Planning says what; organising says how: tasks, who does them, grouping, reporting and where decisions are made.
  • Four steps: identify activities, group them, assign duties and authority, set reporting relationships.
  • Organising creates positions; staffing fills them. Its result is the organisation structure.

Remember: Identify, group, assign, relate.

Staffing

  • Koontz and O'Donnell: manning the structure through selection, appraisal and development. Today largely HRM's work.
  • Steps: manpower planning, recruitment, selection, placement and orientation.
  • Then training and development, compensation, appraisal, and promotion, transfer and career planning.
  • Recruitment widens the pool; selection narrows it.

Remember: Plan, find, choose, place, grow, pay, rate, move.

Directing and leadership styles

  • Elements of directing: supervision, motivation, communication, leadership.
  • Autocratic, democratic and laissez-faire styles (Lewin, 1939).
  • Transactional and transformational leadership (Burns, 1978).
  • No single style is best: it depends on the leader, the followers and the culture.

Remember: Direct through people: oversee, encourage, inform, influence.

Coordinating

  • Mooney and Reiley: the orderly arrangement of group effort for unity of action.
  • The essence of management (Koontz and O'Donnell); one of Fayol's five elements; the CO in POSDCORB.
  • Kinds: internal and external, vertical and horizontal.
  • Follett: direct contact, early start, reciprocal relating, continuity. Cooperation is willingness; coordination is arrangement.

Remember: Many efforts, one direction.

Controlling

  • Process: set standards, measure, compare, take corrective action, then back to the plan.
  • Planning sets the standard; control checks against it and feeds the next plan.
  • Control is continuous, at every level, action-oriented, and looks ahead as well as back.
  • Techniques: observation, reports and MIS, budgets, ratios and ROI, break-even, benchmarking.

Remember: Set, measure, compare, correct.

Don’t confuse it with

  • The functions of management: Don't confuse the lists' words. Fayol's "command" and Terry's "actuating" cover broadly what Koontz and O'Donnell call directing. Staffing appears in Gulick's and Koontz and O'Donnell's lists, but not in Fayol's or Terry's.
  • Planning: Don't confuse planning with forecasting. A forecast estimates what will happen, such as Diwali demand. Planning decides what to do about it. Forecasts feed the planning premises.
  • Organising: Don't confuse organising with staffing. Organising creates the positions and the links between them. Staffing fills those positions with people.
  • Staffing: Don't confuse recruitment with selection. Recruitment widens the pool: it attracts as many suitable applicants as possible. Selection narrows it: it rejects most of them to choose the few who fit.
  • Directing and leadership styles: Don't confuse directing with leadership. Leadership is one of directing's four elements; directing also includes supervision, motivation and communication.
  • Coordinating: Don't confuse coordination with cooperation. Cooperation is people's willingness to help each other. Coordination is the manager's deliberate work of arranging their efforts. Willing teams can still pull in different directions if nobody coordinates them.
  • Controlling: Don't confuse controlling with planning. Planning sets the standard; controlling checks against it, and its findings feed the next plan. Planning without controlling is pointless, and controlling without planning has nothing to measure.

Key terms

Benchmarking
Comparing an organisation's performance or practices with the best in its field.
Contingency Plan
An alternative plan kept ready for use if conditions change or the main plan fails.
Controlling
Setting standards, measuring performance, comparing it with the standards and correcting deviations.
Coordination
The orderly arrangement of group effort to provide unity of action in the pursuit of a common purpose; often called the essence of management.
Departmentalisation
Grouping related activities into departments or units, for example by function, product or region.
Directing
Guiding, motivating, supervising and communicating with people so they work toward the organisation's goals.
Management by Exception
Attending only to significant deviations from the standard, leaving routine results to run.
Organising
Identifying and grouping the work, assigning responsibility and authority, and setting reporting relationships so people can work together toward goals.
Orientation (Induction)
Introducing a newly placed employee to colleagues, rules, policies and facilities.
Planning
Deciding in advance what to do, how to do it, when to do it and who is to do it; the primary function of management.
Planning Premises
The assumptions about the future, external and internal, on which a plan is built.
POSDCORB
Luther Gulick's 1937 list of executive functions: planning, organising, staffing, directing, co-ordinating, reporting and budgeting.
Staffing
Filling the positions in the organisation structure with the right people and keeping them filled, from manpower planning to career planning.
Transactional Leadership
A style that relies on clear goals and on rewards and penalties for meeting them.
Transformational Leadership
A style that inspires followers to change through a shared vision and the leader's own example.

Unit 1 · Chapter 3Theories of Management

Classical school

  • Late 19th to early 20th century. Key names: F. W. Taylor and Henri Fayol. Focus: efficiency, structure and productivity.
  • Three streams: scientific management (Taylor), administrative management (Fayol) and bureaucracy (Weber).
  • Taylor: time and motion studies, standard methods, differential piece-rate, functional foremanship.
  • Fayol: five functions of management; principles such as division of work, unity of command and scalar chain.
  • Weakness: workers treated as economic beings; principles drawn from experience, not tested.

Remember: Taylor from the shop floor up; Fayol from the top down.

Weber's bureaucracy

  • Max Weber (1864–1920): bureaucracy as the most rational way to organise large-scale work, an ideal type.
  • Three types of authority: traditional, charismatic and rational-legal; bureaucracy rests on rational-legal.
  • Features: hierarchy, division of labour, rules, impersonality, merit, career, records.
  • Strengths: predictability, fairness, accountability. Weaknesses: rigidity, red tape, goal displacement.

Remember: The office, not the person; the rule, not the mood.

Neoclassical school

  • 1920s to 1930s. Key name: Elton Mayo. Built on the Hawthorne studies.
  • Focus: human relations, motivation, communication, teamwork and morale.
  • The worker is a social being; informal groups and attention shape output.
  • Participative leadership and attention to relationships matter.
  • Limits: satisfaction links only moderately to performance; structure and conflict neglected.

Remember: From tasks and structure to people.

The Hawthorne experiments

  • Western Electric, Hawthorne Works, 1924–1932; Mayo, Roethlisberger and Dickson.
  • Illumination: output rose either way. Relay assembly: attention and morale mattered.
  • Interviews: being heard mattered. Bank wiring: the group sets its own norm.
  • Hawthorne effect: behaviour changes when people know they are observed.
  • Critics: tiny groups, pay and staff changes in the relay room, smaller effects on reanalysis.

Remember: Light, relay, listen, wire: people, not lamps.

Theory X, Theory Y and Theory Z

  • McGregor, The Human Side of Enterprise (1960).
  • Theory X: people dislike work, avoid responsibility, need control.
  • Theory Y: work is natural; people direct themselves and seek responsibility. Not the absence of control.
  • Assumptions tend to prove themselves through the style they produce.
  • Theory Z: Ouchi (1981), long-term employment and collective decisions; Maslow used the name in 1969.

Remember: X controls, Y trusts, Z commits for the long term.

Systems approach

  • Mid-20th century to the present. Key names: Chester Barnard and Ludwig von Bertalanffy.
  • An open system of interdependent subsystems interacting with its environment; a change in one affects the rest.
  • Five parts: inputs, transformation, outputs, feedback, environment.
  • Key words: interdependence, integration, coordination, feedback and synergy.
  • Limit: abstract; it says everything connects, not what to do.

Remember: The whole, not isolated parts.

Contingency approach

  • 1960s to the present. Key names: Fred Fiedler, Paul Lawrence and Jay Lorsch.
  • There is no single best way to manage: if this, then that.
  • Effectiveness depends on the fit between structure, environment, technology and people.
  • Stable settings suit rules and central control; changing ones suit flexible roles.
  • Limit: "it depends" can be vague about how to weigh the factors.

Remember: It depends: structure, environment, technology, people.

Contemporary approaches

  • Late 20th century to the present. Key names: W. Edwards Deming, Peter Drucker and Ikujiro Nonaka.
  • TQM: continuous improvement and customer satisfaction through teamwork; the Plan–Do–Check–Act cycle.
  • Knowledge management: create, share and use knowledge, tacit and explicit, as a competitive resource.
  • TQM is not inspection; knowledge management is not an IT system.

Remember: Plan, do, check, act. Share what you know.

From one school to the next

  • Classical: efficiency and structure. Neoclassical: people. Systems: the interconnected organisation.
  • Contingency: situation-specific management. Contemporary: continuous improvement and knowledge.
  • Each is a response to the limits of the one before.
  • The schools overlap and coexist; they did not replace one another.

Remember: Tasks, people, the whole, the situation, improvement.

Don’t confuse it with

  • Classical school: Don't confuse Taylor with Fayol. Taylor worked from the bottom up: one task, one worker, one best method. Fayol worked from the top down: what every manager does (planning, organising, commanding, coordinating and controlling) and the principles for running the whole organisation.
  • Weber's bureaucracy: Don't confuse Weber's bureaucracy with "bureaucracy" as an insult. In everyday speech the word means red tape. Weber meant a technically efficient form of organisation; red tape is what happens when it goes wrong.
  • Neoclassical school: Don't confuse neoclassical management with neoclassical economics. In economics, "neoclassical" means the marginal analysis of Marshall and others. In management, it means the human relations school that followed Taylor and Fayol.
  • The Hawthorne experiments: Don't confuse the Hawthorne effect with the halo effect. The Hawthorne effect is about the people being observed: they change because they are watched. The halo effect is about the person judging: one good trait colours the rating of all the others.
  • Theory X, Theory Y and Theory Z: Don't confuse Theory Y with having no control. McGregor's point was that people control themselves when they are committed to goals they share. Targets still matter; the question is who does the checking. And Theory Z is not McGregor's third step: it is Ouchi's separate model.
  • Systems approach: Don't confuse the systems approach with the contingency approach. The systems approach says the parts connect and the environment matters. The contingency approach goes a step further: it asks which arrangement fits which situation. And don't confuse open with closed systems: the classical school, in effect, treated the organisation as closed.
  • Contingency approach: Don't confuse the contingency approach with Fiedler's contingency model. The approach is a general view of management. Fiedler's model is one leadership theory within it: it matches a leader's style to how favourable the situation is. Hersey and Blanchard's situational leadership is another.
  • Contemporary approaches: Don't confuse TQM with inspection, or knowledge management with an IT system. Inspection catches defects after they happen; TQM prevents them and makes quality everyone's job. A database stores information; knowledge management is about people sharing and using what they know, much of it tacit.
  • From one school to the next: Don't read the schools as replacing each other. A modern firm uses time standards (classical), written rules (Weber), attention to teams (neoclassical), a view of the whole (systems), fit to circumstances (contingency) and quality cycles (contemporary) at once.

Key terms

Bureaucracy (Weber)
Max Weber's model of organisation based on rational-legal authority: hierarchy, written rules, impersonality, merit, careers and records.
Contingency Theory
A management theory holding that there is no single best way to organise; effectiveness depends on matching structure to the situation (structure, environment, technology, people).
Hawthorne Studies
Elton Mayo's research proving that productivity is driven by social and psychological factors, not merely physical working conditions.
Neoclassical Theory
A management theory (1920s-30s) emphasising human relations, motivation and teamwork over purely mechanical efficiency.
Open System
The Modern/Systems Approach view of an organisation as an interdependent set of subsystems interacting with its external environment.
Systems Approach
A management perspective viewing the organisation as an open system of interdependent subsystems interacting with the external environment.
Theory Z
William Ouchi's 1981 model, drawn from Japanese management, of long-term employment, collective decision-making and concern for the whole employee.
Total Quality Management (TQM)
A contemporary management approach prioritising continuous improvement and customer satisfaction.

Unit 1 · Chapter 4Communication

What communication is

  • Communication is the exchange of facts, ideas, opinions or emotions by two or more persons (Newman and Summer); Louis Allen calls it a bridge of meaning.
  • Forms: verbal, non-verbal, written and digital.
  • It is two-way, continuous, pervasive and goal-oriented, and needs a sender and a receiver.
  • Functions: inform, instruct, persuade and motivate, integrate, counsel, hear grievances, train.

Remember: Sent is not the same as understood.

The communication process

  • The sender forms an idea and encodes it into words, gestures or visuals.
  • The message travels through a channel: spoken, written or electronic.
  • The receiver decodes it, and feedback returns to confirm understanding.
  • Noise (physical, psychological or semantic) can interfere at any step. The goal is to minimise distortion and maximise understanding.
  • The medium is the broad means; the channel is the specific route, such as a phone call or an email.

Remember: Encode, send, decode, reply.

Models of communication

  • Shannon and Weaver (1949): source to destination, with noise; one-way.
  • Schramm (1954): two-way, through a shared field of experience.
  • Berlo (1960): SMCR, each element shaped by skills, attitudes, knowledge, social system and culture.
  • Each model simplifies: Shannon and Weaver measure signals, not meaning; SMCR shows no feedback.

Remember: Noise, then shared experience, then the human factors.

Formal and informal communication

  • Formal: official channels and the hierarchy. Strength: consistency, clarity and accountability. Examples: reports, memos, meetings.
  • Informal: natural, unstructured channels. Strength: relationship building and a quick exchange of ideas.
  • Formal flows downward, upward, horizontally and externally.
  • Informal travels by the grapevine, casual talk, social media, personal calls and non-verbal signals; the channel, not the medium, makes it informal.
  • Formal or informal depends on the channel, not on whether words are spoken or written.

Remember: Formal: consistent and accountable. Informal: quick and personal.

Directions of communication

  • Downward: orders, policies, instructions; risk of delay and filtering.
  • Upward: reports, suggestions, grievances; risk of fear and distortion.
  • Horizontal: peers at the same level coordinating.
  • Diagonal: across levels and departments; fast, but bypasses the chain of command.

Remember: Down commands, up informs, across coordinates, diagonal hurries.

Communication networks and the grapevine

  • Formal networks: chain, wheel, circle, all-channel.
  • Wheel is fastest for simple tasks; all-channel satisfies most and suits complex problems.
  • Grapevine patterns (Keith Davis): single strand, gossip, probability, cluster. Cluster is the most common.
  • The grapevine is a channel, not the same as rumour; it works best alongside open formal channels.

Remember: Chain, wheel, circle, all; strand, gossip, chance, cluster.

Oral and written communication

  • Oral: quick, flexible, personal, immediate feedback; no record.
  • Written: permanent record, precise, fixes responsibility; slow and impersonal.
  • Both are verbal; non-verbal cues carry the feeling behind them.
  • Discuss it, then write it down.

Remember: Say it for speed; write it to keep it.

Barriers to communication

  • Physical: noise, distance, poor infrastructure. Psychological: stress, fear, bias.
  • Language: vocabulary, jargon, dialect. Cultural: beliefs, traditions, practices.
  • Perceptual: different interpretations, experience, attitudes.
  • Organisational: rigid hierarchy, poor coordination. Attitudinal: negative behaviour, dominance, lack of respect.
  • Reduce barriers: clarify, choose the medium, use simple words, listen, ask for feedback.

Remember: Physical, psychological, language, cultural, perceptual, organisational, attitudinal.

Don’t confuse it with

  • What communication is: Don't confuse communication with information. Information is the content, such as a notice on a board. It becomes communication only when someone receives it and understands it.
  • The communication process: Don't confuse the medium with the channel. The medium is the broad means: spoken, written or electronic. The channel is the specific route the message takes, such as a phone call, a letter or an email. Face to face, feedback is immediate. In writing, the sender cannot see the receiver's face and must wait for a reply.
  • Models of communication: Don't confuse a linear model with a two-way one. Shannon and Weaver draw a one-way line from source to destination. Schramm draws a loop in which both people send and receive.
  • Formal and informal communication: Don't confuse informal with spoken. The test is whether the channel is official, not whether words are spoken or written. A board meeting is spoken and formal. A message in a staff chat group is written and informal.
  • Directions of communication: Don't confuse horizontal with diagonal. Horizontal is between people at the same level. Diagonal is between different levels in different departments. Fayol's gangplank is horizontal: peers talk directly, with their superiors' consent, and keep them informed.
  • Communication networks and the grapevine: Don't confuse the grapevine with rumour. The grapevine is the channel. A rumour is unverified content that it sometimes carries. The grapevine also carries true news, often faster than the formal route.
  • Oral and written communication: Don't confuse verbal with oral. Verbal means using words, spoken or written. Oral means spoken only. A letter is verbal but not oral. A nod is neither: it is non-verbal.
  • Barriers to communication: Don't confuse barriers with noise. Noise, in the process model, is interference at some step. Barriers are the sources of that interference. Physical noise comes from physical barriers; semantic noise comes from semantic barriers.

Key terms

Barriers to Communication
Physical, psychological, language, cultural, perceptual, organisational or attitudinal obstacles that distort or block the transfer of a message.
Communication Network
The pattern of channels among members of a group: chain, wheel, circle or all-channel.
Diagonal Communication
Communication between people at different levels in different departments; fast, but it bypasses the chain of command.
Downward Communication
Communication from superiors to subordinates, such as orders, policies and instructions.
Encoding
The stage of the communication process where the sender transforms thoughts into transmittable symbols such as words, gestures or visuals.
Formal Communication
Communication that follows official organisational channels and hierarchy, ensuring consistency and accountability.
Grapevine Communication
An unofficial, informal communication network that spreads information — often rumour-based — rapidly through an organisation.
Informal Communication
Unstructured, spontaneous communication such as the grapevine or face-to-face interaction that builds relationships and speeds up decisions.
Noise (Communication)
Any physical, psychological or semantic interference that disrupts the transmission or understanding of a message.
Semantic Barrier
A breakdown in communication caused by words or symbols with different meanings, jargon, poor translation or unstated assumptions.
Shannon–Weaver Model
A 1949 model of communication from source to destination through a channel, with noise distorting the signal.
SMCR Model
David Berlo's 1960 model of source, message, channel and receiver, each shaped by human factors such as skills, attitudes and culture.
Upward Communication
Communication from subordinates to superiors, such as reports, suggestions and grievances.

Unit 1 · Chapter 5Decision Making

What a decision rests on

  • A decision is the choice of one course of action from two or more alternatives, to solve a problem or reach a goal.
  • Drucker: whatever a manager does, he does through making decisions.
  • It rests on logic, analysis and intuition; each has a weakness.
  • It is selective, purposive and made at every level, and not acting can itself be a decision.

Remember: Logic, analysis, intuition.

Types of decision

  • Programmability (Herbert Simon): programmed (routine, by rules) or non-programmed (novel, needing judgement).
  • Level: strategic (long-term), tactical (turns strategy into action) or operational (day-to-day).
  • Purpose: routine, major (high risk, high return) or minor (low risk).
  • Decision maker: individual, group, personal or organisational. One decision carries several labels at once.

Remember: Programmed or not. Strategic, tactical or operational.

The rational decision process

  • Define the problem and its urgency; gather information; identify and weight the criteria; develop alternatives.
  • Evaluate alternatives on feasibility, cost, risk and outcome; choose the best balance of benefit and risk.
  • Implement by assigning responsibility and resources; monitor results and correct where needed.
  • A weighted score multiplies each criterion's score by its weight and adds them up.
  • Herbert Simon: bounded rationality leads real managers to satisfice, taking the first option that is good enough.

Remember: Identify, inform, alternatives, evaluate, select, implement, review.

Techniques and tools

  • Decision tree: risk analysis. Delphi method: forecasting. Decision matrix: selection. Cost-benefit analysis: investment.
  • PEST analysis: market entry. SWOT analysis: strategy. Conjoint analysis: product and pricing.
  • Pareto analysis: quality improvement. Multi-voting: project selection. Linear programming: production planning.
  • Payback analysis: capital decisions. Feasibility study: new projects.
  • Expected value weights each payoff by its probability; payback ignores what comes after the cost is recovered.

Remember: Match the tool to the decision.

Don’t confuse it with

  • What a decision rests on: Don't confuse decision making with problem solving. Problem solving is the whole effort to find and close a gap. Decision making is the point inside it where one option is chosen. And with only one option there is no decision, since nothing is selected.
  • Types of decision: Don't confuse programmed with minor. Programmability is about whether a rule exists, not about the stakes. A bank's standard home-loan approval is programmed, yet each loan involves lakhs of rupees. A one-off choice of venue for a staff picnic is non-programmed, yet minor.
  • The rational decision process: Don't confuse criteria with alternatives. Criteria are what you judge by: rent, distance, labour. Alternatives are what you choose between: sites A, B and C. Set the criteria before scoring, or the favourite option tends to shape them.
  • Techniques and tools: Don't confuse PEST with SWOT. PEST looks only outside the firm. SWOT looks inside (strengths and weaknesses) and outside (opportunities and threats).

Unit 1 · Chapter 6Organisation Structure

Types of structure

  • Structure: how job tasks are formally divided, grouped and coordinated (Robbins and Judge).
  • Functional: efficiency, but silos. Divisional: flexibility, but duplication. Matrix: collaboration, but dual authority.
  • Hierarchical: clear authority, but slow adaptation. Virtual: flexibility, but technology dependence. Lean: autonomy, but overload. Hybrid: adaptability, but complexity.
  • Flexible forms: network, flat, holacracy, team-based and boundaryless.
  • Structure follows strategy (Chandler, 1962): diversified firms tend to move to divisional structures.

Remember: Every structure trades a strength for a challenge.

Line, line-and-staff and other forms

  • Line (scalar, military): one chain of command; simple and quick, but short of specialists.
  • Line-and-staff: staff advise, line commands; risk of line-staff conflict.
  • Functional (Taylor): eight specialist foremen; breaks unity of command. Committee and project forms.
  • Mechanistic suits stable conditions, organic suits change (Burns and Stalker, 1961).
  • The informal organisation grows from friendships and speaks through the grapevine.

Remember: Line commands, staff advise, Taylor's foremen each command one part.

Authority, responsibility and accountability

  • Authority: the right to decide. Responsibility: the duty to perform. Accountability: answering for results.
  • Sources: formal (position), acceptance (Barnard, 1938; zone of indifference), competence.
  • Line authority commands, staff authority advises, functional authority directs one activity in other departments.
  • Parity: authority should match responsibility (Fayol; Urwick's correspondence). Ultimate responsibility cannot be delegated.
  • Authority comes with a post; power is the wider ability to influence.

Remember: Authority down, accountability up, and the two should match.

Span of control and charts

  • Span of control: the number of subordinates one manager supervises.
  • Wide span: flat, faster decisions, lower cost, more autonomy; but overload and limited supervision.
  • Narrow span: tall, close supervision, better coordination; but slower decisions, higher cost, bureaucracy.
  • Charts show who reports to whom: hierarchical, flat, matrix, divisional, team-based.
  • Organising process: purpose and goals, inputs, activities and tasks, outputs, monitoring and feedback.

Remember: Wide and flat, or narrow and tall.

How wide a span: Graicunas and Urwick

  • Graicunas (1933): R = n[2^(n−1) + n − 1].
  • Three kinds: direct single (n), direct group n(2^(n−1) − 1), cross n(n − 1).
  • 4 → 44, 5 → 100, 6 → 222, 7 → 490, 8 → 1,080 relationships.
  • Urwick: five, or at most six, where work interlocks.
  • Span depends on competence, the work, plans, change, technology, dispersion and decentralisation; delayering widens spans.

Remember: Add one person, and the relationships more than double.

Delegation and decentralisation

  • Delegation passes responsibility and authority for a task from superior to subordinate.
  • Responsibility → authority → action → accountability; the superior keeps ultimate accountability.
  • Sound delegation: training, guidance, trust, feedback, clear limits and check-ins.
  • Decentralisation spreads decisions across the organisation: functional, geographic, product- or service-based, or market-based.
  • Delegation: narrow, a task, an individual. Decentralisation: broad, the organisation, a unit.

Remember: Delegation is about the person; decentralisation is about the system.

Centralisation and decentralisation

  • Allen: centralisation reserves authority at central points; decentralisation delegates all but that to the lowest levels.
  • A matter of degree; Dale's four tests measure it.
  • Centralisation: uniformity and control. Decentralisation: speed, initiative and management development.
  • Factors: size, cost of decisions, need for uniformity, philosophy, managers available, controls, change.
  • Decentralisation is about where decisions are made, not how many branches there are.

Remember: Keep the few at the centre; push the rest down.

Don’t confuse it with

  • Types of structure: Don't confuse the functional structure with Taylor's functional organisation. In a functional structure, departments are grouped by function and each worker still has one boss. In Taylor's functional organisation (next block), several specialist foremen give orders to the same worker.
  • Line, line-and-staff and other forms: Don't confuse line-and-staff with the functional form. Staff specialists advise the line manager, who still gives the orders. In Taylor's functional form, the specialists give the orders themselves.
  • Authority, responsibility and accountability: Don't confuse authority with power. Authority comes with a position and is accepted as legitimate. Power is the wider ability to influence others. An experienced clerk whom everyone consults has power without the authority of a post.
  • Span of control and charts: Don't confuse span with levels. The span is how wide each manager's group is. The number of levels is how tall the hierarchy is. For the same number of people, wider spans mean fewer levels.
  • How wide a span: Graicunas and Urwick: Don't read R as a workload. R counts possible relationships, not the ones that actually take time. Many combinations rarely occur. And Urwick's limit of five or six applies only where the subordinates' work interlocks.
  • Delegation and decentralisation: Don't confuse delegation with abdication. Delegating means handing over a task with limits, support and checks. Handing it over and never following up is abdication, and the manager still answers for whatever goes wrong.
  • Centralisation and decentralisation: Don't confuse decentralisation with having many branches. Decentralisation is about where decisions are made, not where offices are. A firm with branches across India is still centralised if every decision goes to head office.

Formulas

  • R = n [2n−1 + n − 1]

Key terms

Acceptance Theory of Authority
Chester Barnard's view (1938) that an order has authority only if those who receive it accept it.
Accountability
The obligation to answer to a superior for the results of assigned work; it flows upward and cannot be delegated away.
Centralisation
The systematic and consistent reservation of authority at central points in an organisation (Louis A. Allen).
Committee Organisation
An arrangement in which a group of managers decides jointly on matters referred to it.
Decentralisation
The system-wide distribution of decision-making power across multiple levels of an organisation — functional, geographic, product-based or market-based.
Delegation of Authority
The transfer of responsibility and decision-making power from a superior to a subordinate, while the superior retains ultimate accountability.
Graicunas's Formula
V. A. Graicunas's (1933) count of a manager's possible relationships with n subordinates: n[2^(n−1) + n − 1].
Holacracy
An informal organisational structure built on self-managed teams rather than traditional hierarchy.
Informal Organisation
The network of personal and social relationships that grows on its own alongside the formal structure.
Line and Staff Organisation
A form in which line managers hold authority to command and staff specialists advise and serve them.
Line Organisation
The simplest form of organisation, in which authority runs straight down a single chain of command.
Matrix Structure
An organisational design with dual reporting lines, combining functional and project-based authority.
Mechanistic and Organic Structures
Burns and Stalker's (1961) contrast between rigid, centralised structures suited to stable conditions and flexible, decentralised ones suited to change.
Organisational Chart
A visual map showing an organisation's hierarchy, roles, and reporting relationships.
Parity of Authority and Responsibility
The principle that the authority given to a person should match the responsibility placed on them.
Project Organisation
A temporary structure drawing specialists from several departments for one time-bound goal, disbanded when it is met.

Unit 1 · Chapter 7Business Economics and Demand

What business economics is

  • Business economics applies economic principles and methods to real business situations; it is the same subject as managerial economics.
  • It informs four kinds of decision: production, pricing, investment and risk management.
  • Opportunity cost, the value of the best alternative given up, is a real cost even though no account shows it.
  • Accounting records the past; business economics looks ahead at choices.

Remember: Production, pricing, investment, risk.

Managerial economics

  • Integrates economic theory with business practice for decision-making and forward planning (Spencer and Siegelman, 1959); Joel Dean's 1951 book was the first textbook.
  • Nature: mainly micro, normative, pragmatic, forward-looking, conceptual and quantitative; it uses macro to read the environment.
  • Scope: operational (demand, cost, pricing, profit, capital) and environmental (the economy, policy, finance, trade).
  • Objectives beyond profit: sales revenue (Baumol), growth (Marris), satisficing (Simon).

Remember: Theory meets practice, for decisions and forward planning.

How economics has been defined

  • Adam Smith (1776): wealth. Alfred Marshall (1890): welfare, the ordinary business of life.
  • Lionel Robbins (1932): scarcity and choice, ends and scarce means with alternative uses.
  • J. M. Keynes (1936): income and employment. Paul Samuelson (1948): resources, choice and growth.
  • Robbins objected that “material” welfare leaves out services; modern textbooks combine the definitions.

Remember: Smith wealth, Marshall welfare, Robbins scarcity, Keynes employment, Samuelson growth.

Demand

  • Effective demand = desire + ability to pay + willingness to pay, over a stated period.
  • Demand is the whole price–quantity relationship; quantity demanded is the amount at one price.
  • Own price: a movement along the curve (expansion or contraction). Any other determinant: a shift (increase or decrease).
  • Determinants: price, income, tastes, related goods, expected prices, population and government policy. Cost of production is not one.

Remember: Desire, ability, willingness.

The demand function

  • Dx = f(Px, Pr, Y, T, E, N, A): own price, related prices, income, tastes, expectations, population, advertising.
  • A demand schedule is a table of prices and quantities; the demand curve graphs it.
  • Linear (Q = 50 − 2.5P): constant slope. Non-linear Q = aP⁻ᵇ: constant elasticity b.
  • Slope is not elasticity: on Q = 50 − 2.5P elasticity is 9 at ₹18, 1 at the midpoint (₹10) and 0.25 at ₹4.

Remember: Price plus six other forces; the slope is not the elasticity.

Law of demand

  • Other things equal, when price falls quantity demanded rises, and when price rises it falls.
  • Income effect: a lower price raises real purchasing power. Substitution effect: the good becomes cheaper relative to alternatives.
  • Diminishing marginal utility: each extra unit is worth less, so buyers pay less for more.
  • Income and substitution effects together make the price effect. The law gives direction; elasticity gives size.

Remember: Price down, quantity up, other things equal.

Exceptions and special demand effects

  • Veblen: a higher price raises status (The Theory of the Leisure Class, 1899). Giffen: a staple of the poor, bought more as its price rises.
  • A Giffen good is strongly inferior, takes a large share of the budget and has no close substitute.
  • Snob: demand rises with exclusivity. Bandwagon: others buy, so the consumer follows. Leibenstein named both in 1950.
  • Speculation and necessities are often listed, but are not true exceptions: expectations shift the curve, and necessities have a steep one.

Remember: Veblen: status. Giffen: staple. Snob: exclusive. Bandwagon: follow.

Types of demand

  • Individual and market (all buyers added at each price); firm and industry.
  • Joint (used together), composite (several uses), derived (depends on another good), direct (final consumption), independent (unaffected).
  • Short-run and long-run: long-run demand is usually more elastic. Durables can be postponed and are partly replacements.
  • A firm with derived demand watches its customers' markets, not only its own.

Remember: Car and petrol joint, electricity composite, steel for cars derived, salt independent.

Demand forecasting

  • Short-run uses: production, pricing, sales targets, working finance. Long-run uses: capacity, investment, manpower.
  • Survey methods: buyers' intentions, sales-force opinion, expert opinion and Delphi, market experiments.
  • Statistical methods: trend projection (Y = a + bT), regression, barometric (leading indicators).
  • Surveys suit new products; statistics suit established ones. A forecast is not a target; forecast a range.

Remember: Ask people, or read the numbers; for something new, ask.

Don’t confuse it with

  • What business economics is: Don't confuse business economics with accounting. Accounting records what has already happened, in rupees paid and received. Business economics looks ahead at choices, and it counts costs that appear in no account, such as the income given up.
  • Managerial economics: nature, scope and importance: Don't confuse normative with positive economics. A positive statement describes what is, and can be tested, such as "a 10% price rise cuts sales by 15%". A normative statement says what should be done, such as "so we should not raise the price". Managerial economics uses positive analysis to reach normative advice.
  • How economics has been defined: Don't confuse Marshall's "welfare" with the welfare state. Marshall meant material well-being: income and the things it buys. He was not writing about government benefits.
  • Demand: Don't confuse an increase in demand with an expansion of quantity demanded. Only a change in the good's own price moves you along the curve; everything else shifts it. Cost of production is a supply-side factor and does not determine demand. It can change the price, and so the quantity demanded, but it is not on the list.
  • The demand function: Don't confuse slope with elasticity. Along the straight line above, the slope never changes, but elasticity (2.5 × P/Q) is 9 at P = 18 and 1.5 at P = 12. Slope compares raw changes; elasticity compares percentages.
  • Law of demand: Don't confuse the law of demand with elasticity. The law gives only the direction: price up, quantity down. Elasticity, the next chapter, measures how far quantity moves.
  • Exceptions and special demand effects: Don't confuse a Giffen good with a Veblen good. A Giffen good is a cheap staple of the poor, driven by the income effect. A Veblen good is a luxury of the rich, driven by status. Every Giffen good is inferior, but most inferior goods are not Giffen goods.
  • Types of demand: Don't confuse joint demand with composite demand. Joint demand is two goods wanted together for one purpose (a car and petrol). Composite demand is one good wanted for several purposes (electricity for lights, fans and machines).
  • Demand forecasting: Don't confuse a forecast with a sales target. A forecast estimates what will sell. A target states what management wants sold. Setting the forecast equal to the target hides the gap that management needs to see.

Formulas

  • Effective demand = desire + ability to pay + willingness to pay
  • Dx = f(Px, Pr, Y, T, E, N, A)

Key terms

Barometric Method
Forecasting demand from leading indicators that move before it, such as building permits ahead of cement demand.
Delphi Method
A forecasting method in which experts answer anonymously in rounds, seeing a summary of others' views, until their estimates converge.
Demand Forecasting
Estimating future demand for a product, by survey methods or statistical methods, to plan production, prices and capacity.
Demand Function
An equation stating quantity demanded as depending on own price, related prices, income, tastes, expectations, population and advertising.
Giffen Good
A strongly inferior staple taking a large share of a poor household's budget, whose demand rises when its price rises; named by Marshall after Sir Robert Giffen.
Managerial Economics
The integration of economic theory with business practice to help managers make decisions and plan ahead (Spencer and Siegelman); also called business economics.
Trend Projection
Forecasting by fitting a trend to past sales, for example by least squares, and extending it into the future.
Veblen Good
A good bought partly because its high price signals status, so demand can rise with price; after Thorstein Veblen's idea of conspicuous consumption (1899).

Unit 1 · Chapter 8Elasticity of Demand

Measuring elasticity: PED, YED and XED

  • PED = % change in quantity demanded ÷ % change in price. Above 1 elastic, 1 unitary, below 1 inelastic.
  • YED = % change in quantity demanded ÷ % change in income. Above 1 luxury, 0 to 1 necessity, below 0 inferior.
  • XED = % change in quantity of A ÷ % change in price of B. Positive: substitutes. Negative: complements.

Remember: PED: own price. YED: income. XED: another good's price.

Methods of measuring price elasticity

  • Proportionate: e = (ΔQ/Q) ÷ (ΔP/P).
  • Point: lower segment ÷ upper segment; 1 at the midpoint, ∞ and 0 at the ends.
  • Arc: the midpoint formula, the same both ways.
  • Total outlay (Marshall): spending up when price falls means elastic.

Remember: Watch the spending: price down, spending up means elastic.

Five degrees of price elasticity

  • Perfectly elastic: PED infinite, horizontal curve.
  • Elastic: above 1, flatter curve. Unitary: equal to 1.
  • Inelastic: below 1, steeper curve. Perfectly inelastic: 0, vertical curve.

Remember: Flat is elastic. Steep is inelastic.

What makes demand elastic

  • Substitutes: more close substitutes mean more elastic demand. One brand is more elastic than the whole category.
  • Nature of the good: necessities are inelastic, luxuries elastic.
  • Share of income: expensive items are more elastic. Time: demand is more elastic over a longer period.
  • Durability: durable goods are more elastic than non-durable goods.

Remember: Substitutes, necessity, share of income, time, durability.

Using elasticity in decisions

  • Pricing: elastic demand, a price cut raises revenue; inelastic demand, a price rise raises revenue.
  • Taxation: taxing inelastic goods raises more revenue.
  • Cross elasticity guides bundling of complements and analysis of competition from substitutes.
  • YED supports market segmentation and shows which products grow with incomes.

Remember: Elastic: cut price to raise revenue. Inelastic: raise it.

Don’t confuse it with

  • Measuring elasticity: PED, YED and XED: Don't confuse elasticity with slope. Slope compares raw changes, such as cups per rupee. Elasticity compares percentages. Along a straight-line demand curve the slope is the same everywhere, but elasticity is high at high prices and low at low prices.
  • Five degrees of price elasticity: Don't read elasticity from steepness alone. Comparing two curves, flatter means more elastic only at the same price and quantity. Along one straight line, elasticity changes from point to point.

Formulas

  • PED, price elasticity: % change in quantity demanded ÷ % change in price
  • YED, income elasticity: % change in quantity demanded ÷ % change in income
  • XED, cross elasticity: % change in quantity of A ÷ % change in price of B
  • e = (ΔQ ÷ Q) ÷ (ΔP ÷ P) = (ΔQ ÷ ΔP) × (P ÷ Q)
  • e = [(Q₂ − Q₁) ÷ ((Q₁ + Q₂) ÷ 2)] ÷ [(P₂ − P₁) ÷ ((P₁ + P₂) ÷ 2)]

Key terms

Arc Elasticity
Elasticity between two points on a demand curve, measured with average price and quantity so the result is the same in either direction.
Cross Elasticity of Demand (XED)
The responsiveness of demand for one good to a price change in a related good — positive for substitutes, negative for complements.
Elasticity of Demand
A measure of how responsive quantity demanded is to changes in price, income, or the price of related goods.
Income Elasticity of Demand (YED)
The responsiveness of demand to a change in consumer income, distinguishing normal, inferior, necessity and luxury goods.
Point Elasticity
Elasticity at a single point on a demand curve; on a straight line it equals the lower segment divided by the upper segment.
Price Elasticity of Demand (PED)
A measure of how responsive quantity demanded is to a change in a product's own price.
Total Outlay Method
Marshall's method of judging elasticity from total spending: if spending rises when price falls, demand is elastic; if unchanged, unitary; if it falls, inelastic.

Unit 1 · Chapter 9Utility Analysis

Core idea and assumptions

  • The cardinal approach measures utility in utils (or in money) and assumes the consumer seeks the most total utility from a given income.
  • Assumptions: rational consumer, cardinal measurement, divisible goods, diminishing marginal utility, constant marginal utility of money, independent utilities.
  • Utility is want-satisfying power, not usefulness: a cigarette has utility for a smoker.
  • The ordinal approach (Hicks and Allen, 1934) drops measurement and only ranks bundles.

Remember: Cardinal counts satisfaction; ordinal only ranks it.

Total and marginal utility

  • Total utility (TU): the sum of utility from all units consumed. Marginal utility (MU): the change in TU from one more unit.
  • MUₙ = TUₙ − TUₙ₋₁; TU is the running sum of MU.
  • MU positive: TU rises. MU zero: TU is at its maximum. MU negative: TU falls.
  • Paradox of value: price follows marginal, not total, utility (water and diamonds).

Remember: TU is satisfaction in total. MU is satisfaction at the margin.

Law of diminishing marginal utility

  • Marshall: the additional benefit from a thing diminishes with every increase in the stock already held.
  • It holds if units are identical and of sensible size, consumption is continuous, and tastes and income do not change.
  • TU rises while MU is positive, peaks when MU = 0 (28 in the table), and falls when MU turns negative.
  • Apparent exceptions (collections, addiction, money) mostly break an assumption. The law underlies the downward-sloping demand curve.

Remember: MU above 0: TU rises. MU = 0: TU peaks. MU below 0: TU falls.

Law of equi-marginal utility

  • MU₁ ÷ P₁ = MU₂ ÷ P₂ = MU₃ ÷ P₃ = MU of a rupee, with the whole budget spent.
  • Spend each next rupee where MU per rupee is highest; buying more lowers MU until the ratios are equal.
  • Example: ₹100 buys 4 chai and 3 samosas, 2 utils per rupee each, 350 utils in all.
  • Limits: indivisible goods, habit and impulse, unmeasurable utility. Managers use it as the equi-marginal principle.

Remember: Marginal utility per rupee, equal across goods.

Consumer surplus

  • Consumer surplus = total utility in money − total expenditure (Marshall).
  • One unit: ₹1,500 − ₹1,200 = ₹300; at a price of ₹1,300 it falls to ₹200.
  • Several units: mangoes worth ₹50, ₹40, ₹30 and ₹20 at ₹20 each give ₹140 − ₹80 = ₹60. On a graph it is the area below demand and above price.
  • Limits: unmeasurable utility, a changing MU of money, necessities. Sellers try to capture it; governments use it to weigh public projects.

Remember: Willingness to pay minus price paid.

Don’t confuse it with

  • Core idea and assumptions: Don't confuse cardinal with ordinal. Cardinal numbers measure (10 utils is twice 5 utils). Ordinal numbers only rank (first, second). The ordinal approach, in the next chapter, asks only which bundle a consumer prefers.
  • Total and marginal utility: Don't confuse falling MU with falling TU. While MU is falling but still above zero, TU keeps rising, only more slowly. TU falls only once MU turns negative.
  • Law of diminishing marginal utility: Don't confuse diminishing marginal utility with diminishing returns. Diminishing marginal utility is about a consumer's satisfaction from more units. The law of diminishing returns is about a producer's extra output when more of one input is added to fixed amounts of others.
  • Law of equi-marginal utility: Don't confuse equal MU per rupee with equal MU or equal spending. At equilibrium the last samosa gives 40 utils and the last chai only 20. But the samosa costs twice as much, so each gives 2 utils per rupee.
  • Consumer surplus: Don't confuse consumer surplus with a discount. A discount is measured from the printed price. Consumer surplus is measured from what you yourself would have paid. Nor confuse it with

Formulas

  • TUₙ = MU₁ + MU₂ + … + MUₙ     MUₙ = TUₙ − TUₙ₋₁
  • MU₁ ÷ P₁ = MU₂ ÷ P₂ = MU₃ ÷ P₃ = MU of a rupee
  • Consumer surplus = total utility in money − total expenditure

Unit 1 · Chapter 10Indifference Curve Analysis

The ordinal approach

  • The ordinal approach ranks bundles; it never measures satisfaction.
  • Hicks and Allen set it out in 1934. Its tools are the indifference curve and the budget line.
  • Assumptions: a rational consumer, ordinal utility, complete, transitive and consistent preferences, non-satiation, diminishing MRS and divisible goods.
  • Revealed preference (Samuelson, 1938) reads preferences from what consumers actually buy.

Remember: Cardinal asks how much. Ordinal asks which is preferred.

Indifference curve

  • An indifference curve joins bundles of two goods that give equal satisfaction; a set of them is an indifference map.
  • Downward sloping, convex to the origin (diminishing MRS), never intersecting, and higher is better.
  • Curves cannot cross: by transitivity, two levels of satisfaction would be equal.
  • Perfect substitutes: a straight line. Perfect complements: an L-shape.

Remember: Downward, convex, never crossing, higher is better.

Marginal rate of substitution (MRS)

  • MRSxy: the amount of Y a consumer gives up for one more unit of X, satisfaction held constant.
  • MRSxy = −ΔY ÷ ΔX = MUx ÷ MUy.
  • In the schedule MRS falls 4, 3, 2, 1: diminishing MRS.
  • MRS is the slope of the indifference curve; as it diminishes, the curve becomes convex.

Remember: A diminishing MRS gives the convex curve.

Budget line

  • Px × X + Py × Y = M: every bundle affordable at a given income and prices.
  • Conditions: income fixed, prices constant, entire income spent, two goods.
  • Slope −Px ÷ Py: the opportunity cost of one good in units of the other. The ends are M ÷ Py and M ÷ Px.
  • A change in income shifts the line in parallel; a change in one price pivots it.
  • Bundles on or inside the line are affordable; those outside are not.

Remember: Slope: −Px/Py.

Consumer equilibrium

  • Equilibrium: the highest affordable indifference curve, where it touches the budget line.
  • Conditions: MRS = Px ÷ Py, and the curve convex at that point.
  • Example: ₹120, samosas at ₹20 and chai at ₹10 give C (3, 6) or D (4, 4), where MRS = 2.
  • Cardinal: MU per rupee equalised. Ordinal: MRS = price ratio. Since MRS = MUx ÷ MUy, they are the same condition.

Remember: Cardinal asks how much. Ordinal asks which is preferred.

Don’t confuse it with

  • The ordinal approach: Don't confuse ranking with measuring. "I prefer A to B" is ordinal. "A gives twice the satisfaction of B" is cardinal. The ordinal approach needs only the first; the table under Consumer equilibrium compares the two approaches.
  • Indifference curve: Don't confuse "indifferent" with "uninterested". Here it means equally satisfied by two bundles.
  • Marginal rate of substitution (MRS): Don't confuse MRS with the price ratio. MRS is the consumer's own rate of exchange, set by her tastes. Px ÷ Py is the market's rate, set by prices. Equilibrium is where they match.
  • Budget line: Don't confuse the budget line with an indifference curve. The budget line is about money: income and prices, and it is straight. The indifference curve is about tastes, and it is curved. Neither alone tells you the choice.
  • Consumer equilibrium: Don't confuse equilibrium with the highest curve or the cheapest bundle. Higher curves exist, such as IC₃, but she cannot afford them. A cheaper bundle inside the line leaves money, and satisfaction, unused.

Formulas

  • MRSxy = −ΔY ÷ ΔX = MUx ÷ MUy
  • Px × X + Py × Y = M     slope = −Px ÷ Py
  • MRSxy = Px ÷ Py

Key terms

Budget Line
A graphical representation of all combinations of two goods a consumer can purchase given a fixed income and fixed prices.
Consumer Equilibrium
The point at which a consumer maximises utility subject to the budget constraint, where the indifference curve is tangent to the budget line.
Indifference Curve
A graphical representation of all combinations of two goods that provide a consumer with the same level of satisfaction.
Transitivity
A rational-consumer assumption stating that if a consumer prefers A to B and B to C, they must also prefer A to C.

Unit 1 · Chapter 11Market Structures

What a market is

  • A market: buyers and sellers of a commodity in contact, not a place (Cournot, quoted by Marshall).
  • It needs buyers and sellers, a commodity, contact, knowledge of conditions, and tends to one price.
  • Structure depends on the number and size of sellers and buyers, the product, entry and exit, and economies of scale.
  • Buyer side: monopsony, duopsony, oligopsony; bilateral monopoly settles price by bargaining.

Remember: Contact, not a place; count the sellers, and the buyers.

Revenue: total, average and marginal

  • TR = P × Q; AR = TR ÷ Q = P; MR = ΔTR ÷ ΔQ. The AR curve is the demand curve.
  • Perfect competition: AR = MR = P. Otherwise MR is below AR; for a straight-line AR, MR is twice as steep.
  • TR is at its maximum where MR = 0; MR can be negative.
  • MR = AR(1 − 1/e): positive if elastic, zero at e = 1, negative if inelastic.

Remember: Average is the price; marginal is less, unless the price never moves.

The four market structures

  • Perfect competition: very many sellers, homogeneous product, free entry, price taker.
  • Monopolistic competition: many sellers, differentiated product, easy entry, limited price control.
  • Oligopoly: few sellers, difficult entry, considerable price control.
  • Monopoly: one seller, no close substitute, blocked entry, price maker.
  • Normal profit keeps a firm in the industry; supernormal profit is anything above it, and free entry competes it away.

Remember: Sellers, product, entry.

Perfect competition

  • Conditions: many buyers and sellers, homogeneous product, free entry and exit, perfect knowledge and mobility, no transport costs.
  • Pure competition (Chamberlin): the first three conditions only.
  • Marshall's periods: market (demand sets price), short run (demand and supply), long run (mainly cost).
  • Short run: shut down if price falls below average variable cost.
  • Long run: P = AR = MR = MC = minimum AC; normal profit.

Remember: Price takers, free entry, profit competed away.

Monopoly and monopolistic competition

  • Monopoly: one seller, no close substitutes, barriers to entry (patents, key inputs, natural monopoly); the firm is the industry.
  • Equilibrium MR = MC; price from the demand curve; always on the elastic part.
  • Monopolistic competition (Chamberlin, 1933): differentiation, free entry, selling costs, a product group.
  • Long run: demand tangent to AC, normal profit, excess capacity.

Remember: Monopoly keeps its profit; brands compete theirs away.

Oligopoly and duopoly

  • Few sellers, interdependence, entry barriers, advertising; pure or differentiated; a duopoly has two sellers.
  • Cournot: output, two-thirds of competitive output; Bertrand: price, P = MC; Edgeworth: oscillation; Stackelberg: leader and follower.
  • Kinked demand (Sweezy; Hall and Hitch, 1939): rigid prices.
  • Collusion: cartels with quotas, and price leadership by a low-cost, dominant or barometric firm.

Remember: Few sellers, each watching the others.

Price determination

  • Every profit-maximising firm sets output where MC = MR, with MC cutting MR from below.
  • Perfect competition: P = MR = MC, price taker. Monopolistic competition: P > MR, partial control and heavy advertising.
  • Oligopoly: interdependent firms; the kinked demand curve and its MR gap explain price rigidity.
  • Monopoly: P > MR, the most control over price, supernormal profit can persist.

Remember: MC = MR everywhere; the price differs.

Price discrimination, dumping and reverse dumping

  • Price discrimination: different prices for the same product when the difference is not due to cost (Joan Robinson).
  • It needs monopoly power, separable markets with resale prevented, and different elasticity across markets.
  • Degrees (Pigou, 1920): first (each buyer's willingness to pay), second (by quantity), third (market segments).
  • Third degree: MR equal in every market and to MC; higher price where demand is less elastic.
  • Dumping: lower price abroad than at home, or below cost. Reverse dumping: higher price abroad.

Remember: Monopoly power, separable markets, different elasticity.

Don’t confuse it with

  • What a market is: Don't confuse monopsony with monopoly. Monopoly is one seller, with power to push prices up. Monopsony is one buyer, with power to push the prices it pays down, such as the wages of workers in a one-employer town.
  • Revenue: total, average and marginal: Don't confuse maximum revenue with maximum profit. TR is highest where MR = 0. Profit is highest where MR = MC: where the extra revenue from a unit equals its extra cost. Since extra units usually cost something, a firm maximising profit stops before revenue peaks.
  • The four market structures: Don't confuse monopolistic competition with monopoly. A monopoly is the only seller of a product with no close substitute. In monopolistic competition there are many sellers; each has a "monopoly" over its own brand only. A restaurant owns its menu and name, but diners can walk next door.
  • Perfect competition: Don't confuse perfect competition with pure competition. Pure competition (Chamberlin) needs only many sellers, a homogeneous product and free entry. Perfect competition also needs perfect knowledge, perfect mobility and no transport costs.
  • Monopoly and monopolistic competition: Don't confuse "price maker" with "can charge any price". A monopolist chooses a point on its demand curve. Raise the price and it sells less. Its power is the power to choose, not to escape demand.
  • Oligopoly and duopoly: Don't confuse oligopoly with monopolistic competition. Both can have branded products. In monopolistic competition there are so many sellers that each can ignore the others. In oligopoly there are so few that none can.
  • Price determination: Don't confuse MR = MC with P = MC. MR = MC is the profit rule for every firm. P = MC holds only in perfect competition, where price and MR are the same. Elsewhere price sits above MC, and the gap is a measure of market power.
  • Price discrimination, dumping and reverse dumping: Don't confuse price discrimination with prices that reflect cost. A higher fare for an air-conditioned coach pays partly for a costlier service, so it is not pure discrimination. Likewise, a low export price is not dumping if the exporter's costs really are that low.

Formulas

  • TR = P × Q   ·   AR = TR ÷ Q = P   ·   MR = ΔTR ÷ ΔQ = TRn − TRn−1
  • MR = AR × (1 − 1 ÷ e)

Key terms

Average Revenue
Total revenue divided by quantity sold, which equals price; the average revenue curve is the firm's demand curve.
Bilateral Monopoly
A market in which a single seller faces a single buyer, so price is settled by bargaining within limits.
Cartel
A formal agreement among firms to fix a joint price and share out output, such as OPEC.
Cournot Model
Augustin Cournot's 1838 duopoly model in which each firm chooses output taking its rival's as given; each produces one-third of the competitive output.
Duopoly
An oligopoly with two sellers.
Excess Capacity
Under monopolistic competition, the shortfall between a firm's long-run output and the output at which its average cost would be lowest.
Kinked Demand Curve
A model of oligopoly pricing where the demand curve has a kink at the prevailing price, reflecting rivals' asymmetric reactions to price changes.
Long-Run Profitability
The sustainable profit level a firm can earn in a given market structure — normal profit under perfect/monopolistic competition, potentially supernormal under oligopoly/monopoly.
Marginal Revenue
The change in total revenue from selling one more unit; below price whenever the firm must cut price to sell more.
Market
In economics, the whole set of buyers and sellers of a commodity in contact with each other, not a particular place.
Monopolistic Competition
A market structure with many sellers offering differentiated products and relatively easy entry/exit.
Monopoly
A market structure with a single seller, a unique product, and blocked entry, giving full control over price.
Monopsony
A market with a single buyer facing many sellers.
Natural Monopoly
A monopoly arising because economies of scale let one firm supply the whole market more cheaply than several could.
Normal Profit
The minimum profit level required to keep a firm operating in an industry — the typical long-run outcome under perfect and monopolistic competition.
Oligopoly
A market structure dominated by a few large sellers with interdependent pricing decisions.
Perfect Competition
A market structure with an infinite number of sellers, homogeneous products and free entry/exit.
Price Discrimination
The practice of charging different prices to different consumers or markets for the same product, without a cost-based justification.
Price Leadership
Tacit collusion in which firms follow the prices set by a low-cost, dominant or barometric firm.
Reverse Dumping
A form of international price discrimination where a firm sells a product at a higher price abroad than in its home market.

Unit 1 · Chapter 12National Income and Inflation

National income

  • National income: the money value of all final goods and services produced by a country's residents in a year, at factor cost (NNP at factor cost).
  • Only final goods count, to avoid double counting; value added at each stage sums to the final value.
  • Three methods: product (value added), income (W + R + I + P) and expenditure (C + I + G + X − M); in principle all agree.
  • Excluded: transfer payments, second-hand sales and purely financial transactions.

Remember: Output = income = expenditure.

Concepts and formulas

  • GDP = C + I + G + (X − M). GNP = GDP + NFIA. NNP = GNP − depreciation.
  • National income = NNP at market price − indirect taxes + subsidies.
  • Personal income = NI − undistributed profits − corporate taxes + transfers. Disposable income = PI − personal taxes.
  • Per capita income = NI ÷ population.
  • Three switches: domestic to national (NFIA), gross to net (depreciation), market price to factor cost (net indirect taxes).

Remember: GDP, GNP, NNP, national income, personal income, disposable income.

Inflation

  • Inflation: a persistent rise in the general price level, which lowers purchasing power.
  • Causes: demand-pull (AD shifts right), cost-push (AS shifts left), built-in (wage-price spiral).
  • Creeping below about 3%; walking roughly 3 to 10%; running roughly 10 to 20%; hyperinflation above 50% a month (Cagan).
  • Disinflation: the rate slows. Deflation: the price level falls. Stagflation: high inflation with high unemployment and stagnant growth.

Remember: Demand-pull, cost-push, built-in.

Measuring inflation

  • CPI = current basket price ÷ base price × 100: consumer prices and the cost of living, including services.
  • WPI = current wholesale price ÷ base price × 100: bulk and producer prices, no services.
  • GDP deflator = nominal GDP ÷ real GDP × 100: every good and service, a changing basket.
  • Inflation rate = change in the index ÷ last period's index × 100.

Remember: CPI: consumers. WPI: wholesale. Deflator: the whole economy.

Effects and control

  • Moderate inflation can lift spending, investment, production and employment.
  • High inflation cuts purchasing power and savings, deepens inequality and raises uncertainty; borrowers gain, lenders and fixed incomes lose.
  • Real interest rate ≈ nominal rate − inflation.
  • Tools: monetary policy (RBI: repo rate, CRR, SLR, open market operations), fiscal policy, price control measures, supply-side measures.

Remember: Monetary, fiscal, price control, supply-side.

Don’t confuse it with

  • National income: Don't confuse final with intermediate goods by the product's name. What matters is the use. Flour bought by a bakery is intermediate. The same flour bought by a household for its kitchen is final.
  • Concepts and formulas: Don't confuse GDP with GNP. GDP asks where: everything produced inside the borders, whoever owns it. GNP asks who: everything the country's residents earn, wherever they earn it. A foreign-owned factory in Pune adds to India's GDP; the profit it earns for its foreign owners is subtracted to reach GNP.
  • Inflation: Don't confuse disinflation with deflation. If inflation falls from 8% to 4%, prices are still rising, only more slowly: that is disinflation. Deflation means the price level itself falls. Cut-offs for walking and running inflation differ between textbooks; learn the order and treat the ranges as rough.
  • Measuring inflation: Don't confuse index points with per cent. An index that moves from 120 to 126 has risen 6 points, but only 5%. The two match only when the starting index is 100.
  • Effects and control: Don't confuse monetary with fiscal policy. Monetary policy is the central bank's: interest rates, reserve ratios and money. Fiscal policy is the government's: taxes and public spending. Both can cool demand, but different bodies decide them.

Formulas

  • GDP: C + I + G + (X − M): consumption, investment, government expenditure, exports minus imports
  • GNP: GDP + net factor income from abroad (NFIA)
  • NNP: GNP − depreciation
  • National income: NNP at market price − indirect taxes + subsidies
  • Personal income: NI − undistributed profits − corporate taxes + transfers
  • Disposable income: PI − personal taxes
  • Per capita income: NI ÷ population
  • CPI = current basket price ÷ base price × 100 · WPI = current wholesale price ÷ base price × 100 · GDP deflator = nominal GDP ÷ real GDP × 100

Key terms

Built-In Inflation
Inflation driven by a wage-price spiral, where workers and firms adjust wages and prices based on expected future inflation.
Demand-Pull Inflation
Inflation caused when aggregate demand in an economy exceeds aggregate supply capability.
Disinflation
A slowdown in the rate of inflation, where prices continue rising but at a reduced pace.
Fiscal Policy
A government's use of taxation and public spending to influence economic conditions such as inflation.
GDP Deflator
A comprehensive measure of price change, calculated as the ratio of nominal GDP to real GDP, multiplied by 100.
Gross Domestic Product (GDP)
The market value of all final goods and services produced within a country's borders, equal to Consumption + Investment + Government Expenditure + Net Exports.
Gross National Product (GNP)
Total income earned by a country's residents, both domestically and abroad, equal to GDP plus net factor income from abroad.
Hyperinflation
An extreme, uncontrollable rise in prices exceeding 50% per month, typically leading to currency collapse.
Inflation
A persistent rise in the general price level of goods and services, resulting in a decline in purchasing power.
Monetary Policy
Central bank actions such as adjusting interest rates or reserve ratios to control money supply and inflation.
National Income
The total money value of all final goods and services produced by a country's normal residents over a year, including net factor income from abroad, measured at factor cost (NNP at factor cost).
Per Capita Income (PCI)
Average income per person in an economy, calculated as national income divided by total population, used as a standard-of-living indicator.
Personal Income (PI)
Income actually received by individuals before direct taxes, including transfer payments but excluding retained corporate profits.
Running Inflation
A rapid rate of inflation, roughly 10-20%, signalling an overheating economy.
Stagflation
An unusual economic condition combining high inflation with high unemployment and stagnant growth.
Value Added Method
A method of measuring national income by summing the value created at every stage of production.
Walking Inflation
A moderate rate of inflation, roughly 3-10%, that gradually erodes purchasing power over time.
Wholesale Price Index (WPI)
A measure of inflation based on bulk/producer prices, excluding services.

Unit 1 · Chapter 13Business Ethics and CSR

Ethics, morals and values

  • Ethics: standards and codes that guide right behaviour. Morals: personal beliefs about right and wrong. Values: deeply held principles about what is important.
  • Business ethics applies moral principles to business decisions, balancing profit with social welfare.
  • It builds trust and reputation, promotes fairness and accountability, and supports long-term sustainability.
  • Law is the minimum; what is legal is not always ethical.

Remember: Ethics are codes, morals are beliefs, values are what matters.

Principles of business ethics

  • Impartiality, legal compliance, accountability, and trust and honesty.
  • Fair practices (ethical pricing and competition, anti-corruption) and due diligence (assess risks and consequences).
  • Social obligation (benefit society) and stakeholder interest (employees, customers, investors, community).
  • A code of conduct is one firm's written rules applying the principles; the principles can conflict.

Remember: Eight principles, from impartiality to stakeholder interest.

Ethical issue and ethical dilemma

  • Ethical issue: a business action that violates moral principles, such as data falsification, insider trading or labour exploitation.
  • Ethical dilemma: a choice between conflicting moral values or obligations, such as layoffs against avoiding bankruptcy.
  • Three checks: who is affected, which values conflict, and what is legal is not always ethical.
  • A temptation (right versus wrong) is an issue, not a dilemma (right versus right).

Remember: An issue breaks a principle; a dilemma pits two values.

Decision approaches and theories

  • Utilitarian: the greatest good for the greatest number. Rights: does it protect individual rights?
  • Justice: is treatment fair? Common good: does it serve community welfare? Virtue ethics: what would an honest, courageous, compassionate person do?
  • Teleological ethics judges by consequences; deontological by duty; virtue ethics by character.
  • Meta-ethics asks what ethical terms mean; applied ethics tackles real cases.

Remember: Person, act, results: virtue, duty, consequences.

Corporate social responsibility

  • CSR integrates social, environmental and economic responsibility into business operations, aiming at shared value.
  • Carroll's pyramid: economic, legal, ethical, philanthropic. CSR is more than charity.
  • India: guidelines 2009, voluntary guidelines 2011, company law 2013, CSR spending mandatory from 1 April 2014, one of the first countries to require it by law.
  • Applies to a company with net worth of ₹500 crore or more, turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more (any one).
  • Spend at least 2% of the average net profit of the preceding three years.

Remember: ₹500 crore net worth, ₹1,000 crore turnover or ₹5 crore profit. Spend 2%.

Don’t confuse it with

  • Ethics, morals and values: Don't confuse ethics with law. Law is the minimum that society enforces. Ethics asks what is right, including where the law is silent or out of date. Some acts are legal but unethical, such as hiding a known product defect that no rule yet covers. Keeping the wholesaler's ₹2,000 may never reach a court, but it is still wrong.
  • Principles of business ethics: Don't confuse principles with a code of conduct. Principles are general standards that apply to any firm. A code of conduct is one firm's written rules that apply them to its own situations, such as how large a gift staff may accept.
  • Ethical issue and ethical dilemma: Don't confuse a dilemma with a temptation. Falsifying data to meet a target can feel like a hard choice. But only one side is a moral value; the other is self-interest. That makes it an ethical issue. Rushworth Kidder called real dilemmas "right versus right" choices, and temptations "right versus wrong".
  • Decision approaches and theories: Don't confuse utilitarianism with ethical egoism. Both judge by consequences. Egoism counts only the decision-maker's good; utilitarianism counts everyone's good equally. Also keep meta-ethics (what ethical words mean) apart from applied ethics (what to do in a real case).
  • Corporate social responsibility: Don't confuse CSR with charity. Charity is only the top layer of Carroll's pyramid. CSR starts with how the money is earned: fair pay, safe products and clean production. A firm that pollutes a river and funds a school nearby has not met its responsibility.

Key terms

Business Ethics
The application of moral principles to corporate conduct, balancing the profit motive with social welfare and stakeholder interests.
CSR (Corporate Social Responsibility)
The integration of social, environmental and economic responsibility into business operations; mandatory in India above specified net worth, turnover or profit thresholds.
Deontological Ethics
An ethical approach focused on adherence to moral duties and principles rather than outcomes.
Ethical Dilemma
A situation requiring a choice between two or more conflicting moral values or obligations.
Utilitarian Approach
An ethical decision-making approach favouring the action that provides the greatest good for the greatest number of people.
Virtue Ethics
An ethical theory emphasising the moral character of the decision-maker — such as honesty and courage — rather than rules or outcomes.

Unit 1 · Chapter 14Corporate Governance and Value-Based Organisations

Corporate governance

  • Corporate governance is the system by which companies are directed and controlled (Cadbury Report, 1992).
  • Shareholders elect the board; the board appoints and oversees managers; reports flow back up.
  • Agency theory: managers may act against shareholders, so monitor and align through audits, independent directors and incentives.
  • Stewardship theory: managers are trustworthy stewards, so empower them.
  • OECD Principles: shareholder rights, equitable treatment, transparency and disclosure, the role of stakeholders, and the board's responsibilities.

Remember: Agency: watch. Stewardship: trust.

Value-based organisation (VBO)

  • A VBO is an organisation in which ethical values shape culture, leadership and strategy.
  • Societal contribution ranks alongside profit, not after it.
  • The vision statement, the long-term aspirational direction, is at the top of its hierarchy.
  • Trust is a core success factor, built through consistent ethical conduct and lost through visible breaches.

Remember: Values set the vision; conduct earns the trust.

Don’t confuse it with

  • Corporate governance: Don't confuse governance with management. Management runs the business day to day. Governance decides who directs the managers, and checks that they serve the company. Also keep the roles straight: shareholders are the principals; managers are the agents.
  • Value-based organisation (VBO): Don't confuse vision with mission. A vision says where the organisation wants to be in the long run. A mission says what it does now, for whom and how. Nor confuse stated values with lived values: values on a wall poster count only if decisions follow them.

Key terms

Agency Theory
A corporate governance theory explaining the conflict of interest between shareholders (principals) and managers (agents), resolved through audits and performance incentives.
Corporate Governance
The system of rules, practices and processes by which a company is directed and controlled to balance stakeholder interests.
OECD Principles
International corporate governance guidelines covering shareholder rights, equitable treatment, transparency and stakeholder roles.
Stewardship Theory
A corporate governance theory viewing managers as trustworthy stewards of the company rather than self-interested agents.
Trust (VBO)
A core success factor of a Value-Based Organisation, built through consistent ethical conduct and shared values.
Value-Based Organisation (VBO)
An organisation where ethical values shape culture, leadership and strategy, prioritising societal contribution alongside profit.
Vision Statement
The long-term aspirational direction guiding an organisation's future growth, forming the top tier of the VBO hierarchy.

Unit 2 · Chapter 1Organisational Behaviour: Significance and Theories

What organisational behaviour studies

  • OB studies how individuals, groups and structure affect behaviour at work, to understand, predict and improve it.
  • It draws on psychology, social psychology, sociology, anthropology and political science.
  • Classical school: efficiency and structure (Taylor, Fayol, Weber).
  • Behavioural school: people and motivation (Mayo, Maslow, McGregor). Modern school: systems and situations.

Remember: Efficiency, then people, then systems and situations.

Elements, aims and disciplines of OB

  • Four elements: people, structure, technology and environment; a change in one reaches the others.
  • Luthans's aims: understanding, prediction and control of behaviour.
  • OB is multidisciplinary, humanistic, performance-oriented, applications-oriented and uses scientific method.
  • Psychology: the individual. Social psychology: influence. Sociology: groups. Anthropology: culture. Political science: power.

Remember: People, structure, technology, environment: change one and the rest move.

Five models of OB

  • Autocratic: power, obedience, dependence on the boss, subsistence, minimum performance.
  • Custodial: economic resources, security and benefits, dependence on the organisation, passive cooperation.
  • Supportive: leadership, participation, status and recognition. Collegial: partnership, self-discipline, self-actualisation.
  • System: trust and community, psychological ownership, self-motivation, passion and commitment.
  • The models are not stages; most firms mix them, and the best one depends on the work.

Remember: Power, money, leadership, partnership, trust.

Classical school of management

  • Taylor (scientific management): find the most efficient way to do a job; four principles; the differential piece-rate.
  • Fayol (administrative management): five functions and fourteen principles, including unity of command.
  • Weber (bureaucracy): hierarchy, rules, division of labour, impersonality, appointment by competence; aim: efficiency without favouritism.
  • Weakness: workers treated as machine parts; feelings, informal groups and the environment ignored.

Remember: Taylor the task, Fayol the manager, Weber the rules.

Behavioural school of management

  • Hawthorne studies (1924–32, interpreted by Elton Mayo): illumination, relay assembly, interviewing, bank wiring.
  • Feeling valued raised productivity; the Hawthorne effect is behaviour changed by attention.
  • Maslow: physiological, safety, social, esteem and self-actualisation needs.
  • McGregor: Theory X (control) against Theory Y (participation), as assumptions that tend to fulfil themselves.

Remember: Control or participation: X or Y.

Modern school: systems and contingency

  • Systems theory: inputs, transformation and outputs, with feedback, inside an external environment.
  • Key ideas: interdependence, interaction, environment and feedback; open, not closed, systems.
  • Contingency theory: no single best way; fit practice to environment, technology, structure and people.
  • Mechanistic structures suit stable markets; organic structures suit changing ones.

Remember: It depends on the situation.

Socio-technical approach

  • Every organisation has a social system (people), a technical system (tools, methods) and an environment.
  • Effectiveness needs a balance among them: joint optimisation.
  • Roots: Trist and the Tavistock Institute's studies of coal mining.
  • Modern theory has three approaches: systems, socio-technical and contingency.

Remember: Design the people and the tools together.

Don’t confuse it with

  • What organisational behaviour studies: Don't confuse OB with human resource management (HRM). HRM is a management function: hiring, training, pay and appraisal. OB is the knowledge about behaviour that HRM, and every other manager, draws on.
  • Elements, aims and disciplines of OB: Don't confuse psychology with social psychology. Psychology works at the level of one person. Social psychology asks how that person is changed by others, which is why group decisions and attitude change sit there.
  • Five models of OB: Don't confuse the models with leadership styles. Autocratic, democratic and laissez-faire describe one leader's way of deciding. A model describes the whole climate: what the organisation relies on, what it expects of people, and what people feel in return. Models resemble McGregor's pair loosely: autocratic leans to Theory X, collegial to Theory Y.
  • Classical school of management: Don't confuse Taylor with Fayol. Taylor worked from the shop floor up: the best way to do one task. Fayol worked from the top down: what every manager does. Unity of command is Fayol's principle. Taylor's functional foremanship, which put eight specialist foremen over each worker, breaks it.
  • Behavioural school of management: Don't confuse Theory X and Y with two types of worker. They are a manager's assumptions about workers. McGregor's point was that assumptions tend to fulfil themselves: treat people as lazy and they disengage. Theory Z is a separate idea, William Ouchi's 1981 account of Japanese-style management.
  • Modern school: systems and contingency: Don't confuse systems theory with contingency theory. Systems theory describes how the parts of an organisation connect with each other and the environment. Contingency theory tells a manager how to choose a practice: by reading the situation. A closed system, by contrast, ignores its environment, as the classical school largely did.
  • Socio-technical approach: Don't confuse the socio-technical approach with the systems approach. Systems theory describes any organisation as connected parts with feedback. The socio-technical approach picks one pair of parts, people and technology, and says to design them together. It is one application of systems thinking.

Key terms

Bureaucratic Management
Max Weber's approach emphasising clear hierarchy, detailed rules and impersonality to achieve efficiency and eliminate favouritism.
Contingency Theory
A management theory holding that there is no single best way to organise; the right approach depends on the specific situation.
Hawthorne Effect
The tendency for productivity to rise when workers feel observed and valued, discovered in Elton Mayo's studies.
Scientific Management
Taylor's approach of scientifically studying and standardising work to determine the most efficient method.
Systems Theory
A management view of organisations as open systems of interrelated parts striving toward a common goal.
Theory X
McGregor's assumption that employees are inherently lazy, avoid work and require coercion and control.
Theory Y
McGregor's assumption that employees are naturally motivated, creative and seek responsibility.

Unit 2 · Chapter 2Personality, Perception and Attitude

Personality

  • Personality: a unique, relatively consistent pattern of thoughts, feelings and behaviour, shaped by genes, environment, experience and learning.
  • The Big Five (OCEAN) score traits on scales; conscientiousness links most consistently with job performance.
  • MBTI: 16 types from four two-way dimensions (E–I, S–N, T–F, J–P); popular, but weak at predicting performance.
  • Theories: psychoanalytic, behaviourist, humanistic, trait, cognitive, biological.

Remember: Personality is who you are, fairly steadily.

What shapes personality

  • Personality: from Latin persona, the actor's mask; Allport defines it as the dynamic organisation of psychophysical systems that determine characteristic behaviour and thought.
  • Determinants: heredity (biological), culture, family, social groups and the situation; many texts use three: heredity, environment, situation.
  • Heredity sets a range, not a result; shares of heredity and learning cannot be given exactly.
  • A manager cannot change heredity but can change the situation.

Remember: Born with it, taught by it, brought out by the moment.

The Dark Triad and traits at work

  • Dark Triad (Paulhus and Williams): narcissism, Machiavellianism, psychopathy; these are socially undesirable traits.
  • Narcissism: inflated self-importance; Machiavellianism: manipulation, ends justify means; psychopathy: little concern or remorse.
  • Internal locus of control suits initiative-heavy jobs; external suits structured, routine ones.
  • High risk-takers decide faster on less information; match risk-taking to the job.

Remember: Self, schemer, cold: the dark three.

Perception

  • Perception: selecting, organising and interpreting sensory information; it is subjective.
  • Shaped by the perceiver, the target and the situation.
  • Attribution (Kelley): high distinctiveness or consensus points outside the person; high consistency points to the person.
  • Errors: stereotyping, halo and horn effects, selective perception, projection, contrast effect, fundamental attribution error, self-serving bias.

Remember: Select, organise, interpret.

Attitude

  • Attitude: a learned tendency to respond consistently, favourably or unfavourably.
  • Three components: affective (feel), behavioural (act), cognitive (think).
  • Work attitudes: job satisfaction, organisational commitment (affective, continuance, normative), job involvement.
  • Cognitive dissonance (Festinger): a clash between attitudes and behaviour is uncomfortable, so people change one or explain it away.

Remember: Think, feel, act.

Defining attitude; POS and job attitudes

  • Allport: a state of readiness organised through experience; Krech and Crutchfield: an enduring organisation of motivational, emotional, perceptual and cognitive processes; Katz and Stotland: a predisposition to evaluate an object in a certain way.
  • Attitudes are learned, directed at objects, vary in strength, and may be explicit (stated) or implicit (unconscious).
  • Perceived organisational support (POS): belief that the organisation values contributions and cares about well-being.
  • Job attitudes: satisfaction, involvement, organisational commitment, POS and engagement.

Remember: Ready, steady, felt: attitude is a readiness shaped by experience.

Don’t confuse it with

  • Personality: Don't confuse the MBTI with the Big Five. The MBTI sorts people into types: you are E or I. The Big Five scores each trait on a scale: you are more or less extraverted. Neuroticism is not an illness; it is the low end of emotional stability.
  • What shapes personality: Don't confuse heredity with fixed destiny. Heredity sets a range, not a result. Study notes often call personality "inherited and learned" as if the two could be separated. In practice they work together, and no one can say what percentage of any one person's personality comes from each.
  • The Dark Triad and traits at work: Don't confuse Machiavellianism with ambition. An ambitious person wants to rise and may do so fairly. A high-Mach person treats others as tools and accepts deception to win.
  • Perception: Don't confuse the halo effect with stereotyping. The halo effect spreads one trait of a person across the whole judgement of that person. Stereotyping judges a person by the group they belong to. Likewise, the fundamental attribution error is about how we judge others; the self-serving bias is about how we judge ourselves.
  • Attitude: Don't confuse job involvement with organisational commitment. Involvement is attachment to the job itself; commitment is attachment to the employer. A doctor can be deeply involved in medicine and still feel no loyalty to the hospital that employs her.
  • Defining attitude; POS and job attitudes: Don't confuse perceived organisational support with job satisfaction. Satisfaction is how you feel about the job's content and conditions. POS is what you believe about the organisation's attitude toward you.

Key terms

Attitude
A learned tendency to respond consistently, favourably or unfavourably, toward a person, object or situation.
Behaviourist Theory (Personality)
A theory holding that personality is shaped by learning, conditioning and environment rather than internal drives.
Big Five Model (OCEAN)
A trait-based personality framework comprising Openness, Conscientiousness, Extraversion, Agreeableness and Neuroticism.
Contrast Effect
A perceptual error where a person is evaluated by comparison with others rather than against objective standards.
Halo/Horn Effect
A perceptual error of evaluating a person entirely based on one positive (halo) or negative (horn) trait.
Humanistic Theory (Personality)
A theory (Rogers, Maslow) focused on inherent goodness, self-growth and self-actualisation.
Interpretation
The perceptual stage of assigning meaning to organised sensory data based on prior experience and beliefs.
Job Involvement
The degree of psychological identification an employee has with their job as part of their self-worth.
Job Satisfaction
Positive or negative feelings toward one's job roles that influence performance.
MBTI (Myers-Briggs Type Indicator)
A personality framework based on four dichotomies: Extraversion/Introversion, Sensing/Intuition, Thinking/Feeling, and Judging/Perceiving.
Organisational Commitment
An employee's emotional loyalty to the organisation, which reduces turnover.
Perception
The subjective process of selecting, organising and interpreting sensory information to give it meaning.
Personality
A unique, consistent pattern of thoughts, emotions and behaviours shaped by genetics, environment and experience.
Projection
A perceptual error of attributing one's own motives or feelings to other people.
Psychoanalytic Theory
Freud's theory that personality is driven by unconscious forces — id, ego, superego — and early childhood experiences.
Selective Perception
A perceptual error of focusing only on information that confirms existing opinions.
Stereotyping
A perceptual error of judging an individual based on the group they belong to.
Trait Theory
A personality theory (Allport, Big Five) defining personality through stable, measurable characteristics.

Unit 2 · Chapter 3Values, Learning and Motivation

What shapes individual behaviour

  • Lewin: B = f(P, E). Behaviour depends on the person and the environment together.
  • Biological: age, gender, health, heredity.
  • Psychological: personality, perception, attitude, beliefs.
  • Environmental: culture, family, peers, workplace. Collectivist cultures stress teamwork; individualist ones, personal success.

Remember: Biology, psychology, environment.

Values

  • Values: enduring beliefs about what is right, desirable or important; stable, often formed early through family and culture.
  • They act as standards, influence ethics and shape priorities, but do not always predict behaviour under pressure.
  • Rokeach: terminal values (ends: freedom, inner harmony, wisdom) and instrumental values (means: honesty, responsibility, politeness), 18 of each in his survey.
  • Values are broad and stable; attitudes are evaluations of particular things and change more easily.

Remember: Terminal are ends; instrumental are means.

Learning

  • Learning: a relatively permanent change in behaviour that occurs as a result of experience.
  • Classical conditioning (Pavlov): association; the bell alone comes to bring salivation.
  • Operant (Skinner): positive and negative reinforcement make behaviour more likely; punishment and extinction make it less likely.
  • Cognitive (Tolman, Piaget): thinking. Social learning (Bandura): observation, through attention, retention, reproduction and reinforcement.

Remember: Pavlov associates, Skinner reinforces, Piaget thinks, Bandura watches.

Motivation

  • Content theories (what motivates): Maslow, Herzberg, McClelland. Process theories (how): Vroom.
  • Maslow: physiological, safety, social, esteem, self-actualisation; the first two are lower-order needs.
  • Herzberg: motivators create satisfaction; hygiene factors, such as pay, only prevent dissatisfaction.
  • McClelland: achievement, affiliation, power. Vroom: motivation = expectancy × instrumentality × valence, so one weak link pulls it down.
  • Reinforcement theory (Skinner): behaviour follows its consequences, with no need to look at inner states.

Remember: Maslow needs, Herzberg two factors, McClelland A-A-P, Vroom E × I × V.

Self-determination theory

  • Self-determination theory (Deci and Ryan): three innate needs, autonomy, competence and relatedness.
  • Intrinsic motivation is doing something for its own sake; extrinsic is doing it for a separate result.
  • Extrinsic motivation is a range, from acting under pressure to accepting the task as one's own.
  • Autonomy means a sense of choice, not working alone. Rewards for work people already enjoy can reduce interest.

Remember: Autonomy chooses, competence grows, relatedness belongs.

Goal-setting theory

  • Goal-setting theory (Locke and Latham): specific, difficult goals beat easy and "do your best" goals.
  • Five principles: clarity, challenge, commitment, feedback, task complexity.
  • Performance rises with difficulty up to the limit of ability or commitment, then levels off or falls.
  • SMART is a checklist for wording goals; goal-setting theory is the research on why goals work.

Remember: Clear, challenging, committed, checked, complexity.

Self-efficacy theory

  • Self-efficacy (Bandura): the belief that you can perform a specific task; higher belief brings more effort and persistence.
  • Four sources: mastery experience (strongest), vicarious experience, social persuasion, physiological and emotional states.
  • It is task-specific, unlike self-esteem, and closely related to expectancy in Vroom's theory.
  • Build it by graded steps, similar role models and honest, specific encouragement.

Remember: Do it, watch it, hear it, feel it.

Don’t confuse it with

  • What shapes individual behaviour: Don't confuse behaviour with personality. Personality is the stable pattern of traits a person carries; it is one psychological factor. Behaviour is what the person actually does in a given situation, and it depends on the setting too.
  • Values: Don't confuse values with attitudes. A value is broad and stable: "honesty matters". An attitude is an evaluation of one particular thing: "I dislike the new gift policy". Attitudes change more easily.
  • Learning: Don't confuse negative reinforcement with punishment. Both involve something unpleasant. Negative reinforcement removes it, to make a behaviour more likely. Punishment adds it, to make a behaviour less likely.
  • Motivation: Don't confuse content theories with process theories. Content theories list what motivates; process theories explain how the decision to make an effort is made.
  • Self-determination theory: Don't confuse intrinsic and extrinsic motivation with Herzberg's motivators and hygiene factors. Herzberg sorts features of the job, such as pay and recognition. Self-determination theory sorts the reason the person acts.
  • Goal-setting theory: Don't confuse goal-setting theory with the SMART checklist. SMART (Specific, Measurable, Achievable, Realistic, Time-bound; some books say Relevant) is a way to word a goal; see Strategic Intent in Unit 6. Goal-setting theory is the research on why goals motivate. They partly pull apart: "achievable" warns against impossible goals, while the theory says hard goals beat easy ones, up to the limit of ability.
  • Self-efficacy theory: Don't confuse self-efficacy with self-esteem. Self-esteem is a general sense of one's worth. Self-efficacy is a belief about one task and changes from task to task.

Formulas

  • B = f(P, E): behaviour is a function of the person and the environment
  • Motivation = Expectancy × Instrumentality × Valence

Key terms

Achievement Need
McClelland's need for accomplishing challenging goals and excelling at tasks.
Affiliation Need
McClelland's need for warm, friendly interpersonal relationships and a sense of belonging.
Classical Conditioning
Pavlov's learning theory linking a neutral stimulus with a natural response through repeated association.
Cognitive Learning
A learning theory (Tolman, Piaget) emphasising reasoning, thinking and problem-solving over conditioning.
Herzberg's Two-Factor Theory
A motivation theory distinguishing Motivators, which cause satisfaction, from Hygiene Factors, which prevent dissatisfaction.
Hierarchy of Needs
Maslow's model of five sequential need levels — Physiological, Safety, Social, Esteem and Self-Actualisation.
Hygiene Factors
Herzberg's category of factors, such as base pay, that prevent job dissatisfaction but do not motivate.
Learning
A relatively permanent change in behaviour or knowledge acquired through experience, observation or practice.
McClelland's Needs Theory
A motivation theory proposing that behaviour is driven by three needs — Achievement, Affiliation and Power.
Motivation
The internal or external push that energises, sustains and directs behaviour toward goals.
Motivators
Herzberg's category of factors, such as recognition, that actively cause job satisfaction.
Operant Conditioning
Skinner's learning theory in which behaviour is shaped through rewards and punishments.
Social Learning Theory
Bandura's theory that people learn through observing and imitating others.
Vroom's Expectancy Theory
A motivation theory proposing Motivation = Expectancy × Instrumentality × Valence, linking effort to performance and reward.

Unit 2 · Chapter 4Group Behaviour, Teams and Leadership

Groups and group norms

  • Formal groups are created by the organisation; informal groups form naturally.
  • Norms: unwritten rules; positive ones help, negative ones pressure.
  • Social loafing: less effort in groups, lowering performance and morale.

Remember: Formal is official; informal is spontaneous.

Types of teams and team effectiveness

  • A work group shares information; a work team produces more than the sum of its members.
  • Four types: problem-solving, self-managed, cross-functional, virtual.
  • A multiteam system is a team of teams sharing a higher goal.
  • Effectiveness depends on context, composition and process.

Remember: Solve, self-manage, cross over, connect virtually.

Team building and Tuckman's stages

  • Team building: trust, communication, conflict resolution, collaboration, shared goals.
  • Tuckman: forming, storming, norming, performing, adjourning.
  • Benefits: trust, creativity, communication, problem-solving.

Remember: Forming, storming, norming, performing, adjourning.

Belbin's team roles

  • A team role is a tendency to contribute and interact in a particular way.
  • Action: Shaper, Implementer, Completer Finisher.
  • People: Co-ordinator, Teamworker, Resource Investigator.
  • Thinking: Plant, Monitor Evaluator, Specialist (added later).

Remember: Action, people, thinking: three groups of three.

Leadership

  • Leadership: influencing a group toward a vision or goals (Robbins and Judge).
  • Four families: trait, behavioural, contingency, transformational.
  • Lewin's styles: autocratic (control), democratic (participation), laissez-faire (autonomy).
  • Situational leadership: telling, selling, participating, delegating, as follower readiness grows.
  • Management copes with complexity; leadership copes with change (Kotter).

Remember: Who they are, what they do, what fits, what they change.

Trait theory and newer views of leadership

  • Trait theory seeks the qualities that set leaders apart; it grew from the great man idea.
  • Traits predict who emerges as a leader better than who is effective.
  • LMX: different relationships with followers form an in-group and an out-group.
  • Charismatic, authentic and servant leadership add vision, honesty and service.

Remember: Traits show who rises, not who leads well.

Group dynamics

  • Size: small groups decide faster; large ones bring diversity and coordination problems.
  • Cohesiveness helps coordination, but extreme cohesiveness suppresses dissent.
  • Groupthink: harmony over critical thinking, alternatives ignored, poor decisions.

Remember: Size, cohesiveness, groupthink.

Don’t confuse it with

  • Groups and group norms: Don't confuse a group with a team. Every team is a group, but not every group is a team. In a team, members share responsibility for one result; in a work group, each answers for their own part.
  • Types of teams and team effectiveness: Don't confuse a cross-functional team with a self-managed team. Cross-functional describes who is on the team: different departments. Self-managed describes how it is run: without a supervisor. One team can be both.
  • Belbin's team roles: Don't confuse a team role with a functional role or a Tuckman stage. A functional role is the job someone is hired for, such as accountant. A team role is a style of contributing that shows in any job. Tuckman describes how a team develops over time. Belbin describes who is in it. Also, a team does not need nine different people: one person can cover two or three roles, and a small team can still be balanced.
  • Leadership: Don't confuse leadership with management. In John Kotter's distinction, management copes with complexity: plans, budgets, control. Leadership copes with change: direction, alignment, motivation. Most managers need both.
  • Trait theory and newer views of leadership: Don't confuse trait theory with behavioural theory. Trait theory assumes leaders are largely born, so it helps choose the right person. Behavioural theories look at what leaders do, so they imply leaders can be trained. A note that says traits "can be trained" is mixing the two.
  • Group dynamics: Don't confuse cohesion with groupthink. Cohesion helps a group work together. Groupthink is what happens when keeping that cohesion matters more than getting the decision right.

Key terms

Autocratic Leadership
A leadership style involving total leader control with minimal team input, best suited to emergencies.
Democratic Leadership
A leadership style that actively involves the team in decision-making.
Formal Groups
Groups structured by the organisation with assigned tasks and specific objectives.
Forming
Tuckman's first stage of team development, marked by cautious, polite behaviour and unclear roles.
Group Cohesiveness
The psychological bond between group members; high cohesion generally improves performance but can suppress dissent if excessive.
Groupthink
A phenomenon where the desire for group harmony overrides critical thinking, leading to poor high-stakes decisions.
Informal Groups
Naturally formed groups based on shared interests and social connections rather than organisational structure.
Laissez-Faire Leadership
A leadership style granting high team autonomy with minimal guidance, effective for highly skilled, self-motivated professionals.
Leadership
The art of motivating and guiding a group toward a shared vision by setting direction and managing conflict.
Norming
Tuckman's third stage of team development, where trust increases and roles are accepted.
Storming
Tuckman's second stage of team development, where conflicts emerge and boundaries are tested.

Unit 2 · Chapter 5Interpersonal Behaviour and Transactional Analysis

Interpersonal behaviour and its patterns

  • Interpersonal behaviour includes verbal and non-verbal communication: tone, body language, emotion, gesture.
  • Patterns: one-to-one (trust), one-to-many (clarity), many-to-one (listening), many-to-many (collaboration).
  • Reciprocal influence: positive behaviour builds morale and cooperation; negative behaviour erodes them.
  • Interpersonal is between people; intrapersonal is within one person.

Remember: A shapes B, and B shapes A.

Types, determinants and skills

  • Cooperative behaviour: shared goals, respect, openness. Conflicting behaviour: different goals, perceptions or misunderstandings.
  • Determinants: personality, perception, attitudes, values, emotional intelligence, motivation.
  • Skills: positive thinking, mutual trust, empathy, courtesy, avoiding ego clashes.
  • Task conflict, kept moderate, can help; personal conflict rarely does.

Remember: Fight about the work, not about each other.

Transactional analysis

  • Transactional analysis (Eric Berne) explains interactions through ego states.
  • Johari window (Luft and Ingham): open, blind, hidden, unknown; feedback shrinks blind, self-disclosure shrinks hidden.
  • Ego states: Parent (learned values), Adult (logic), Child (emotion).
  • Transactions: complementary (talk flows), crossed (talk stops), ulterior (a hidden second message).

Remember: Parent is learned values, Adult is logic, Child is emotion.

Life scripts, life positions, strokes and games

  • Life script: an unconscious pattern formed in childhood that shapes later behaviour.
  • Life positions: I'm OK–you're OK is ideal; the others bring conflict, dependency or disengagement.
  • Strokes: acts of recognition, positive or negative, conditional or unconditional.
  • Games: recurring patterns with hidden motives, such as “Yes, but…”.

Remember: I'm OK, you're OK.

Nine complementary transactions at work

  • Complementary: the reply reverses the opening message, so the lines are parallel and talk flows.
  • Three ego states by three give nine pairs; Adult–Adult is generally best, and Parent–Child suits emergencies.
  • The other pairs bring costs: hostility, frustration, role reversal, whim or rivalry.
  • Ulterior transactions carry a hidden message and involve at least three ego states.

Remember: Smooth talk is not always good talk.

Life scripts, the drama triangle and why games are played

  • Life script (Berne): a programme formed in early childhood under parental influence; it can be rewritten.
  • Karpman's drama triangle (1968): Persecutor, Victim, Rescuer; players switch corners.
  • Roles are legitimate when the facts call for them and illegitimate when used as masks.
  • Games repeat, make surface sense and hold an ulterior transaction; people play for strokes, to reinforce life positions and to avoid intimacy.

Remember: Persecutor, Victim, Rescuer: switch corners, switch to Adult.

Don’t confuse it with

  • Interpersonal behaviour and its patterns: Don't confuse interpersonal with intrapersonal. Intrapersonal processes happen inside one person: self-talk, one's own feelings and perception. Interpersonal behaviour happens between two or more people.
  • Types, determinants and skills: Don't confuse disagreement about the work with disagreement about each other. Conflict over tasks or methods, kept moderate, can improve decisions. Conflict over personalities rarely helps; it drains trust and attention. The showroom row became useful once it was about the floor, not about who was the better salesperson.
  • Transactional analysis: Johari window, ego states and transactions: Don't confuse the two models. The Johari window comes from Luft and Ingham, not from Berne; it is taught with TA because both aim at self-awareness. And an ego state is not an age or a family role: a 25-year-old can speak from the Parent, and a grandparent from the Child.
  • Nine complementary transactions at work: Don't confuse complementary with healthy. Complementary only says the talk keeps flowing. Parent–Child flows beautifully while the employee shrinks. Crossed transactions block talk, but a block can also be the useful moment when someone refuses an unhealthy pattern.
  • Life scripts, life positions, strokes and games: Don't confuse a game with one ulterior transaction. An ulterior transaction is a single exchange with a hidden message. A game is a chain of such exchanges, repeated over time, that ends in the same bad feeling. And in TA a game is not play: nobody enjoys the ending.
  • Life scripts, the drama triangle and why games are played: Don't confuse roles with life positions. A life position is a standing belief about yourself and others. A role is a part you play in one scene, and you can switch it within one conversation.

Unit 2 · Chapter 6Organisational Culture and Climate

What organisational culture is

  • Culture: a system of shared meaning that distinguishes one organisation from another (Robbins and Judge).
  • Schein's three levels: artefacts, espoused values, basic assumptions.
  • Seven characteristics: innovation and risk-taking, attention to detail, outcome, people and team orientation, aggressiveness, stability.
  • When culture and the rule book disagree, people usually follow the culture.

Remember: Culture is how things are done here.

Strength and functions of culture

  • Dominant culture: core values most accept. Subcultures: departmental or local variants within it.
  • Strong culture: core values intensely held and widely shared (Robbins and Judge).
  • Functions: boundary definition, identity, commitment, stability, behaviour guide.
  • Strong is not the same as good: strong cultures can block change, diversity and mergers.

Remember: Boundary, identity, commitment, stability, guide.

How culture is built and kept

  • Built by the founder's philosophy and top management as role models.
  • Kept by selection, training, performance evaluation, rewards and promotion.
  • Socialisation: pre-arrival, encounter, metamorphosis. It teaches norms; training teaches skills.
  • A positive culture builds on strengths and rewards more than it punishes, but still needs objective standards.

Remember: Pre-arrival, encounter, metamorphosis.

Types of culture, and climate

  • Competing values framework (Cameron and Quinn): internal or external focus; flexibility or stability.
  • Clan collaborates, adhocracy creates, market competes, hierarchy controls.
  • Climate: shared perceptions of the workplace; people-, rule-, innovation- or goal-oriented.
  • Culture is values and meaning, long-term; climate is perceptions and feelings, current.

Remember: Clan collaborates, adhocracy creates, market competes, hierarchy controls.

Motives and effects of climate

  • Six motives mark a climate: achievement, affiliation, influence, control, dependency, extension (Pareek).
  • Extension is the urge to be relevant and useful to large groups, including society.
  • Control and dependency are often seen as the less healthy climates.
  • Employees' perception of the workplace (its climate) affects performance and satisfaction; the more widely shared it is, the more effect.
  • Climate describes what members perceive; it does not say whether they like it.

Remember: Achievement, affiliation, influence, control, dependency, extension.

Don’t confuse it with

  • What organisational culture is: Don't confuse culture with the rule book. Policies are written and official. Culture is what people actually do. When the two disagree, people usually follow the culture.
  • Strength and functions of culture: Don't confuse a strong culture with a good one. Strength measures how widely and firmly values are held, not whether they are the right values. A culture can be strongly committed to hiding bad news.
  • How culture is built and kept: Don't confuse socialisation with training. Training teaches the skills of the job: how to process a loan. Socialisation teaches the norms: whether you may question the manager's decision on it.
  • Types of culture, and climate: Don't confuse culture with climate. Culture is the deep layer of values that takes years to shift. Climate is the surface feel that one manager can change in a month, as in the government office above.
  • Motives and effects of climate: Don't confuse these motives with McClelland's three needs. McClelland names achievement, affiliation and power. Pareek's list adds extension, control and dependency, and describes what a workplace arouses, not what one person needs. Likewise, climate describes what members perceive; it does not say whether they like it. Liking is job satisfaction.

Unit 2 · Chapter 7Workforce Diversity and Cross-Cultural Behaviour

Workforce diversity and its dimensions

  • Diversity: differences in age, gender, race, religion, ethnicity, ability and background; in India also language, region and caste.
  • Managing it: fairness and equity, inclusion, respect, a business link.
  • Surface-level differences are seen at once; deep-level ones show over time. Primary dimensions cannot change; secondary ones can.
  • Diversity is the mix; inclusion is whether the mix is heard and valued.
  • Benefits are not automatic: diverse teams can also bring more conflict.

Remember: Inclusion, equal opportunity, respect.

Benefits, challenges and approaches

  • Benefits: market reach, better decisions, better relations, lower turnover, goodwill.
  • Challenges: communication gaps, conflict, stereotypes, resistance, slower agreement.
  • Thomas and Ely (1996): discrimination and fairness; access and legitimacy; learning and effectiveness.
  • Equal opportunity is a fair chance for all; affirmative action is a positive step to correct past disadvantage.
  • In India: Articles 15 and 16, plus statutes on harassment, disability, transgender persons and equal pay.

Remember: Fairness, access, learning.

Techniques for managing diversity

  • Techniques: awareness, shared culture, special care, career development, ending discrimination, preventing harassment, diverse committees.
  • Glass ceiling: an invisible barrier to the top jobs; glass cliff: risky posts given in a crisis.
  • Groups: command, task, functional; interest, friendship, reference. In-groups and out-groups create belonging and exclusion.
  • Group roles: task (planner), relationship (motivator), individual (dominator).
  • Equity can need different arrangements; responsibility and mentoring beat training alone.

Remember: Aware, share, care, develop, end bias, protect, include.

Cross-cultural behaviour and Hofstede

  • Cross-cultural OB: how cultural differences affect behaviour in multicultural workplaces.
  • Hofstede (IBM surveys; Culture's Consequences, 1980): power distance, uncertainty avoidance, individualism, masculinity, time orientation.
  • Scores are national averages, not descriptions of individuals.
  • Criticism: one company, old data, and a nation is not always one culture.

Remember: P, U, I, M, T.

Cross-cultural models beyond Hofstede

  • Hall: high-context cultures carry meaning in setting and silence; low-context cultures in explicit words.
  • Trompenaars: seven dimensions, five about relationships plus time and nature.
  • Lewis: linear-active, multi-active and reactive.
  • Cultural intelligence (Earley and Ang, 2003): drive, knowledge, strategy, action.
  • Models are maps, not rules; check with the person.

Remember: Context, seven, three, four.

Culture shock and cross-cultural training

  • Culture shock: difficulty adapting to an unfamiliar culture; caused by language, customs and stress, and worse when the cultural distance is wide.
  • U-curve: honeymoon, crisis, adjustment, mastery; research support is weak, so treat it as a warning.
  • Reduced by training, adjustment support and integration.
  • Training areas: self-awareness, host-country knowledge, role clarification, intercultural communication, conflict resolution.
  • Reverse culture shock comes on returning home.

Remember: Train, support, integrate.

Don’t confuse it with

  • Workforce diversity and its dimensions: Don't confuse diversity with inclusion. Diversity is the mix of people an organisation has. Inclusion is whether each of them is heard, valued and able to progress. A firm can hire a diverse workforce and still exclude most of it from decisions.
  • Benefits, challenges and approaches: Don't confuse equal opportunity with affirmative action. Equal opportunity means a fair chance for everyone: no one is barred because of the group they belong to. Affirmative action means positive steps, such as outreach, targets or preference, to correct past disadvantage. In India, Article 15 of the Constitution bars discrimination on grounds of religion, race, caste, sex or place of birth. Article 16 guarantees equal opportunity in public employment and also allows reservation for disadvantaged groups.
  • Techniques for managing diversity: Don't confuse equal treatment with identical treatment. Giving everyone the same changing room, shift and transport is identical treatment. It is not fair if the room, shift or transport works for only one group. Equity sometimes needs different arrangements for the same opportunity.
  • Cross-cultural behaviour and Hofstede: Don't apply a country's score to one person. Hofstede's scores are national averages. Many Indians challenge their bosses freely, and many Americans prefer group decisions. Hofstede himself warned against reading individuals from country scores.
  • Cross-cultural models beyond Hofstede: Don't confuse high-context with high power distance. Context is about how meaning travels in communication. Power distance is about accepting unequal power. Do not assume one follows from the other.
  • Culture shock and cross-cultural training: Don't confuse culture shock with reverse culture shock. Culture shock comes on arrival in a new culture. Reverse culture shock comes on returning home, when the person has changed and home feels strange. Firms often prepare people to go, and forget to prepare them to come back.

Unit 2 · Chapter 8Emotions and Stress Management

Emotions, moods and affect

  • Affect: broad emotional tone. Emotions: brief, intense, specific. Moods: general, longer, often without cause.
  • An emotion can settle into a mood; a bad mood makes reactions stronger.
  • Six universal emotions (Ekman): happiness, sadness, fear, anger, surprise, disgust.
  • Display rules: a culture's rules on which feelings may be shown, where and to whom.
  • Descartes's six passions (wonder, love, hatred, desire, joy, sadness) are a different list.

Remember: Emotion is short and specific; mood is long and general.

Sources of emotions and moods

  • Sources: personality, weather (limited), stress, social interaction, sleep, exercise, age, sex.
  • Poor sleep weakens regulation; exercise lifts mood modestly.
  • Illusory correlation: seeing a link that is not there, as with weather.
  • Some sources are fixed; a manager can change rosters, workload and conflict.

Remember: Sleep, exercise and people move moods most.

Emotional labour and emotional intelligence

  • Emotional labour (Hochschild): displaying the emotions a job requires; dissonance can cause burnout.
  • Surface acting fakes the display; deep acting tries to feel it. Surface acting drains more.
  • Emotional intelligence (Salovey and Mayer; Goleman): recognise and manage your own and others' emotions.
  • Components: self-awareness, emotional regulation, empathy, relationships.
  • Criticism: EI overlaps with personality and IQ, and self-report tests can be faked.

Remember: Recognise, regulate, empathise, relate.

Work stress

  • Stress: demands stretching the capacity to cope; demands above resources cause strain.
  • Challenge stressors can motivate; hindrance stressors block goals.
  • Sources: environmental, organisational, personal. Consequences: physiological, psychological, behavioural.
  • Stressor is the cause, stress the reaction, strain the harm.
  • Inverted U: moderate stress may help, but its evidence for work is limited.

Remember: Demands above resources: strain.

Why people feel stress differently

  • Organisational demands: task, role (conflict, ambiguity, overload) and interpersonal.
  • Stressors add up; a small one can tip a person who is already stretched.
  • Experience, locus of control, Type A behaviour and support change how stress is felt.
  • Burnout: emotional exhaustion, depersonalisation, lowered sense of accomplishment.
  • Managers and employees may disagree about what pressure is acceptable.

Remember: Same demand, different strain; long strain becomes burnout.

Stress management

  • Individual: time management, exercise, relaxation, social support.
  • Organisational: job fit, training, clear goals, job redesign, empowerment, communication, sabbaticals, wellness programmes.
  • Primary removes the stressor; secondary helps coping; tertiary treats the harm.
  • Individual coping cannot fix a stressor that the job creates.

Remember: Manage stress from both sides.

Time management and fitting the remedy

  • Five principles: daily list, rank by importance and urgency, schedule, use your best hours, cut electronic distractions.
  • Other habits: noncompetitive exercise, relaxation, regular short breaks.
  • Selection, training, goals, job redesign and voice work best when fitted to the person.
  • Time management cannot fix an impossible workload or unclear roles.

Remember: List, rank, schedule, protect your best hours.

Don’t confuse it with

  • Emotions, moods and affect: Don't confuse the six universal emotions with Descartes's six passions. René Descartes, in The Passions of the Soul (1649), named six primitive passions: wonder, love, hatred, desire, joy and sadness. Only joy and sadness overlap with the modern list. Wonder, love, hatred and desire are not among the six universal emotions.
  • Sources of emotions and moods: Don't confuse personality with mood. Personality is stable and sets a person's usual emotional level. Mood changes from day to day. A cheerful person still has bad weeks, and a bad week does not change their personality.
  • Emotional labour and emotional intelligence: Don't confuse emotional labour with emotional intelligence. Emotional labour is a demand the job makes. Emotional intelligence is an ability the person brings. High EI helps someone carry emotional labour with less strain, but it does not remove the demand.
  • Work stress: Don't confuse a stressor with stress, or stress with strain. The stressor is the cause, such as the audit. Stress is the person's reaction to it. Strain is the harm that follows when demands keep exceeding resources.
  • Why people feel stress differently: Don't confuse stress with burnout. Stress is a reaction to demands and can be short and useful. Burnout is the exhausted, cynical state after months of stress without relief. Stress that people recover from is not burnout.
  • Stress management: Don't confuse coping with fixing. Individual approaches help a person cope with a stressor. Only organisational approaches can remove a stressor that the job creates. A firm that offers only yoga and helplines is asking staff to cope with what it could fix.
  • Time management and fitting the remedy: Don't confuse time management with working longer. Time management changes the order and focus of work. More hours without a plan raises demands and leaves resources unchanged.

Unit 2 · Chapter 9Organisational Justice and Whistleblowing

Organisational justice

  • Organisational justice: employees' perception of fairness at work (Greenberg, 1987).
  • It is about perception: what staff believe, not what management intended.
  • Three dimensions: distributive (outcome), procedural (process), interactional (treatment).
  • Fairness builds trust, morale, productivity and retention.

Remember: Outcome, process, treatment.

Distributive and procedural justice

  • Distributive justice: fair shares, by equity (contribution), equality (same for all) or need.
  • Deutsch: equity suits productivity, equality suits harmony, need suits welfare.
  • Procedural justice: fair methods, even when the outcome is unfavourable.
  • Leventhal's six rules: consistency, bias-free, accuracy, representation, correctability, ethicality.

Remember: C, B, A, R, C, E.

Adams's equity theory

  • Adams (1963): people compare outcomes ÷ inputs with a referent's ratio.
  • Equal ratios bring satisfaction; a lower ratio brings resentment; a higher ratio can bring guilt.
  • Ways to restore balance: change inputs, change outcomes, distort perceptions, change the referent, act on the referent, leave.
  • Equity theory (a reaction) is not the equity principle (a way to share rewards).

Remember: My ratio against theirs: equal is calm, unequal is action.

Interactional justice

  • Interactional justice: fair treatment when decisions are carried out and told (Bies and Moag, 1986).
  • Interpersonal justice: dignity, respect, courtesy.
  • Informational justice: honest, timely, adequate explanations.
  • Distributive is the outcome, procedural the process, interactional the treatment.

Remember: Respect in treatment, honesty in explanation.

Whistleblowing

  • Whistleblowing: disclosure of illegal, immoral or illegitimate practices to those who can act (Near and Miceli, 1985).
  • Employees, customers, contractors, consultants and suppliers may report; retaliation is a real risk.
  • Internal first; external when internal mechanisms fail or are hostile.
  • A grievance is about your own treatment; whistleblowing is about harm to others.

Remember: Wrongdoing, report inside, resolve; if not, report outside.

Reportable offences, benefits and India's framework

  • Reportable: legal and ethical violations, fraud, safety risks, environmental harm, misuse of funds, abuse of power, IP violations.
  • Benefits: early detection, trust, ethical culture, a responsible image, scandal prevention, transparency.
  • India: Companies Act 2013 (vigil mechanisms, SFIO), SEBI framework for listed entities.
  • Whistle Blowers Protection Act 2014: disclosures about public servants; enacted, not yet in force.

Remember: Companies Act, SEBI, Whistle Blowers Protection Act.

Vigil mechanism and safeguards

  • Section 177(9): listed companies, and by rule deposit-taking companies and those borrowing above ₹50 crore, must have a vigil mechanism.
  • Safeguards against victimisation and direct access to the audit committee chairperson are required.
  • Clause 49 of the listing agreement gave way to the LODR Regulations, 2015.
  • Good policies add confidentiality, several channels, fair investigation and feedback.
  • Frivolous reports are screened by the audit committee; the vigil mechanism is not the 2014 Act.

Remember: Listed, deposits, ₹50 crore: vigil mechanism, safeguards, audit committee access.

Don’t confuse it with

  • Organisational justice: Don't confuse justice with getting what you want. People often accept a disappointing outcome when the process and the treatment were fair. They can also feel wronged by a good outcome that was decided in secret or delivered with contempt.
  • Distributive and procedural justice: Don't confuse equity with equality. Equity pays in proportion to contribution, so shares differ. Equality gives everyone the same share, whatever each contributed.
  • Adams's equity theory: Don't confuse equity theory with the equity principle. The equity principle is one rule for sharing rewards (by contribution), set against equality and need. Equity theory describes how people react when they believe the ratio between their input and their reward is out of line. The principle is what an organisation chooses; the theory explains what employees do about it.
  • Interactional justice: Don't confuse interactional justice with procedural justice. Procedural justice concerns the rules of the process, which are designed in advance. Interactional justice concerns how the person carrying them out behaves. A fair procedure can still be delivered rudely or without explanation.
  • Whistleblowing: Don't confuse whistleblowing with a personal grievance. A grievance is about the complainant's own treatment, such as pay or a transfer. Whistleblowing is about wrongdoing that harms others, the organisation or the public.
  • Reportable offences, benefits and India's framework: Don't confuse the 2014 Act with the corporate rules. The Whistle Blowers Protection Act concerns disclosures about public servants, and it has not yet been brought into force. Vigil mechanisms in companies come from the Companies Act, 2013, and those in listed entities from the SEBI framework.
  • Vigil mechanism and safeguards: Don't confuse the vigil mechanism with the Whistle Blowers Protection Act, 2014. The vigil mechanism is a company's duty under the Companies Act and the SEBI rules. The 2014 Act concerns disclosures about public servants and has not yet been brought into force. Study material sometimes says SEBI "mandates anonymous reporting" under Clause 49. Clause 49 did not require anonymous reporting, and Section 177 does not; a company may choose to accept anonymous reports.

Key terms

Distributive Justice
The fairness of outcomes in the allocation of rewards and resources, based on equity, equality or need.
External Whistleblowing
Reporting organisational wrongdoing outside the company, such as to media or regulators, typically when internal channels fail.
Interactional Justice
The fairness of interpersonal treatment and communication during decision-making, covering both dignity and honest explanation.
Internal Whistleblowing
Reporting wrongdoing within the company, such as to HR or an ethics committee.
Organisational Justice
Employees' perceptions of fairness in the workplace, covering outcomes, the processes used to reach them, and how people are treated.
Procedural Justice
The fairness of the methods and processes used to reach a decision, regardless of outcome.
Whistle Blowers Protection Act, 2014
An Indian law setting up a mechanism to receive public-interest disclosures of corruption, wilful misuse of power or criminal offences by public servants, and to protect those who make them against victimisation. Enacted, but not yet brought into force.
Whistleblowing
The act of exposing organisational wrongdoing to protect ethical standards, laws and public welfare.

Unit 2 · Chapter 10Human Resource Management

Meaning and objectives of HRM

  • HRM: acquiring, developing, motivating and retaining employees to achieve organisational goals.
  • Aims: performance, welfare, alignment with strategy.
  • Objectives: personal (the employee), organisational (the firm), and other (law and society: compliance, diversity, fairness).
  • Every manager does HRM; the HR department designs the systems.
  • The objectives can conflict, and HRM has to choose between them.

Remember: Acquire, develop, motivate, retain.

Evolution of HRM

  • Pre-industrial, Industrial Revolution, scientific management (Taylor), human relations (Mayo).
  • Post-war personnel, modern HRM, TQM and globalisation, strategic HRM.
  • Three broad shifts: control, people, strategy.
  • Each stage left something behind; the stages overlap rather than replace each other.

Remember: Control, efficiency, human relations, personnel, HRM, strategic HR.

Functions of HRM

  • Plan (HR planning), acquire (recruitment and selection), develop (training).
  • Evaluate (appraisal), reward (compensation), relate (employee relations).
  • Protect (safety and welfare), prepare (career and succession planning).
  • Flippo: managerial functions (plan, organise, direct, control) against operative ones.

Remember: Plan, acquire, develop, evaluate, reward, relate, protect, prepare.

Roles of HRM and of the HR manager

  • The HR function has three roles: advisory, functional and service.
  • A policy is a general guide to decisions; a procedure sets out the steps for applying it.
  • The HR manager's seven roles: humanitarian, counsellor, mediator, spokesperson, problem solver, change agent and manager of manpower.
  • The roles can conflict: the counsellor needs trust, the spokesperson speaks for management.

Remember: Advise, frame, serve; and seven hats for the manager.

Approaches to HRM, and how HRM differs

  • Approaches: traditional, human relations, HRD, contingency, strategic, high-performance, best practices, RBV, employee-centric, evidence-based.
  • Best practices: one way works everywhere. Contingency: it depends. RBV: people as a hard-to-copy resource.
  • HRM is strategic and proactive; personnel management administrative and reactive.
  • HRM asks how to manage people; OB asks why people behave as they do.

Remember: HRM manages; OB understands.

Four perspectives on HRM

  • Normative: how HRM should be done, through the hard (Michigan) and soft (Harvard) models.
  • Critical: a gap between rhetoric and reality.
  • Behavioural: employee behaviour links strategy to performance.
  • Systems: input, throughput and output in an environment; HRM manages competence, behaviour and environment contact.
  • Standard causal chain: strategy, HR strategy, practices, outcomes, performance; practices can be intended, actual or perceived.

Remember: Should, doubt, behave, system.

Influences on HRM and recent trends

  • Internal influences: corporate, operational, marketing and financial strategies.
  • External influences: market, economic, technological, social, and political and legal changes.
  • Trends: rising expectations and turnover, downsizing, continuous improvement, re-engineering, contingent workforce and decentralised work sites.
  • Continuous improvement is incremental; re-engineering is radical.

Remember: Inside strategies, outside forces, then the trends.

Don’t confuse it with

  • Meaning and objectives of HRM: Don't confuse HRM with the HR department. Every manager who hires, coaches, appraises or disciplines is doing HRM. The HR department designs the systems and supports managers; it cannot do their people work for them.
  • Evolution of HRM: Don't confuse the human relations stage with HRM. The human relations movement of the 1920s and 1930s was about social needs and morale. HRM came decades later and is broader: it covers planning, development, reward and strategy as one system.
  • Functions of HRM: Don't confuse operative functions with managerial functions. In Edwin Flippo's classic split, the managerial functions of HR are planning, organising, directing and controlling. The operative functions are procurement, development, compensation, integration, maintenance and separation. The eight functions above are operative ones in modern names.
  • Roles of HRM and of the HR manager: Don't confuse these lists with other role lists. Dave Ulrich's four roles (strategic partner, administrative expert, employee champion, change agent) describe the HR function in business terms. The seven roles above describe the people-facing duties of the manager. Mintzberg's managerial roles, in Principles of management, apply to every manager, not only to HR.
  • Approaches to HRM, and how HRM differs: Don't confuse HRM with organisational behaviour. Organisational behaviour (OB) studies why people act as they do at work: motivation, perception, groups. HRM uses that knowledge to design hiring, pay and training. OB explains; HRM acts.
  • Four perspectives on HRM: Don't confuse hard with Harvard. The Michigan model is the classic hard one, with people as a resource fitted to strategy. The Harvard model is the classic soft one, built on stakeholders and commitment. Some study notes swap the two.
  • Influences on HRM and recent trends: Don't confuse continuous improvement with re-engineering. Continuous improvement is steady, small and permanent, like a bakery that refines one step of its process every month. Re-engineering is a radical redesign of how the work is done, like the same bakery replacing its whole ordering-to-delivery flow.

Key terms

Evidence-Based HRM
An HR approach that utilises hard data and analytics to drive scientific decision-making.
High-Performance Work System (HPWS)
An HR approach integrating strategy with teamwork, empowerment and performance-linked rewards.
Human Resource Management (HRM)
The systematic process of acquiring, developing, motivating and retaining employees to achieve organisational goals.
Resource-Based View (HR)
An HR approach viewing employees as valuable assets crucial to sustainable competitive advantage.

Unit 2 · Chapter 11Human Resource Planning

Meaning of human resource planning

  • HRP: forecasting and managing the demand for and supply of human resources.
  • The right number and kind of people, at the right place, at the right time.
  • Objective: balance. A shortage calls for recruiting, training or overtime; a surplus for a hiring freeze or redeployment.
  • HRP comes before recruitment, selection and training, which follow from it.

Remember: Right people, right place, right time.

Objectives and features of HRP

  • Main objective: balance between the people available and the people required.
  • Human resources include skill, knowledge, values, commitment and motivation, not only headcount.
  • Five features: defined objectives, determining needs, an inventory, adjusting demand and supply, a proper work environment.
  • Planning controls cost, gives recruitment and training a target, and shows skill gaps early.

Remember: Goals, needs, inventory, adjust, environment.

The HRP process

  • Analyse objectives; forecast demand (number and type, by department); analyse supply.
  • Match demand and supply; analyse skill gaps; develop action plans.
  • Monitor and control, and update the plan as conditions change.
  • Net requirement = forecast demand − forecast supply (present staff, less leavers and moves out, plus moves in).

Remember: Strategy, forecast, analyse, match, act, review.

Methods of supply analysis

  • Skills inventory; succession planning; turnover analysis.
  • Promotion and mobility analysis, which shows internal movement; Markov analysis and replacement charts refine it.
  • Turnover rate = separations ÷ average number of employees × 100.
  • Supply also comes from the outside labour market.

Remember: Skills, succession, turnover, mobility.

Factors and barriers in HRP

  • Factors: type and strategy, stage of growth, environmental uncertainty, time horizon, information, nature of jobs, outsourcing.
  • Plans are commonly short-term (about a year), medium-term and long-term (several years); limits vary.
  • Barriers: inaccurate forecasts, poor records, resistance, weak support, treating people as numbers, short-term pressure.
  • A factor is a condition to account for; a barrier is a failure in planning that can be fixed.

Remember: Factors shape the plan; barriers block it; review often.

Don’t confuse it with

  • Meaning of human resource planning: Don't confuse HRP with recruitment. HRP decides how many people of which kind are needed, and when. Recruitment comes after it and goes out to find them, and only for the gap that cannot be filled from inside.
  • Objectives and features of HRP: Don't confuse a matching headcount with a matching workforce. A plan can balance 96 posts with 96 people and still fail if the people lack the skills. This is why the plan describes quality as well as numbers.
  • The HRP process: Don't confuse forecasting demand with analysing supply. Demand asks how many people the work will need. Supply asks how many of the right people the organisation will actually have, after exits and internal moves.
  • Methods of supply analysis: Don't confuse a skills inventory with job analysis. A skills inventory describes people: what each employee can do. Job analysis describes jobs: what each job needs. HRP compares the two to find skill gaps. Job analysis supports HR planning, but it is not itself a method of supply analysis, and scenario planning belongs with demand forecasting (see the previous block).
  • Factors and barriers in HRP: Don't confuse a factor with a barrier. A factor, such as the state of the labour market, is a condition the planner must account for. A barrier, such as stale records or union distrust, is a failure in how planning is carried out, and can be fixed.

Formulas

  • Forecast supply = present staff − expected leavers − promotions and transfers out + promotions and transfers in
  • Net requirement = forecast demand − forecast supply
  • Labour turnover rate = separations during the period ÷ average number of employees × 100

Key terms

Human Resource Planning (HRP)
The systematic process of forecasting and managing the demand and supply of human resources.
Scenario Planning
An HR supply-analysis method anticipating multiple possible workforce futures.
Skills Gap Analysis
Identifying the precise difference between an organisation's existing and required skills.
Succession Planning
Identifying and preparing future leaders for critical roles to ensure leadership continuity.
Turnover Analysis
Examining historical employee exit patterns to predict future manpower needs.

Unit 2 · Chapter 12Recruitment and Selection

Recruitment and its sources

  • Recruitment: searching for prospective employees and stimulating them to apply (Flippo).
  • Internal: job posting, referrals, promotions, transfers, rehiring, previous applicants; cheaper and faster, but a smaller pool.
  • External: online, social media, agencies, campus, headhunting, walk-ins and more; wider pool and fresh skills, but costlier and riskier.
  • Referrals count as internal, though the people referred come from outside.

Remember: Vacancy, attract, talent pool, select.

The recruitment process

  • Identify the vacancy, analyse the job, write the description and specification.
  • Advertise, review applications, build a talent pool, brand the employer.
  • Communicate, network, run campaigns, track and report.
  • Yield ratios and cost per hire show how well recruitment worked.

Remember: Need, analyse, attract, screen, build, evaluate.

Recruitment planning, strategy and policy

  • Five stages: planning, strategy, searching, screening, evaluation and control.
  • Strategy choices: make or buy, centralised or decentralised, area, sources.
  • Internal factors: policy, HR plan, size and growth, budget, attractiveness. External: labour market, unemployment, laws, competitors, conditions.
  • Policy is the permanent rule book; strategy is the plan for one drive.
  • Recruitment costs include recruiter pay, advertising, agency fees, overheads and the cost of an empty post.

Remember: Plan, strategise, search, screen, evaluate.

Selection and selection tests

  • Selection: evaluating applicants and choosing the most suitable one.
  • Process: screening, tests, interview, verification, decision, medical, offer. Onboarding follows selection.
  • Tests: intelligence, aptitude, interest, personality, achievement, trade, dexterity.
  • Good tests are reliable (consistent) and valid (predict job performance).

Remember: Skills, attitude and values must match the role.

Interviews and the final steps of selection

  • Types: structured, unstructured, semi-structured, individual, panel, group, behavioural, situational, stress, depth.
  • An exit interview is held at leaving, not for selection.
  • Errors: halo, first impression, contrast, similar-to-me, stereotyping; structure and independent scoring reduce them.
  • After the interview: reference and background check, final selection, medical examination and offer.
  • Selection ratio = number hired ÷ number of applicants.

Remember: Ask all the same, score on paper, check, then offer.

Recruitment against selection

  • Recruitment: attracting candidates; positive; broad; a pool of candidates.
  • Selection: choosing the best; negative (it eliminates); narrow; the hiring decision.
  • Recruitment is mainly HR; selection is HR with departmental heads.
  • Judge recruitment by the quality of the pool, selection by how hires perform.

Remember: Recruitment attracts; selection chooses.

Don’t confuse it with

  • Recruitment and its sources: Don't confuse an internal source with an internal candidate. Employee referrals count as an internal method because they work through current staff. The people referred, though, usually come from outside.
  • The recruitment process: Don't confuse the job description with the job specification. The description sets out the job: its duties and responsibilities. The specification sets out the person: the qualifications, skills and experience needed. The 2,000 unsuitable applications usually trace back to a vague specification.
  • Recruitment planning, strategy and policy: Don't confuse policy with strategy. The policy is permanent and covers all hiring: for example, "fill senior posts from inside first". The strategy is the plan for one drive: for example, "buy two trained welders from outside this quarter".
  • Selection and selection tests: Don't confuse an aptitude test with an achievement test. Aptitude is potential: how well a person could learn the skill. Achievement is what the person has already learnt. Use aptitude tests for freshers and achievement tests for experienced hires.
  • Interviews and the final steps of selection: Don't confuse the selection ratio with a yield ratio. The selection ratio is one overall figure: hired against applied. A yield ratio compares one stage with the next.
  • Recruitment against selection: Don't read "negative" as "bad". Selection is called negative because it rejects far more people than it accepts. Recruitment is positive because it invites people in. Both are needed.

Key terms

Aptitude Test
A selection test assessing a candidate's capacity to learn specific job-related skills.
External Recruitment
Sourcing candidates from outside the organisation to inject fresh skills and perspectives.
Internal Recruitment
Filling vacancies from within the organisation's existing network, chiefly through job posting, promotions and transfers, and also by rehiring former employees or reconsidering previous applicants.
Onboarding
The process of introducing new hires to company culture and policies after a job offer.
Recruitment
The process of searching for, identifying and attracting qualified candidates to fill job vacancies.
Reference & Background Check
A selection step verifying a candidate's history and credentials before an offer is made.
Selection
The process of choosing the most suitable candidate from the recruitment pool to minimise turnover.
Shortlisting
The selection stage of filtering applicants who meet minimum criteria for further evaluation.
Talent Pool
A curated group of potential candidates built through ongoing recruitment efforts.

Unit 2 · Chapter 13Training and Development

Training and its methods

  • Training: increasing knowledge and skill for doing a particular job (Flippo).
  • On the job: coaching, job rotation, mentoring, internships, apprenticeships.
  • Off the job: classroom, seminars and workshops, e-learning, simulations, case studies, vestibule training.
  • Training fixes skill gaps only; it cannot cure faulty equipment, unclear targets or low morale.

Remember: On the job or off it.

Case, role play and simulation methods

  • Case study: a detailed problem to analyse; incident method: one short event and a decision.
  • Role play: act a part, then review; in-basket: prioritise and delegate under a time limit.
  • Business games: teams run an imaginary firm; lectures and conferences give concepts and shared views with little practice.
  • Committee assignments are usually listed as on-the-job: a group studies a real problem.
  • The learning fades unless trainees can use it at work, and the debrief is where it happens.

Remember: Practise the decision before you face it.

The training process

  • Identify needs; determine participants; prepare learners.
  • Present the operation; performance try-out under supervision; follow up.
  • Steps 3 to 6 are job instruction training: prepare, present, try out, follow up.
  • Kirkpatrick's levels: reaction, learning, behaviour, results.
  • Needs analysis has three levels (organisation, task, person) and uses observation, interviews, focus groups, surveys, customer feedback and records.

Remember: Needs, participants, preparation, presentation, try-out, follow-up.

Development, and how it differs from training

  • Development: knowledge, skills and abilities for future responsibilities and growth.
  • Focus: future roles, career growth, leadership potential, the talent pipeline.
  • Training is short-term and job-specific; development is long-term and career-oriented.
  • Purpose, not method, decides: the same mentoring can be training or development.
  • Textbooks add that training is mostly for operatives and reactive, development for managers and proactive; these are tendencies, not rules.

Remember: Training for now; development for next.

Induction, orientation and onboarding

  • Induction: the planned welcome that helps a new employee settle in and start work.
  • Three kinds: general (HR, the organisation), specific (supervisor, the job) and follow-up (satisfaction check after some weeks).
  • Benefits: lower early turnover, faster learning, better morale, fewer grievances, a sense of belonging.
  • Onboarding is wider: preboarding, induction and orientation, then integration.
  • Induction welcomes and informs; training builds job skills.

Remember: General, specific, follow-up.

Don’t confuse it with

  • Training and its methods: Don't confuse coaching with mentoring. Coaching is short and specific: how to do this task well. Mentoring is long-term guidance by a senior, often about the person's career as well as the job.
  • Case, role play and simulation methods: Don't confuse the case with the incident. A case is long and gives enough detail to analyse a whole situation. An incident is short, shows one event, and asks for a decision. Also, the in-basket is used twice in this subject: here to teach, and in the assessment centre to assess. The exercise is the same; the purpose differs.
  • The training process: Don't confuse a good reaction with training that worked. Trainees can enjoy a session and learn nothing, or learn and never use it. Only levels 3 and 4 show that the job has changed.
  • Development, and how it differs from training: Don't sort by method alone. Job rotation, mentoring and coaching appear under both training and development. What decides is the purpose: a skill for the present job is training; readiness for a future role is development.
  • Induction, orientation and onboarding: Don't confuse induction with training. Induction welcomes and informs every newcomer. Training builds the skills for a job. The two overlap in specific induction, but one does not replace the other. Also, most Indian textbooks use "induction" and "orientation" almost as synonyms; "onboarding" is the wider process around them.

Formulas

  • Training ROI (%) = (benefit − cost) ÷ cost × 100

Key terms

Development (HR)
Long-term, broad career-oriented growth activities that prepare employees for future roles.
Mentoring
A development method pairing an employee with an experienced guide to support long-term career growth.
Off-the-Job Training
Training conducted outside the normal work environment, focused on theoretical or simulated learning.
On-the-Job Training (OJT)
Learning through hands-on experience while performing actual duties under supervision.
Training
Short-term activities that enhance an employee's practical skills for their current job.

Unit 2 · Chapter 14Job Analysis, Evaluation and Design

Job analysis and its methods

  • Job analysis: a systematic study of a job's tasks, methods, equipment, skills and attitudes.
  • Yields purpose, organisational fit, the human profile, and relationships and context.
  • Methods: direct observation, work method analysis, critical incident technique, interviews; most analyses combine several.
  • It produces the job description and job specification, and comes before job evaluation.

Remember: Study the job before you fill it.

Interviews, questionnaires and diaries

  • Interviews can be structured, unstructured or open-ended, with jobholders and supervisors.
  • Questionnaires reach many people cheaply; diaries show where the time really goes.
  • Work method analysis has two levels: time and motion study, and micro-motion analysis (filming).
  • These methods rely on what people say, so combine two and cross-check with supervisors.

Remember: Watch it, ask about it, or let the jobholder write it down.

Job description and job specification

  • Both come from job analysis: the description looks at the work, the specification at the worker.
  • Job description: purpose and summary, tasks and duties, reporting line, working conditions, tools.
  • Job specification: qualifications, experience, mental and physical attributes, emotional traits, skills.
  • The description feeds the advertisement and appraisal; the specification feeds screening and interviews.

Remember: Description is what; specification is who.

Job evaluation and its methods

  • Job evaluation: a systematic, comparative process for the relative worth of jobs.
  • Objectives: internal equity, a standard pay structure, fairness, benchmarking.
  • Process: job analysis, documentation, rating, hierarchy; pay ranges attach to the grades.
  • Methods: ranking and grading (non-quantitative); points and factor comparison (quantitative).

Remember: Analyse, document, rate, rank.

Job evaluation methods compared

  • Ranking: job against job; quick but subjective. Classification: job against grade description.
  • Points: factor scores that total to grades; consistent but costly to set up.
  • Factor comparison: factors priced in rupees against key jobs whose pay is agreed to be fair.
  • Paired comparison of n jobs needs n(n-1)/2 comparisons: 15 for six jobs.

Remember: Job against job, job against grade, factor scores, factor rupees.

Job design

  • Job design: structuring jobs for efficiency while meeting motivational needs.
  • Simplification: fewer tasks. Rotation: different tasks.
  • Enlargement: more tasks (horizontal). Enrichment: more authority (vertical).
  • Match the method to the problem: boredom, low ownership or errors.

Remember: Simplify, rotate, enlarge, enrich.

Don’t confuse it with

  • Job analysis and its methods: Don't confuse job analysis with job evaluation. Analysis describes what a job is and what it needs. Evaluation judges what the job is worth compared with other jobs. Analysis comes first and feeds evaluation.
  • Interviews, questionnaires and diaries: Don't confuse the work diary with the critical incident technique. The diary records the ordinary day, task by task. Critical incidents record only the extremes, the exceptionally good or poor episodes. A diary shows how time is spent; incidents show what separates good work from poor.
  • Job description and job specification: Don't confuse the two. A common slip is to put "three years' experience" in the description. Anything about the person goes in the specification; anything about the work goes in the description.
  • Job evaluation and its methods: Don't confuse job evaluation with performance appraisal. Evaluation rates the job; appraisal rates how well a person does it. Two operators in the same job share one job value but can get different appraisal ratings.
  • Job evaluation methods compared: Don't confuse ranking with classification. Ranking compares jobs with one another. Classification compares each job with a fixed written description. Also, the points system scores in points and factor comparison in rupees. Some books call factor comparison a hybrid, because it ranks jobs and then prices them; most classify it as analytical.
  • Job design: Don't confuse enlargement with enrichment. Enlargement is horizontal: more of the same kind of work. Enrichment is vertical: more control over the work. Frederick Herzberg warned that piling on more routine tasks ("horizontal job loading") does not motivate.

Formulas

  • MPS = [(skill variety + task identity + task significance) ÷ 3] × autonomy × feedback

Key terms

Critical Incident Technique
A job analysis method documenting extreme examples of good or poor performance to uncover key job behaviours.
Direct Observation
A job analysis method of watching an employee perform routine or physical tasks in real time.
Factor Comparison
A quantitative job evaluation method that compares jobs, factor by factor, with benchmark jobs whose pay rates are agreed.
Grading/Classification
A non-quantitative job evaluation method grouping jobs into predefined salary grades.
Job Analysis
A systematic diagnostic process of studying the tasks, methods, skills and attitudes required for a specific job.
Job Description
A document detailing a job's title, duties and working conditions to reduce ambiguity for applicants.
Job Enlargement
Increasing the variety and number of tasks at the same responsibility level — horizontal expansion.
Job Enrichment
Adding greater autonomy and decision-making power to a job to boost intrinsic motivation — vertical expansion.
Job Evaluation
A systematic process assessing the relative value of one job compared to all others in an organisation.
Job Rotation
Periodically moving employees across different tasks to reduce boredom and build cross-functional skills.
Job Simplification
Creating highly repetitive, specialised tasks to maximise efficiency, which can cause monotony.
Job Specification
A document defining the ideal candidate profile — education, experience and traits — required for a job.
Points System
A quantitative job evaluation method assigning weighted points to compensable factors that convert into salary bands.
Ranking System
A simple, non-quantitative job evaluation method that compares and ranks whole jobs by their overall worth.

Unit 2 · Chapter 15Compensation Management

Meaning and objectives of compensation

  • Compensation management: rewarding employees for their contribution.
  • Direct monetary: wages, incentives, bonuses. Indirect monetary: benefits and perks. Non-monetary: recognition, the work itself.
  • Objectives: attract, retain, motivate, equity, productivity, compliance.
  • Internal equity is fairness between jobs inside the firm; external equity is fairness against the market.
  • Pay is a hygiene factor: it prevents dissatisfaction but does not motivate on its own.

Remember: Reward, motivate, retain, ensure equity.

Components of the pay package

  • Four components: wage or salary, dearness and other allowances, incentives, fringe benefits and perquisites.
  • Dearness allowance is the cost-of-living allowance; HRA, CCA, medical, education and conveyance allowances each meet one cost.
  • Gross salary minus deductions is take-home salary; cost to company also includes the employer's contributions.
  • Provident fund and gratuity follow basic pay plus DA, so the split between basic pay and allowances matters.

Remember: Gross less deductions is take-home; CTC is more than gross.

Fringe benefits and perquisites

  • Fringe benefits: extras beyond wages for employees generally, such as provident fund, gratuity, medical care, insurance and paid leave.
  • Perquisites: special benefits for top executives, such as a company car, a furnished house, stock options and club membership.
  • Statutory benefits are required by law; voluntary benefits are the employer's choice.
  • A stock option is the right to buy shares later at a price fixed today; the gain is market price minus option price.

Remember: Fringes for all, perks for the top.

The Employees' Compensation Act, 1923

  • Financial protection for employees injured at work or suffering occupational diseases.
  • Test: injury arising out of and in the course of employment; both parts must hold.
  • Employer liability; dependants' claims; medical examination; prompt notice; penalties.
  • Amount depends on injury, disability percentage, monthly wage and age.
  • The Code on Social Security, 2020 now replaces the Act.

Remember: Injury at work brings compensation.

Incentive plans

  • Halsey: time wage plus 50% of time saved. Rowan: bonus = time wage × share of standard time saved.
  • Rowan pays more below 50% time saved, Halsey above; they are equal at 50%.
  • Bedaux: base pay plus Bedaux points. Emerson: bonus rising with efficiency from two-thirds.
  • Gantt: time rate plus a bonus for meeting the standard. Taylor: differential piece rates, no guaranteed wage.

Remember: Halsey shares, Rowan proportions, Taylor differentiates.

Don’t confuse it with

  • Meaning and objectives of compensation: Don't confuse compensation with salary. A salary or wage is one monetary part. Compensation is the whole package, including bonuses, benefits, recognition and perks. Two job offers with the same salary can differ widely in compensation.
  • Components of the pay package: Don't confuse gross salary, take-home salary and cost to company. Gross salary is everything earned before deductions. Take-home salary is what remains after tax, the employee's own provident fund contribution and similar deductions. Cost to company (CTC) is the employer's total yearly cost. It adds the employer's own contributions and benefits, so it is always larger than gross. Note that the employee's provident fund contribution is a deduction from pay. Only the employer's contribution is a benefit.
  • Fringe benefits and perquisites: Don't confuse benefits with allowances, or the two meanings of perquisite. An allowance is cash added to pay to meet a cost, such as rent. A benefit is something the employer provides or pays for. In income-tax law, "perquisite" is wider: it covers any benefit in kind from an employer, whatever the employee's rank. Exam answers on this topic mean the executive perks.
  • The Employees' Compensation Act, 1923: Don't confuse the two meanings of compensation. In compensation management, compensation is the reward for work. Under this Act, it is a payment for harm caused by work. An exam question about compensation for an accident is about this Act.
  • Incentive plans: Don't confuse Halsey's bonus with Rowan's. Halsey's bonus is a fixed share, 50%, of the time saved, valued at the hourly rate. Rowan's bonus is the time wage multiplied by the fraction of standard time saved. A common slip is to multiply Rowan's fraction by the standard time instead of the time taken. Note too that every plan here guarantees a time wage except Taylor's, which pays only by piece rate.

Formulas

  • Halsey: Earnings = T × R + 50% × (S − T) × R
  • Rowan: Earnings = T × R + ((S − T) ÷ S) × T × R

Unit 2 · Chapter 16Strategic Human Resource Management

Meaning of strategic HRM

  • SHRM: the pattern of planned HR deployments and activities that help the organisation achieve its goals (Wright and McMahan, 1992).
  • Chain: HR activities → strategic alignment → workforce capability → competitive advantage.
  • Employees are long-term strategic assets; HR is proactive; the focus moves from administration to strategy.
  • HR planning, which forecasts numbers, is one tool inside SHRM.

Remember: HR activities, alignment, capability, advantage.

Key strategic dimensions

  • Employer branding and talent acquisition: a strong brand brings better applicants and fewer mismatches.
  • Employee lifecycle management: onboarding, development, engagement, retention.
  • Performance and learning: growth, not fault-finding. Retention and engagement: recognition, fairness, and why people leave.
  • Culture and change management: people-focused change meets less resistance.
  • Retention is staying; engagement is the energy people bring while they stay.

Remember: Brand, lifecycle, performance, retention, culture.

Components and objectives of SHRM

  • Components: human resources as core capital, HR policies and programmes, plans and patterns, unified direction.
  • SHRM = people capability + HR systems + strategic direction.
  • Vertical fit: HR serves the strategy. Horizontal fit: HR practices support each other.
  • Objectives: strategic fit, resource-based strategy, high performance (measures), high involvement (ideas), high commitment (trust).

Remember: Fit, resource, performance, involvement, commitment.

Implementing SHRM

  • Implementation: vision, measures and data, HR readiness, talent forecast, HR systems, evaluate and iterate.
  • The steps form a loop: evaluation feeds the next round.
  • Strategic HR planning: SMART goals, capabilities, workforce skills, departmental needs, strategic recruitment.
  • Data reduce bias only when the data are sound; reporting counts the past, analytics explains and predicts.

Remember: Right people, right capabilities, right strategy, right time.

Don’t confuse it with

  • Meaning of strategic HRM: Don't confuse SHRM with HR planning. HR planning forecasts how many people of each kind the firm will need. SHRM decides what kind of people and practices the strategy needs. HR planning is one tool inside SHRM.
  • Key strategic dimensions: Don't confuse retention with engagement. Retention is whether people stay. Engagement is how much energy and commitment they bring while they are there. A firm can keep people who have stopped caring; that is low engagement with high retention.
  • Components and objectives of SHRM: Don't confuse the three "high" objectives. High-performance management works through measures and targets. High-involvement management works through giving employees a say and sharing ideas. High-commitment management works through trust, so that people want to give their best.
  • Implementing SHRM: Don't confuse people analytics with HR reporting. Reporting counts what happened: headcount, attrition, days to hire. Analytics asks why it happened and what is likely next, such as which new hires are at risk of leaving.

Formulas

  • SHRM = people capability + HR systems + strategic direction

Key terms

Employer Branding
An organisation's reputation and image as an employer, used to attract quality candidates.
Strategic HRM
An approach integrating HR practices directly with overall corporate strategy.

Unit 2 · Chapter 17Competency Mapping and the Balanced Scorecard

Competency and its types

  • A competency is a demonstrable characteristic that enables effective job performance.
  • Four parts: knowledge (knows), skills (can do), attitudes (outlook), traits (enduring qualities).
  • Core: needed by everyone, tied to strategy. Cross-functional: needed across many functions. Functional: job-specific hard skills.
  • Core competencies in HR differ from a firm's core competence (Prahalad and Hamel), a strength of the whole firm.

Remember: Know, can do, outlook, trait; core, cross-functional, functional.

The competency mapping process

  • Competency mapping identifies the competencies for an organisation and each job and builds them into HR processes.
  • Why: costly staff, people as an asset, getting more from existing people, customer focus.
  • Four stages: design the questionnaire, collect data, analyse and map, finalise.
  • Stage 1 covers purpose, critical success factors, key result areas and key activities.
  • Uses: recruitment, training, appraisal and promotion.

Remember: Design, collect, analyse, finalise.

Methods of competency mapping

  • Assessment centre: observed simulations such as group discussion, in-basket and role-play.
  • Critical incident technique (Flanagan): real examples of exceptional success or failure, grouped by behaviour.
  • Interviews: first-hand insight, compared with the competency map.
  • Questionnaires: CMQ, PAQ and others are job analysis tools; Functional Job Analysis is a method rating data, people and things.
  • Psychometric tests: aptitude (can learn) and achievement (has learned).

Remember: Centre, incidents, interviews, questionnaires, tests.

The balanced scorecard and people measures

  • The balanced scorecard (Kaplan and Norton, 1992) turns mission and strategy into measures in four perspectives.
  • It is a general strategic framework, not an HR-only tool; the four are Financial, Customer, Internal Business Process, Learning and Growth.
  • Learning and growth holds employee skills, training, engagement and culture; customer retention belongs under Customer.
  • The competency map gives a yardstick for learning and growth measures.
  • People measures are hard to choose well: training hours show effort, not skill.

Remember: Money, customers, processes, learning: people at the foundation.

Don’t confuse it with

  • Competency and its types: Don't confuse these "core competencies" with a firm's core competence. In strategy, a core competence (Prahalad and Hamel, 1990) is a collective strength of the whole firm that rivals find hard to copy. In this HR sense, "core" means the behaviours every employee needs. Some textbooks use a different split altogether: technical, behavioural and managerial competencies. Learn the scheme your own text uses, and know that the other exists.
  • The competency mapping process: Don't confuse the four stages with the five-step programme. The stages build the map for a job. Study materials also give a five-step sequence for rolling a map out across an organisation:
  • Methods of competency mapping: Don't confuse job analysis tools with competency methods. CMQ, PAQ and FJA come from job analysis. They describe work in a way that can be turned into required competencies, so mapping borrows them, but they do not assess a person. Likewise, aptitude means "can learn"; achievement means "has learned".
  • The balanced scorecard and people measures: Don't confuse learning and growth with customer retention. Customer retention belongs to the Customer perspective. Learning and growth is about the organisation's own capability: employee skills and training, information systems, and culture. Study notes also sometimes call the scorecard a tool "for evaluating HRM" or list "Human Resource" as a fifth perspective. It is a general strategic framework, and the four perspectives are the whole list. Names vary slightly between books: Financial (or Finance), Customer, Internal Business Process (or Business Processes), Learning and Growth.

Key terms

Achievement Test
A psychometric test of what a person has already learned, such as mathematics or language; aptitude tests show what a person can learn.
Assessment Centre
A method, not a building: candidates do simulations such as in-basket exercises, role-play and group discussion while trained assessors observe their behaviour.
Competency
A mix of knowledge, skills, attitudes and traits that shows up as good performance in a role; a demonstrable individual characteristic enabling effective job performance.
Competency Mapping
Deciding which competencies each job needs, writing them down, and using them in recruitment, training, appraisal and promotion.
Core Competency (Employee)
A competency everyone in the organisation needs, tied to its aims, such as teamwork or integrity. Not the same as a firm's strategic core competence.
Critical Success Factor
One of the few things that must go right for a job to succeed; found when designing the competency-mapping questionnaire.
Cross-Functional Competency
A competency many jobs in many departments need, such as computer skills or budgeting; it makes staff versatile and cuts training cost.
Functional Competency
A technical competency needed by one job or job family, such as data analysis or software development; it gives task proficiency and specialisation.
Functional Job Analysis (FJA)
Sidney Fine's job analysis method, rating what a worker does in relation to data, people and things; a method, not a form.
HR Scorecard
Becker, Huselid and Ulrich's (2001) adaptation of the balanced scorecard to the HR function, showing how HR practices support strategy.
Key Result Area (KRA)
An outcome a job is judged on; in competency mapping each one is broken down into key activities.
Learning and Growth Perspective
The balanced scorecard view of the organisation's own capability: employee skills and training, information systems and culture. Customer retention is not part of it.
Position Analysis Questionnaire (PAQ)
A standard job analysis questionnaire linking job characteristics to human characteristics; mapping borrows it, but it does not assess a person.
Psychometric Test
A standardised test of aptitude or achievement giving a consistent, objective measure of a sample of attributes, not the whole person.

Unit 2 · Chapter 18Performance Management and Appraisal

Performance management and its cycle

  • Performance management: a continuous, strategic process that aligns people's work with organisational goals; appraisal is a formal, periodic look at past performance.
  • Objectives: goal alignment, continuous improvement, employee development, recognition and motivation.
  • Five phases: plan (SMART goals), monitor (KPIs), feedback and coaching, review, reward and development. The loop repeats.
  • Key terms: KPI, performance standard, performance gap (expected minus actual), performance improvement plan.

Remember: Plan, monitor, feedback, review, reward.

Traditional appraisal methods

  • Traditional methods: ranking, paired comparison, graphic rating scale, checklist, critical incident, confidential report.
  • Paired comparison needs N × (N − 1) ÷ 2 pairs; the employee with the most wins ranks first.
  • Others in textbooks: forced distribution, forced choice, essay, field review, performance tests.
  • Ranking compares people with each other; rating compares each person with a standard.
  • Common weakness: trait ratings, a backward look, and room for rater bias.

Remember: Rank, pair, scale, tick, incident, secret report.

Modern appraisal methods

  • 360-degree feedback: ratings from supervisor, peers, subordinates, customers and self; it needs a mature culture.
  • MBO (Drucker, 1954): set goals jointly, set standards, compare results, set new goals.
  • BARS (Smith and Kendall, 1963): each scale point is anchored by an example of behaviour.
  • Assessment centres use simulations; psychological appraisal looks at potential; human resource accounting counts cost and value in money.

Remember: 360 sources, objectives, behaviour anchors, simulations, psychologists, money.

Rater errors and fair appraisal

  • Rater errors: halo, horn, leniency, strictness, central tendency, recency, first impression, spillover, personal bias and stereotyping.
  • The halo effect is a rater error, not an appraisal method.
  • Fairer appraisal: clear standards, one dimension at a time, a running record, several raters or calibration, rater training.
  • Challenges: bias, time and cost, feedback avoidance, inconsistent standards.
  • A good feedback talk is one to one, specific, two-way and ends with agreed actions.

Remember: The rater is the problem: halo, horn, lenient, strict, middle, recent.

Don’t confuse it with

  • Performance management and its cycle: Don't confuse performance management with performance appraisal. Appraisal is the formal look back; management is the whole year of planning, watching, helping and rewarding. Textbooks also name the five phases as planning, monitoring, developing, rating and rewarding. It is the same loop with different labels.
  • Traditional appraisal methods: Don't confuse ranking with rating. Ranking compares people with each other, so someone must come last even in a strong team. Rating compares each person with a scale or standard, so everyone can score high. Judging people against others rather than a standard is the contrast effect, a perception error.
  • Modern appraisal methods: Don't confuse BARS with a graphic rating scale. A graphic scale labels its points with words such as poor, average and good, applied to traits. BARS labels each point with a description of behaviour someone can observe.
  • Rater errors and fair appraisal: Don't confuse the halo effect with an appraisal method. The halo effect is a rater error, in which one trait colours the whole judgement. BARS, MBO and 360-degree feedback are methods used to appraise. An exam question that asks which of these is not a method of performance appraisal has the halo effect as its answer. The perception chapter (this unit) covers the halo and horn effects as general perception errors.

Key terms

Behaviourally Anchored Rating Scale (BARS)
Smith and Kendall's 1963 scale in which each point is described by an example of observable behaviour, not a word like average.
Central Tendency
A rater error in which everyone is placed in the middle of the scale, playing safe, so the rating tells the firm nothing.
Confidential Report
A superior's private report on conduct, strengths and weaknesses, common in government service; in its classic form the employee does not see it.
Forced Distribution
The rater must spread employees across the scale in fixed shares, assuming a bell curve; it stops all-high ratings but is unfair to a strong team.
Graphic Rating Scale
The rater scores traits such as punctuality and teamwork on a scale from poor to excellent and the scores are added; cheap, but vague.
Human Resource Accounting
An appraisal method that sets the cost of recruiting, training and keeping an employee against the value they generate, in money.
Key Performance Indicator (KPI)
A specific, measurable figure used to track performance, such as the percentage of parts rejected.
Management by Objectives (MBO)
Peter Drucker's 1954 method: manager and employee set goals jointly, then compare actual results with them and set new goals.
Multi-Source Feedback (360-Degree)
Ratings from supervisor, peers, subordinates, customers and the person themself, put together and fed back; many firms use it for development, not pay.
Paired Comparison
Each employee is compared with every other, one pair at a time; the one with most wins ranks first. Pairs number N × (N − 1) ÷ 2.
Performance Appraisal
A formal, periodic evaluation of how well a person did in the period just ended; one step within performance management.
Performance Improvement Plan (PIP)
A structured, time-limited plan, for example coaching with regular checks, to bring an underperformer up to the standard.
Performance Management
A continuous, strategic yearly routine of agreeing goals, monitoring, giving feedback, reviewing and rewarding, aligning employees' work with organisational goals.
Recency Effect
A rater error in which the latest events outweigh the whole period, so one recent mistake can cancel months of good work.

Unit 2 · Chapter 19Career Planning and Development

Careers, Schein's cone and career stages

  • A career is the sequence of work experiences over a person's life (Hall); Flippo stresses continuity, order and meaning.
  • Schein's cone: vertical (rank), circumferential (function), radial (closeness to the centre).
  • Five stages: exploration, establishment, mid-career, late career, decline. Ages are rough guides.
  • Textbooks differ on the ages and on the number of stages (Super, Greenhaus and others).

Remember: Up, across, inward; explore, establish, mid, late, decline.

Career planning, management and development

  • Career planning: the individual selects career goals and the path to them (Werther and Davis).
  • Seven steps: self-assessment, explore options, SMART goals, action plan, acquire skills, seek feedback, monitor and adjust.
  • Five initiatives: career planning workshops, mentoring, career counselling, coaching, personal development plans.
  • Textbooks disagree on which of career management and career development is the umbrella; learn each definition.

Remember: Assess, explore, goal, plan, learn, feedback, adjust.

Succession planning

  • Succession planning: the systematic process of identifying and developing future leaders for key positions.
  • Six steps: key positions, competency mapping, potential successors, readiness, development plans, implement and monitor.
  • Aims: leadership continuity, retained knowledge, readiness for sudden vacancies.
  • Career planning is employee-focused; succession planning is organisation-focused.
  • Replacement charts are its simple form; plans can favour people who resemble today's leaders.

Remember: Key jobs, skills, candidates, readiness, plans, review.

Career paths, plateau and anchors

  • Career path: the sequential pattern of jobs that forms a career; three kinds are historical, organisational and behavioural.
  • Career mobility: movement across grades or positions, upward or downward, or a change of occupation.
  • Career plateau: promotion chances are low and the work is repetitive; the cause may be structure or content.
  • Career anchors are Schein's: eight themes, found by self-assessment.

Remember: Path, move, plateau, anchor.

Don’t confuse it with

  • Careers, Schein's cone and career stages: Don't confuse the stage schemes. Textbooks differ on the ages and on how many stages there are. Super's scheme runs growth, exploration, establishment, maintenance and disengagement. Greenhaus's has preparation for work, organisational entry, early career, mid-career and late career, with overlapping ages. Another common list has four: establishment, advancement, maintenance and withdrawal. Learn the five above with their ages as rough guides, and note which scheme your course uses.
  • Career planning, management and development: Don't rely on the nesting of the three terms. Some textbooks call career management the umbrella that covers planning and development. Others say career development contains planning and management. Both are common. Learn each term's own definition and say which book you follow.
  • Succession planning: Don't confuse succession planning with career planning. Career planning starts with the employee and her goals. Succession planning starts with the organisation's key jobs and asks who can fill them.
  • Career paths, plateau and anchors: Don't confuse a plateau with the decline stage, or an anchor with a goal. A plateau can come at 35 and the decline stage comes near retirement. A goal is a future position; an anchor is the underlying value that makes some positions satisfying and others not.

Key terms

Career
The series of jobs and roles a person holds over a working life; Hall: an individually perceived sequence of attitudes and behaviours linked to work experiences.
Career Anchor
Schein's term for the self-image of talents, motives and values, formed through work experience, that a person will not give up when forced to choose.
Career Cone
Schein's picture of an organisation as a cone in which a career can move in three directions: vertical, circumferential and radial.
Career Development
The personal improvements a person makes to carry out a career plan, helped by the organisation; in a broader sense, an ongoing move through career stages.
Career Management
The organisation's work, with the individual, of designing and carrying out goals, plans and strategies so employees' needs and the organisation's needs are both met.
Career Mobility
Movement across grades and positions, upward or downward, or a complete change of occupation, started by the employee or the employer.
Career Path
The sequential pattern of jobs that forms a career (Werther and Davis); used interchangeably with career ladder.
Career Planning
The process by which a person selects career goals and the path to those goals (Werther and Davis); the individual's own work.
Career Plateau
A point in the career path where the chance of promotion is low and the work becomes repetitive; it may be structural or content-based.
Circumferential Movement
In Schein's cone, a move across a functional boundary at the same level, such as from a loans desk to a treasury desk.
Nine-Box Grid
A grid plotting performance against potential for each candidate; a high performer with limited potential is not necessarily a successor.
Personal Development Plan (PDP)
A written plan of the skills and experience a person will build, with dates, so progress can be tracked.
Radial Movement
In Schein's cone, a move towards the centre, bringing more trust, influence and access to decisions, without any promotion.
Replacement Chart
A simple form of succession planning that names likely successors for each key post and shows how ready each one is.

Unit 2 · Chapter 20Talent Management and Skill Development

What talent management is

  • Talent management: the full scope of HR processes to attract, onboard, develop, motivate and retain high-performing employees.
  • Seven processes: workforce planning, recruitment and onboarding, performance management, learning and development, engagement, succession planning, retention.
  • It matters for performance, competitive advantage, innovation, team synergy, lower turnover, employer branding and internal capability.
  • It is wider than succession planning and narrower than all of HRM. Critics say it can be old HR under a new name.

Remember: Attract, develop, motivate, retain: the whole path.

The five phases and three strategies

  • Five phases: planning, attracting, developing, retaining, transitioning. Transitioning keeps knowledge (knowledge management) and feeds the next plan.
  • Methods are examples: predictive analytics, employer branding, mentoring and rotation, inclusion and flexibility, mobility and documentation.
  • Hire elite talent: speed, a high benchmark. Nurture emerging talent: lower cost, loyalty. Blend both: mentoring and knowledge transfer.
  • The phases are stages of the cycle; the seven processes are the HR functions that carry them out.

Remember: Plan, attract, develop, retain, transition.

The seven-step framework

  • Seven steps: specify skills, attract, onboard and organise work, learn and develop, appraise, retain, plan succession.
  • Step 1 includes checking whether existing staff can be taught; step 7 involves knowledge management.
  • Appraisal shows who is ready for more, saving outside hires and preparing promotions.
  • Gamified applications, pulse surveys, job crafting, gig platforms and similar tools are examples, not requirements.
  • The seven processes name HR functions; the seven steps give an order of use.

Remember: Skills, attract, onboard, learn, appraise, retain, succeed.

Skill development and its three pillars

  • Skill development: identify skill gaps, then develop and hone the skills. Its value: innovation, agility, job satisfaction, role mastery.
  • Soft (behavioural) skills: emotional intelligence, cultural sensitivity, decision-making, negotiation, empathy.
  • Functional (technical) skills: budgeting, spreadsheet modelling, digital literacy, technical writing. The phrase has other senses elsewhere.
  • Management skills (Katz): conceptual, human, technical. Technical skill is sometimes loosely called hard skill, in contrast to soft skills. See Principles of Management.

Remember: Find the gap, build the skill: soft, functional, managerial.

Don’t confuse it with

  • What talent management is: Don't confuse talent management with HRM, or with succession planning. HRM covers everything about people at work, including pay administration and industrial relations. Talent management follows the flow of capable people. Succession planning is one process inside it. Strategic HRM (this unit) aligns all HR activity with strategy; talent management applies that alignment to the workforce's capability.
  • The five phases and three strategies: Don't confuse the five phases with the seven processes. The phases are stages of the talent cycle. The processes (in the last block) are the HR functions that carry the stages out: recruitment and onboarding sit mainly in attracting, and succession planning in transitioning. Some lists start with "identify" in place of planning; the ground covered is the same.
  • The seven-step framework: Don't confuse the seven steps with the seven processes. They overlap heavily, and both lists have seven items. The processes name the HR functions, such as engagement and retention. The steps put the functions in an order of use, starting from the skills needed.
  • Skill development and its three pillars: Don't confuse the pillars with each other. "Functional skills" is used in three senses. Here it means job-related technical ability. It also means skills that transfer between jobs, and, in some countries' vocational schemes, basic English, mathematics and computer skills. Check which sense a question uses. The pillars also overlap: Katz's human skill is much like soft skill, and Katz's technical skill is much like functional skill.

Key terms

Elite Talent Hiring
Buying ready expertise: it arrives at once and sets a high benchmark, but is costly and may unsettle insiders who were passed over.
Emerging Talent Nurturing
Growing promising people: cheaper per head and builds loyalty, but slower to deliver, and trained people may leave.
Five-Phase Talent Cycle
Planning, attracting, developing, retaining and transitioning; the last phase passes on knowledge and readiness, feeding the next round of planning.
Functional Skills
Technical knowledge needed to run operations and solve problems, such as budgeting or spreadsheet modelling; one of three skill pillars, also called hard skills.
Internal Gig Platform
A system listing short projects that any employee can take on.
Job Crafting
Employees reshaping parts of their own tasks or working relationships.
Knowledge Management
Capturing and sharing what people know so that it stays in the organisation when they move on; the aim of the transitioning phase.
Learning Experience Platform
An online system that recommends learning content to each person; one example of a development method, not a requirement.
Passive Candidate
Someone who has a job and is not searching, but might move for a good offer.
Pulse Survey
A short questionnaire repeated often; it is wasted if nobody acts on the answers.
Seven-Step Talent Framework
A checklist for talent management: specify skills, attract, onboard, learn and develop, appraise, retain, then plan succession.
Skill Development
Intentional effort to build ability to perform, adapt and evolve: first identify skill gaps, then develop and hone the skills.
Soft Skills
Behavioural skills such as emotional intelligence, negotiation, empathy and communication, which matter most in client handling, leadership and influencing others.
Talent Management
Joined-up HR processes to attract, onboard, develop, motivate and retain high-performing employees, from forecasting need to preparing replacements.

Unit 2 · Chapter 21Employee Engagement and Work-Life Balance

What employee engagement is

  • Engagement: enthusiasm and dedication toward the job. Kahn (1990): people bring themselves physically, cognitively and emotionally.
  • Physical is energy and effort, cognitive is attention and thinking, emotional is care, pride and trust.
  • Four levels: highly engaged, moderately engaged, barely engaged, disengaged. Gallup's three groups: engaged, not engaged, actively disengaged.
  • Engagement is not satisfaction (a feeling about the job) or commitment (attachment to the employer).

Remember: Physical is energy, cognitive is thinking, emotional is attachment.

Building and measuring engagement

  • Process: diagnose and design, survey, analyse (the most important step), act (action planning), follow up. It repeats.
  • Action needs owners, measurable targets and coached line managers; follow-up reports back to staff.
  • Engagement score: a summary of survey answers, with no single formula. eNPS = % promoters (9–10) − % detractors (0–6), from −100 to +100.
  • Common drivers: meaningful work, supportive manager, recognition, growth, voice, autonomy and a manageable workload.

Remember: Diagnose, survey, analyse, act, follow up.

Work-life balance and how to build it

  • Work-life balance: the relationship between work and the other commitments in life, and how they affect each other.
  • Four principles: prioritise, reduce stress, manage time, set boundaries.
  • Five strategies: work-leisure plan, cut time-wasters, delegate or outsource, schedule rest, prioritise smartly.
  • Benefits: health, output, relationships, motivation. Balance is not an equal split.

Remember: Prioritise, reduce stress, manage time, set boundaries.

Imbalance, burnout and the employer's part

  • Warning signs: physical (exhaustion, illness), emotional (irritability, low motivation), behavioural (absence, withdrawal, procrastination) and at work (mistakes, missed deadlines).
  • Burnout (WHO, ICD-11): chronic workplace stress not successfully managed; exhaustion, cynicism, reduced effectiveness.
  • Employer actions: flexible hours, leave that is used, no-meeting days, clear boundaries, realistic workload, support.
  • Change the work first (primary), then help people cope (secondary).

Remember: Change the work first; help people cope second.

Don’t confuse it with

  • What employee engagement is: Don't confuse engagement with satisfaction or commitment. Satisfaction is a feeling about the job. Organisational commitment is attachment to the employer. Engagement is the energy and attention a person actually brings to the work. Someone can be satisfied but coasting, or committed to the firm but bored. Job satisfaction and commitment are covered in the chapter on personality, perception and attitude.
  • Building and measuring engagement: Don't confuse the engagement score with eNPS. The score says how favourable staff are across many topics. eNPS says how willing they are to recommend the employer, from one question. Neither says why. The comments and the driver questions do.
  • Work-life balance and how to build it: Don't confuse balance with an equal split. A balanced week is not 50% work and 50% life. Balance is what lets a person meet the demands they care about, and it changes with life stage: a new parent and a young graduate need different mixes. It is also not a perk from the employer. Individuals can do much, but the employer sets the job's demands, as the next block shows.
  • Imbalance, burnout and the employer's part: Don't confuse stress with burnout. Stress is the reaction to demands, and rest and fewer demands can relieve it. Burnout follows when stress goes on for long and is not dealt with. It brings exhaustion, cynicism and a sense of being ineffective. The chapter on emotions and stress covers stress and how to manage it.

Key terms

Burnout
A syndrome from chronic workplace stress not successfully managed (WHO, ICD-11), marked by exhaustion, cynicism towards the job and reduced effectiveness.
Compressed Work Week
Five 8-hour days become four 10-hour days: the total stays 40 hours and the team gains a free day, but days are longer and more tiring.
Employee Engagement
The level of enthusiasm and dedication a person feels towards the job; the energy, attention and care put in beyond the minimum.
Employee Net Promoter Score (eNPS)
From one recommend-us question scored 0 to 10: percentage of promoters (9–10) minus percentage of detractors (0–6); it runs from −100 to +100.
Engagement Cycle
The five-step process of diagnose and design, survey, analyse, act and follow up; follow-up feeds the next round.
Engagement Score
A summary of survey answers, usually an average or a share of favourable answers; compare a team with its own past score.
Gallup Engagement Groups
Gallup's three groups: engaged, not engaged (time but no energy or passion) and actively disengaged (unhappy and working against colleagues' efforts).
Job Demands–Resources Model
High demands with few resources wear people down towards burnout; resources such as support, control and feedback lead towards engagement.
Kahn's Dimensions of Engagement
William Kahn's (1990) three ways people bring themselves to work roles: physically, cognitively and emotionally.
Kahn's Psychological Conditions
Kahn's three conditions for engagement: meaningfulness (a return on effort), safety (showing oneself without fear) and availability (resources to invest).
Work Engagement
Schaufeli and colleagues' (2002) positive, fulfilling state of mind marked by vigour, dedication and absorption; a state of energy, not a trait.
Work-Life Balance
The relationship between work and other commitments in life, and how they affect each other; both get the time and energy they need.
Work-Life Imbalance
When work takes so much time and energy that health or the rest of life begins to suffer; often grows when the boundary is blurred.
Work–Family Conflict
Greenhaus and Beutell's (1985) three forms: time-based, strain-based and behaviour-based conflict between work and family roles.

Unit 2 · Chapter 22Organisation Development and Change

Organisational change and resistance

  • Organisational change is any modification in structure, processes, culture or strategy; it may be planned (proactive) or unplanned (reactive).
  • Four types: structural, technological, people-oriented and strategic. Real changes often cross types.
  • Forces come from inside (vision, culture, leadership, performance, employees) and outside (competition, technology, regulation, economy, social change).
  • Resistance comes from individual and organisational sources. Kotter and Schlesinger's six approaches run from education to coercion.

Remember: What changes: structure, technology, people, strategy.

Organisation development and its process

  • OD is a planned, systematic, data-driven process to improve effectiveness, adaptability and health (Beckhard: planned, organisation-wide, top-managed).
  • Dual approach: the human side (culture, behaviour, communication) and the technical side (structure, goals, processes).
  • Four characteristics: planned, collaborative, data-driven, and feedback with reinforcement.
  • Five steps: diagnosis, planning interventions, implementation, evaluation, reinforcement. Action research has seven, from entry to evaluation.

Remember: Diagnose, plan, implement, evaluate, reinforce.

OD interventions and tools

  • An OD intervention is a structured, data-driven, participative, goal-oriented action on a diagnosed problem.
  • Levels: individual (coaching, training), team (team building, role negotiation), organisation (strategic planning, redesign), process (BPR, process consultation).
  • Main interventions: sensitivity training, team building, process consultation (Schein), survey feedback, structural redesign, organisational learning, role negotiation, BPR (Hammer and Champy).
  • Tools: surveys, focus groups, workshops, job rotation, reward systems.

Remember: Level first, then the tool.

Lewin's model, benefits and challenges

  • Lewin (1947): unfreezing (prepare, show the need), changing (introduce the new, with training), refreezing (reinforce with KPIs and rewards).
  • Performance often dips during the change stage. Without refreezing, people drift back.
  • Criticism: too linear and simple, assumes stable periods, neglects power and politics, suits top-down change.
  • OD gains: productivity, communication, adaptability, retention, teamwork. Challenges: resistance, time, measuring impact, top-management buy-in.

Remember: Unfreeze, change, refreeze: prepare, implement, stabilise.

Don’t confuse it with

  • Organisational change and resistance: Don't confuse the type of change with its cause. The type says what changes: structure, technology, people or strategy. The force says why: competition, a new leader, a new rule. One force, such as a rival's app, can drive changes of all four types.
  • Organisation development and its process: Don't confuse OD with organisational change. Change is any modification, planned or not. OD is one planned, research-based way of managing change, aimed at the organisation's health. Also, books give the OD cycle as four, five or seven steps. Some split planning into design and development; some use diagnosis, action planning, intervention, evaluation. These are the same cycle in more or less detail.
  • OD interventions and tools: Don't confuse sensitivity training with team building. Sensitivity training works on individuals' self-awareness in an open-ended group. Team building works on a real work team's task, roles and trust. Also, process consultation is not expert consulting: the consultant does not supply the answer but helps the group find its own.
  • Lewin's model, benefits and challenges: Don't confuse refreezing with freezing for ever. It means making the new way the normal way. The next change will need unfreezing again.

Key terms

Action Research
Kurt Lewin's cycle of research whose findings go straight into action and whose results are then studied in turn; the classic form of the OD process.
Business Process Re-engineering (BPR)
Hammer and Champy's (1993) radical redesign of a process, starting from what the customer needs, to gain sharply in cost, quality, service and speed.
Change Agent
An OD consultant, inside or outside the organisation, who leads a planned change effort.
Double-Loop Learning
Argyris and Schön's learning that questions the rules and goals themselves; single-loop learning only corrects an error within the current rules.
Force-Field Analysis
Lewin's picture of any present level as a balance between driving forces for change and restraining forces against it; change happens when the balance tips.
Lewin's Three-Stage Model
Kurt Lewin's 1947 model of planned change: unfreezing, changing (moving) and refreezing.
Organisation Development (OD)
A planned, long-term, data-driven effort to improve an organisation's effectiveness, adaptability and health, using behavioural-science knowledge and the involvement of the people concerned.
Organisational Change
Any modification in an organisation's structure, processes, culture or strategy, planned or unplanned.
Process Consultation
Edgar Schein's 1969 intervention: a consultant watches how a group communicates and decides, and helps members see and fix it themselves.
Refreezing
Lewin's third stage: reinforcing the new behaviour, for example through targets and appraisal, until it becomes the norm. It does not mean frozen for ever.
Resistance to Change
Opposition to a change, open or quiet, arising from habit, fear of the unknown or fear of losing pay, status or skills.
Sensitivity Training
Unstructured group sessions (a T-group) where members give and receive frank feedback on how they come across, building self-awareness and empathy.
Survey Feedback
A questionnaire goes to all; results return to each work group, which discusses them and plans action.
Unfreezing
Lewin's first stage: preparing people to accept the need for change by showing why the old way no longer works and lowering fear.

Unit 2 · Chapter 23Industrial Relations, Disputes and Grievances

What industrial relations is

  • IR is the management of relationships among employers, employees, trade unions and the government, aimed at harmony and productivity.
  • Industry means any productive activity, from farming and mining to manufacturing, trade and banking.
  • Five objectives: healthy relationships, preventing and resolving disputes, welfare and productivity, limited government intervention, industrial democracy.
  • HRM deals with each employee; IR deals with the collective side.

Remember: Four parties, one aim: harmony and productivity.

Approaches to industrial relations

  • Unitary: one team, conflict rare. Pluralist: many groups, conflict normal and bargained. Marxist: conflict from class division.
  • Dunlop: systems approach, with actors, contexts, ideology and a web of rules (1958).
  • Flanders: Oxford approach. Margerison: industrial sociology. Silverman (1970): action frame of reference. Mayo: human relations.
  • Gandhian approach: trusteeship, non-violence and moral persuasion.

Remember: Dunlop systems, Flanders Oxford, Silverman action, Mayo human.

Industrial disputes and settlement

  • 1947 Act definition: a dispute connected with employment, terms of employment or conditions of labour between employers and employers, employers and workmen, or workmen and workmen.
  • The Industrial Relations Code, 2020 consolidates the 1947 Act; older exam questions still use the 1947 Act's terms.
  • Economic causes: wages, bonus, hours, leave, dismissal. Non-economic: union recognition, victimisation, ill-treatment, sympathy, politics.
  • Forms: strike, lockout, gherao, picketing; strike kinds include economic, unfair labour practice, sympathy, general, wildcat, sit-down and go-slow.
  • Prevention: works committee. Settlement: conciliation, adjudication, voluntary arbitration. Collective bargaining is a method of negotiation, not settlement machinery.

Remember: Prevent, conciliate, then decide.

Grievance management

  • Grievance: dissatisfaction or a sense of injustice about the job, justified or not, often the gap between expectation and reality.
  • Types: individual (one employee), group (a team), policy or union (many, or how a policy is read).
  • Five steps: acknowledge, investigate, communicate, resolve, document and follow up without retaliation.
  • Open procedures catch problems early, build trust and show where policies fail; unresolved grievances can become industrial disputes.

Remember: Acknowledge, investigate, communicate, resolve, document.

Don’t confuse it with

  • What industrial relations is: Don't confuse industrial relations with human resource management. HRM (see the chapter Human Resource Management) deals with each employee: hiring, training, appraisal and pay. IR deals with the collective side: groups of workers, their unions, employers and the state. In many firms one department does both.
  • Approaches to industrial relations: Don't confuse Dunlop's systems approach with the Oxford approach. Both stress rules. Dunlop builds a whole system around the rules: actors, contexts and ideology. Flanders looks at the institutions that make the rules, above all collective bargaining. Also, study material sometimes calls the action frame the "action theory" or "social action" approach. It is one approach, credited to Silverman.
  • Industrial disputes and settlement: Don't confuse collective bargaining with settlement machinery. Collective bargaining is a method of negotiation: the two sides talk directly, and no neutral decides. Conciliation, adjudication and voluntary arbitration are the machinery for settling a dispute. The works committee is preventive machinery. The chapter Trade Unions and Collective Bargaining teaches bargaining itself.
  • Grievance management: Don't confuse a grievance with an industrial dispute. A grievance is the employee's complaint, raised inside the organisation. It usually becomes an industrial dispute when it stays unresolved and is taken up as a difference between the employer and the workers, often through a union. Nor is it whistleblowing, which reports wrongdoing that harms others; see Organisational Justice and Whistleblowing.

Key terms

Adjudication
A labour court or industrial tribunal hears both sides and gives a binding decision.
Conciliation
A neutral officer helps the parties find an agreement in a dispute but cannot force one.
Dunlop's Systems Approach
John Dunlop's (1958) view of IR as a system of actors, contexts and ideology that produces a web of substantive and procedural rules.
Gandhian Approach
Peace through trusteeship, non-violence and moral persuasion; a strike is allowed only as a last resort, for a just cause and without violence.
Gherao
Workers surround managers and stop them leaving; confining people against their will can break criminal law.
Grievance
An employee's sense of dissatisfaction or injustice about something connected with the job; it may or may not be justified.
Industrial Dispute
Under the 1947 Act, a dispute between employers and employers, employers and workmen, or workmen and workmen, connected with employment, terms of employment or conditions of labour.
Industrial Relations (IR)
The management of relationships among employers, employees, trade unions and government, aiming at industrial harmony and productivity.
Lockout
The employer shuts the workplace, or refuses to employ workers, until they accept its terms.
Oxford Approach
Allan Flanders's view of IR as the study of the institutions, above all collective bargaining, that regulate jobs and make the rules.
Picketing
Workers stand at the gate to persuade others not to work and to draw public attention; peaceful picketing is usually treated as lawful, violence is not.
Pluralist Approach
The view that the organisation holds several groups with different aims, so conflict between management and workers is normal and is managed through bargaining.
Strike
A group of workers stop work together to press their demands.
Unitary Approach
The view that the organisation is one team with one source of authority, management; conflict is rare and comes from poor communication or troublemakers.

Unit 2 · Chapter 24Trade Unions and Collective Bargaining

Trade unions

  • A trade union is an organised group of workers that protects and promotes their collective interests.
  • Objectives: economic, protective, political and social.
  • Types: craft (by skill), industrial (by industry), general (open to all), blue-collar and white-collar (by kind of job).
  • The Trade Unions Act, 1926 was the main law; the Industrial Relations Code, 2020 now consolidates it.
  • INTUC, AITUC, HMS and CITU are well-known central union organisations.

Remember: Economic, protective, political, social.

Collective bargaining

  • Collective bargaining: negotiation between employee representatives, usually a union, and the employer on terms of employment.
  • Features: collective, two sides, a continuing process, give and take.
  • Five stages: preparation, negotiation, agreement, implementation, follow-up and renegotiation.
  • The collective bargaining agreement runs for a fixed period; in India a conciliation settlement binds all workers, a direct agreement only its signatories.
  • Levels: plant, industry, national. Bargaining is not the same as worker participation.

Remember: Prepare, negotiate, agree, implement, review.

Types of bargaining

  • Distributive: win-lose over a fixed sum. Integrative: win-win through shared interests.
  • Concessionary: union gives up benefits to protect jobs. Productivity: pay tied to output. Composite: many issues in one bargain.
  • Benefits: better pay, workplace democracy, fewer disputes, better relations, higher morale.
  • Challenges: multiplicity of unions, lack of unity, employer resistance, legal limits, globalisation.

Remember: Distributive wins and loses; integrative wins together.

Common terms and strike kinds

  • Closed shop: only union members hired. Open shop: free choice. Agency shop: no need to join, but all pay the union a fee.
  • Arbitration: a neutral third party decides when talks fail. Grievance procedure: a formal route for a worker's complaint.
  • Economic strike: failure to agree contract terms. Unfair labour practice strike: protest at illegal conduct by the employer.
  • Wildcat strike: sudden and unapproved, such as during an agreement. Sympathy strike: one union supports another's strike.

Remember: Terms, employer's wrong, no approval, for another.

Don’t confuse it with

  • Trade unions: Don't confuse a craft union with an industrial union. A craft union groups people by skill across industries. An industrial union groups people by industry across skills. Likewise, "blue-collar" and "white-collar" describe the job, not the membership rule.
  • Collective bargaining: Don't confuse collective bargaining with worker participation. In bargaining, two sides negotiate the terms of work, and each protects its own interest. In participation, workers share in decisions about running the work, through works committees or joint councils. The industrial relations chapter treats participation and industrial democracy. Also note that some textbooks give six or more steps, adding items such as ratification by union members. The five stages above are the standard set.
  • Types of bargaining: Don't confuse the types with each other. Distributive and integrative describe the style of talks. Concessionary, productivity and composite describe what the deal is about. A productivity deal can be reached in an integrative spirit, because both sides gain from higher output. A concessionary deal is usually distributive in feel, because the union gives and the firm keeps.
  • Common terms and strike kinds: Don't confuse an economic strike with an unfair labour practice strike. An economic strike is about what the workers will be paid or given. An unfair labour practice strike is about whether the employer broke the law. Also, a wildcat strike lacks union approval, while a sympathy strike is for another union's cause and may well be approved.

Key terms

Agency Shop
Workers need not join the union, but all must pay it a fee for bargaining on their behalf.
Arbitration
Settlement of a dispute by a neutral third party whose decision the parties have agreed, or are required, to accept.
Closed Shop
The employer may hire only union members; in one form, workers must be members before they are hired.
Collective Bargaining
Negotiation between employee representatives, usually a union, and the employer to settle terms and conditions of employment such as wages, benefits and job security.
Collective Bargaining Agreement (CBA)
The written, signed terms reached through bargaining, running for a fixed period, often a few years.
Craft Union
A union of workers with the same craft, skill or occupation, whatever industry they work in.
Distributive Bargaining
Win-lose negotiation over a fixed sum, where one side's gain is the other's loss.
Economic Strike
A strike because talks failed to agree terms of a contract, such as wages, benefits and other conditions of employment.
Industrial Union
A union of workers of one industry, whatever their craft.
Integrative Bargaining
Win-win negotiation in which both sides work on shared interests to make the gain bigger.
Sympathy Strike
One union strikes in support of another union's strike.
Trade Union
An organised group of workers formed to protect and promote their collective interests, such as wages, working hours, job security and safe conditions.
Unfair Labour Practice Strike
A strike to protest illegal conduct by the employer.
Wildcat Strike
A sudden strike without the union's approval, such as one that breaks out while an agreement is still running.

Unit 2 · Chapter 25Labour Welfare and Social Security

Labour welfare and its theories

  • Labour welfare: services, facilities and amenities for workers, over and above wages, from employers, unions, government and other bodies.
  • Aims: health, comfort and morale for workers; a steadier workforce and better relations for employers.
  • Seven theories (motives): policing, religious, philanthropic, paternalistic or trusteeship, placating, public relations, functional.
  • Religious, philanthropic and paternalistic motives treat welfare as a favour, not a right.
  • Trusteeship theory is related to Gandhi's trusteeship but is narrower.

Remember: Law, faith, love, guardianship, calm, image, output.

Types of welfare facilities

  • By place: intra-mural (inside the workplace) and extra-mural (outside it).
  • By provider: statutory (required by law), voluntary (employer's choice), mutual (workers' own effort).
  • Examples: drinking water, canteen, crèche, rest rooms and first aid are intra-mural; housing, recreation and education are extra-mural.
  • The Factories Act's basic amenities are now consolidated in the Occupational Safety, Health and Working Conditions Code, 2020.
  • Not every extra-mural facility is voluntary; plantation law requires housing.

Remember: Place: in or out. Provider: law, employer, workers.

Social security in India

  • Social security: protection against lost earnings from sickness, maternity, injury, old age and unemployment.
  • Instruments: provident fund (retirement savings), employees' state insurance (medical and cash benefits), gratuity (employer's lump sum), maternity benefit, employee compensation (injury caused by work).
  • The Code on Social Security, 2020, in force since 21 November 2025, consolidates the older laws; older exam questions use the old Acts' names.
  • Welfare is facilities at or near work; social security protects income and health against life risks.
  • Coverage gaps remain, especially for informal workers.

Remember: Provident fund, ESI, gratuity, maternity, compensation: one Code.

Don’t confuse it with

  • Labour welfare and its theories: Don't confuse the look-alikes. In the policing theory the "police" is the state, not the employer. Placating aims to calm organised workers; public relations aims at the firm's image with workers and the public. The trusteeship theory is related to Gandhi's idea of trusteeship, but the two are not the same. Gandhi's idea is wider: those who hold wealth should treat it as held for society. The welfare theory is narrower and adds the picture of workers as wards who cannot manage their own interests.
  • Types of welfare facilities: Don't confuse place with provider. "Intra-mural" and "extra-mural" say where. "Statutory", "voluntary" and "mutual" say who. Notes sometimes imply that all extra-mural facilities are voluntary. That is usually true, but not always: the law for plantations, for example, requires employers to provide housing. Voluntary and mutual also differ: voluntary comes from the employer, mutual from the workers.
  • Social security in India: Don't confuse the provident fund with gratuity. The provident fund is built from contributions by the employee and the employer. Gratuity is paid by the employer alone, as a reward for long service. Both are paid at the end of employment, but they are different instruments with different sources.

Key terms

Code on Social Security, 2020
In force from 21 November 2025, it consolidates the older social security laws into one Code and reaches gig and platform workers.
Employees' State Insurance
Medical care and cash benefits for insured employees in sickness, maternity and employment injury.
Extra-Mural Facilities
Welfare facilities outside the workplace, such as housing, recreation and sports, and education for workers and their children.
Functional Theory
Welfare as an investment in output: a healthy, contented worker is more productive.
Gratuity
A lump sum the employer alone pays in recognition of long service.
Intra-Mural Facilities
Welfare facilities inside the workplace, such as drinking water, washing facilities, canteen, rest rooms, crèche and first-aid room.
Labour Welfare
Services, facilities and amenities provided for workers, at or near the workplace, by employers, unions, government and others, over and above wages.
Mutual Welfare Facilities
Facilities organised by the workers themselves, such as a credit society or a consumer store run by workers or their union.
Paternalistic Theory
Also called trusteeship: the employer holds the business in trust and looks after workers as a guardian looks after wards.
Placating Theory
Welfare as a peace offering: timely gestures to calm organised, demanding workers before they press further.
Policing Theory
Welfare as a legal minimum: employers will not act unless forced and can exploit workers, so the state fixes a minimum standard.
Provident Fund
Retirement savings built from contributions by both employee and employer during working life, protecting against old age.
Social Security
Protection society provides through public arrangements against economic distress when earnings stop or fall because of sickness, maternity, injury, old age or unemployment.
Statutory Welfare Facilities
Facilities the employer must provide by law, such as the basic amenities in the Factories Act; which factories must provide which depends on the law's conditions.

Unit 2 · Chapter 26Wage Determination, Profit Sharing and Payment-by-Results Plans

Wage, salary and the wage concepts

  • A wage is pay by the hour, day or week; a salary is a fixed monthly or annual sum, whatever hours are worked.
  • Minimum wage: the floor, owed whatever the industry's capacity to pay. Fair wage: between minimum and living. Living wage: frugal comfort, an aim.
  • Eight influences on pay: ability to pay, labour supply and demand, prevailing rate, cost of living, the living-wage idea, productivity, union power, job requirements.
  • The concepts say what a wage should be; the theories explain what sets it.
  • In India the Code on Wages, 2019 consolidates four older laws, including minimum wages and bonus.

Remember: Minimum is the floor, living is the aim, fair sits between.

Theories of wage determination

  • Subsistence (associated with Ricardo; the name iron law is Lassalle's): wages settle at the natural price of labour.
  • Wage fund (Mill): wage = a fixed fund ÷ number of workers. Surplus value (Marx): workers add more value than the wage replaces.
  • Residual claimant (Walker): wage = output − (rent + interest + profit). Marginal productivity (Clark, Wicksteed): hire until the last worker's output equals the wage.
  • Bargaining (Davidson): strength decides where the wage falls in a range. Behavioural: fairness, comparison and status matter, as in Jaques's felt-fair pay.
  • No theory is complete: market and productivity set a range; bargaining and fairness place the wage in it.

Remember: Ricardo survives, Mill funds, Marx surplus, Walker leftover, Clark margin, Davidson bargains.

Profit sharing

  • Profit sharing: an agreement by which employees receive a share, fixed in advance, of the profits, in addition to regular wages.
  • Forms: cash (current), company shares, deferred. Bases of division: service, percentage of wages, merit rating, attendance, performance, general record.
  • Unlike a bonus, the rule is agreed in advance and continuing; only the amount varies with profit.
  • Limits: weak link between one person's effort and profit, no payout in poor years, doubts about the accounts.

Remember: Fixed share, variable amount, on top of wages.

Taylor, Merrick and Bedaux plans

  • Taylor: two piece rates, higher at or above the standard, lower below it; no guaranteed wage; a sharp jump at the standard.
  • Merrick: three rates, basic below 83% of standard, 110% from 83% to 100%, 120% above 100%; no guaranteed wage; smaller steps than Taylor.
  • Bedaux: Earnings = T × R + 75% × (S − T) × R, with time in B points; the base is the time taken, not the standard.
  • All three need a fair standard from work study, and inspection of quality.

Remember: Taylor two rates, Merrick three, Bedaux 75 per cent of time saved.

Group incentive plans

  • A group incentive plan pays one bonus pool to a whole team or plant, shared among its members.
  • Priestman: bonus as a percentage of wages equals the percentage rise in output over the standard.
  • Scanlon: labour cost against sales value; the saving is shared by an agreed split, with employee suggestion committees.
  • Profit sharing is also a group plan, measured by profit.
  • Risk: a weak link between one person's effort and the bonus, so some may ride on others.

Remember: Priestman output, Scanlon cost ratio, profit sharing profit.

Don’t confuse it with

  • Wage, salary and the wage concepts: Don't confuse the wage concepts with the wage theories. The three concepts say what a wage ought to cover and are used in law and in awards. The theories, in the next concept, try to explain what actually sets wages. Note too that a theory's "subsistence wage" is not the "minimum wage": the minimum wage also covers efficiency, some education and medical care.
  • Theories of wage determination: Don't confuse the iron law of wages with Ricardo's own words. Ricardo wrote of the "natural price of labour". The name "iron law of wages" was popularised later by the German socialist Ferdinand Lassalle for the same idea. Exam papers often attach the name to Ricardo, so know both.
  • Profit sharing: Don't confuse profit sharing with ownership, or with statutory bonus. Profit sharing paid in cash gives no ownership; only the share form does. Bonus required by law, which in India is partly linked to an establishment's profit but carries a minimum payable even without profit, follows rules set by the law, not by an agreement. The Code on Wages, 2019 now carries those rules, and older exam papers use the name Payment of Bonus Act, 1965.
  • Taylor, Merrick and Bedaux plans: Don't confuse Bedaux with Halsey, and don't start from standard time. Bedaux has the same shape as Halsey's plan, but the worker's share is 75%, not 50%, and the standard is counted in B points. A common slip is to pay for the standard time (6 × 10 = ₹60) and then add the bonus, giving ₹67.50. That pays the saved hour twice. The base is always the time actually taken.
  • Group incentive plans: Don't confuse Priestman's plan with Scanlon's. Priestman's plan looks at output against a standard. The Scanlon plan looks at labour cost against sales value, and relies on employees' suggestions. It is not simply "1 per cent bonus for 1 per cent more output".

Formulas

  • Earnings = T × R + 75% × (S − T) × R

Key terms

Bedaux Plan
Pays for time taken plus 75% of the value of time saved against a standard counted in B points; guarantees a time wage.
Code on Wages, 2019
In force from 21 November 2025, it consolidates four older laws on payment of wages, minimum wages, bonus and equal remuneration.
Fair Wage
A wage above the minimum wage but below the living wage; its upper limit is the industry's capacity to pay.
Living Wage
A wage covering essentials plus frugal comfort, such as children's education and insurance against misfortunes; an aim, not a legal floor.
Marginal Productivity Theory
Clark and Wicksteed: a firm hires workers until the value of the last worker's extra output equals the wage.
Merrick's Multiple Piece Rate
Three piece rates: basic rate below 83% of standard output, 110% of it from 83% to 100%, and 120% above 100%; no guaranteed wage.
Minimum Wage
The lowest rung of the wage ladder: it covers the worker's family needs and efficiency, and is owed regardless of the industry's capacity to pay.
Priestman's Plan
A group plan in which bonus as a percentage of wages equals the percentage increase in the group's output over the standard; no bonus below standard.
Profit Sharing
An agreement by which employees receive a share of profit, fixed in advance, on top of regular wages; paid as cash, company shares or deferred.
Residual Claimant Theory
Francis Walker's theory: output is shared among land, labour, capital and enterprise; rent, interest and profit are settled first and wages are what remains.
Scanlon Plan
A group plan: when labour cost falls below a norm share of the sales value of output, the saving is split between employees and company; committees collect suggestions.
Subsistence Wage Theory
Associated with Ricardo: wages settle at the natural price of labour, enough to keep workers alive and numbers steady. Later called the iron law of wages.
Surplus Value Theory
Karl Marx's theory: labour power is bought at about the cost of keeping the worker going, and the employer keeps the extra value the worker adds.
Wage Fund Theory
J. S. Mill's (1848) theory that employers hold a fixed fund for wages, so the average wage is the fund divided by the number of workers.

Unit 2 · Chapter 27International Human Resource Management

Meaning of IHRM

  • IHRM: the HR activities a firm carries out at the international level, to meet its objectives and gain an advantage over rivals at home and abroad.
  • It does the usual HR functions across borders, plus expatriate management, relocation, cross-cultural training and language help.
  • It differs from domestic HRM in scope, employees, activities, environment, involvement in personal lives and risk.
  • Objectives: skills, performance, pay and careers of staff abroad, cross-cultural and language training, common practices, competitive strategies, less cultural friction.
  • Comparative HRM compares countries; IHRM manages one firm across them.

Remember: More countries, more kinds of staff, more activities, more risk.

Employee types and Morgan's model

  • PCN: citizen of the head-office country (home country employee), at head office or posted abroad. HCN: citizen of the unit's country. TCN: citizen of neither.
  • The type depends on the firm and the unit, not on where a person works.
  • Morgan (1986): three broad HR activities (procurement, allocation, utilisation), three country categories (home, host, other) and three employee types (PCN, HCN, TCN).
  • Recruitment, training, appraisal and pay are examples of the work, not Morgan's headings.
  • Nationality is a blunt label: dual nationals and long-term residents fit badly.

Remember: ACE: Activities, Countries, Employees.

Staffing approaches

  • Perlmutter (1969) classified top management's orientation as ethnocentric, polycentric and geocentric; regiocentric was added in later work.
  • Ethnocentric: PCNs in key posts, head office in control, little subsidiary autonomy. Strength: control. Weakness: local morale.
  • Polycentric: HCNs run each subsidiary, which has more local autonomy; PCNs hold head-office posts. Weakness: head office and subsidiaries drift apart.
  • Geocentric: the best person of any nationality; costly and slow. Regiocentric: managers from the region; the region can become a silo.
  • These are ideal types: most firms mix them and change over time.

Remember: Ethno: home. Poly: host. Geo: best anywhere. Regio: the region.

Expatriates and their assignments

  • An expatriate is an employee sent to work in another country, for a long or short term. PCNs and TCNs can be expatriates; an HCN at home cannot.
  • Six roles: direct control, socialisation, network builder, transfer of competence and knowledge, boundary spanner, language node.
  • The cycle: selection, preparation (with cross-cultural training), compensation, support, performance review, then repatriation.
  • Balance-sheet approach: keep the home standard of living by comparing costs in four groups (income tax, housing, goods and services, savings), paying the gaps, and adding incentives.
  • Failure often traces to the family's adjustment, poor selection, weak preparation or weak support; popular failure figures are shaky.

Remember: Control, socialise, network, transfer, span, speak.

Repatriation

  • Repatriation: an expatriate's return to the home country after the assignment. Four stages, in order: preparation, physical relocation, transition, readjustment.
  • Readjustment brings reverse culture shock and career worries: the post, status, pay and use of new skills.
  • Keep the knowledge: agree the next post early, keep a mentor at head office, hold a debriefing, use her skills, ask her to brief the next expatriate.
  • The four stages are the firm's tasks; the U-curve describes feelings over time.
  • Cultural distance shapes the whole cycle; Hofstede's dimensions give the vocabulary for it.

Remember: Prepare, relocate, transition, readjust.

Don’t confuse it with

  • Meaning of IHRM: Don't confuse IHRM with comparative HRM. IHRM manages the people of one firm that operates across borders. Comparative HRM compares how HR is practised in different countries, for example how Indian and German firms hire.
  • Employee types and Morgan's model: Don't confuse where a person works with which type she is. An Indian working abroad is not automatically a host country national. The host country is the one where the unit stands, so an HCN is a national of that country. Nor are PCNs only the people at head office: those posted abroad are PCNs too, and they are the expatriates described later in this chapter.
  • Staffing approaches: Don't confuse polycentric with ethnocentric. In ethnocentric staffing head office keeps control and subsidiaries have little autonomy. In polycentric staffing the subsidiary is run by local nationals and has more autonomy. Do not confuse regiocentric with geocentric either: regiocentric picks from one region, geocentric from the whole world.
  • Expatriates and their assignments: Don't confuse the two kinds of control. The agent of direct control watches and checks, with rules and supervision. The agent of socialisation shapes what people want, by sharing values. Also, an expatriate is not an immigrant: the employer sends her, usually for a set period, and expects her back or on to the next post.
  • Repatriation: Don't confuse the four repatriation stages with the stages of culture shock. The U-curve (honeymoon, crisis, adjustment, mastery) describes how a person feels over time. The four repatriation stages are the firm's tasks in bringing her home. The word "readjustment" appears in both ideas, which is why they are often mixed up.

Key terms

Balance-Sheet Approach
An expatriate pay method that aims to keep the home standard of living by paying the gaps in income tax, housing, goods and services, and savings, plus incentives.
Ethnocentric Approach
Key posts at head office and in subsidiaries go to PCNs, and head office takes the main decisions; subsidiaries have little autonomy.
Expatriate
An employee sent by the firm to work in a country that is not their own, on a long-term or short-term assignment.
Geocentric Approach
Key posts anywhere, head office included, go to the best person whether PCN, HCN or TCN; the firm works as one global network.
Host Country National (HCN)
A citizen of the country where a subsidiary operates.
International HRM (IHRM)
The set of HR activities a firm carries out at the international level to meet its objectives and gain an advantage over competitors at home and abroad.
Morgan's Model
P. V. Morgan's (1986) three-dimensional model of IHRM: three HR activities (procurement, allocation, utilisation), three country categories and three types of employee.
Multinational Company (MNC)
A firm that owns and runs operations in more than one country; the main setting for international HRM.
Parent Country National (PCN)
A citizen of the country where the firm's head office stands; also called a home country employee.
Polycentric Approach
Each subsidiary is run by HCNs as a distinct national unit, with more local autonomy; PCNs hold the key posts at head office.
Regiocentric Approach
Key posts go to managers from the same geographic region as the unit; staff move within the region but seldom to head office.
Repatriation
Bringing an expatriate home at the end of an assignment and helping them settle back in; four stages: preparation, physical relocation, transition and readjustment.
Reverse Culture Shock
The stress of coming home to a place that has changed, and of being a changed person; it belongs to the readjustment stage.
Third Country National (TCN)
A citizen of neither the head-office country nor the country where the unit operates.

Unit 2 · Chapter 28Green Human Resource Management

What green HRM is

  • Green HRM: HR policies, practices and systems that encourage green behaviour, so that the organisation is environmentally sensitive, resource-efficient and socially responsible.
  • It is the people side of environmental management: attitudes, skills and daily habits. Engineers and facilities teams handle the technology.
  • The chain: green HR practices, green employee behaviour, resource efficiency, environmental sustainability.
  • Why firms do it: lower costs, meeting expectations, employer brand, employee commitment and responsibility to society.
  • Limits: the definitions are broad, and much evidence rests on what employees report. Sustainable HRM is the wider idea.

Remember: People change habits; habits change resource use.

Five strategic dimensions of green HRM

  • Five dimensions, in order: green products and services; green workforce; green workplace; green function or process model; green management and governance.
  • Products and services: waste and pollution management, resource replacement, sustainable design, adaptive reuse. Workforce: recruiting, training, careers, culture.
  • Workplace: buildings, ergonomics, virtual work, energy. Function or process: sustainability in each HR function. Governance: board accountability, incentives, reporting.
  • Do not confuse the list with the key strategic dimensions of Strategic HRM.
  • The list organises ideas; its dimensions overlap and its author is rarely named.

Remember: Products, workforce, workplace, process, governance.

Green HR policies across the HR cycle

  • Six stages: sourcing and acquisition, recruitment and selection, orientation, learning and development, performance management, compensation and rewards.
  • Sourcing puts green targets in job descriptions and awareness in the competency model. Recruitment uses online applications, e-resumes and video interviews.
  • Orientation builds a green culture. Learning and development builds green skills, with job rotation through green assignments.
  • Performance management sets green indicators and targets. Rewards recognise green skills and results, and link executive pay to emission and renewable-energy targets.
  • A policy states the aim; a practice is what people actually do.

Remember: Recruit, orient, train, measure, reward, retain.

Green HR practices and how to measure them

  • Practices: paperless HR, virtual meetings and interviews, energy saving, recycling, green commuting, flexible work, green rewards and employee involvement.
  • Green KPIs work at three levels: activity (did we do it), behaviour (do people act differently), result (did resource use fall).
  • Set a baseline and report use per employee and the total. Each figure alone can mislead.
  • Activity is not impact: training 90% of staff is not a lower electricity bill.
  • Flexible work can shift energy use rather than cut it. Exams pair green workplace with resource efficiency and flexible work with lower travel emissions.

Remember: Do it, see it, count it: activity, behaviour, result.

Limits of green HRM, and links to CSR

  • Greenwashing: a false or misleading impression of how green the firm is. Test it with baseline, target, owner and consequence.
  • Resistance: green rules add effort or look imposed. Explain the reason, involve staff, give tools, show results and offer alternatives.
  • Cost: costs come first and savings later. If savings fall short, say so and rest the case on gains that are harder to count.
  • Green HRM is one part of CSR, not the whole. Legal limits on pollution are the minimum it aims to go beyond.
  • Goals: green HRM bears on SDG 12 (responsible consumption and production), 13 (climate action), 7 (clean energy), and 8 through fair work.

Remember: Claim only what you can count.

Don’t confuse it with

  • Five strategic dimensions of green HRM: Don't confuse these five dimensions with the key strategic dimensions in the Strategic HRM chapter. Those are employer branding, lifecycle management, performance and learning, retention and engagement, and culture and change. They describe how HR moves business results in general. These five sort the places where green aims enter a firm.
  • Green HR policies across the HR cycle: Don't confuse a green HR policy with a green HR practice. A policy is the stated rule or aim, such as "interviews are online wherever possible". A practice is what managers and staff actually do. A firm can have the policy without the practice, and the gap between them is where green claims go wrong.
  • Green HR practices and how to measure them: Don't confuse activity with impact. Training 90% of staff is activity. Lower electricity use is impact. A firm can score well on activity and still not change the result.
  • Limits of green HRM, and links to CSR: Don't confuse green HRM with CSR. CSR is the whole of a firm's responsibility to society. Green HRM is the part that works through people management and aims at environmental behaviour inside the firm. A firm can fund a village project and still run a wasteful office. Green HRM targets the office.

Key terms

Adaptive Reuse
Finding a new use for old materials or products; one item under green products and services.
AMO Model
Ability, motivation and opportunity: green behaviour needs people who are able, motivated and given the opportunity to act.
Five Dimensions of Green HRM
A teaching framework of five areas: green products and services, workforce, workplace, function or process model, and management and governance. Its author is rarely named.
Green Commuting
Carpools, public transport for business travel, cycling or walking to work, and loans for low-emission vehicles, to burn less fuel on journeys.
Green HRM
HR policies, practices and systems that encourage green behaviour among employees, to create an environmentally sensitive, resource-efficient and socially responsible organisation.
Green KPI
A measurable number showing whether people are making the firm greener, such as electricity used per employee.
Green Policy
The stated rule or aim, such as interviews online wherever possible; unlike a green practice, it need not be what people actually do.
Green Practice
What managers and staff actually do; the gap between policy and practice is where green claims go wrong.
Green Rewards
Recognition, awards, bonuses linked to green goals, and free bicycles or transport benefits that motivate green behaviour.
Paperless HR
Online applications, e-offer letters, digital appraisal forms and payslips, giving less paper and printing.
Sustainable Development Goals (SDGs)
The 17 goals adopted by UN member states in 2015, to be met by 2030; green HRM bears most on goals 12, 13 and 7.
Sustainable HRM
A fuller idea than green HRM that adds fair treatment, wellbeing and steady employment for staff, families and communities.
Triple Bottom Line
People, planet and profit, used with the sustainability goals as a common language for reporting.

Unit 4 · Chapter 1Accounting Principles: Concepts, Conventions and Standards

Entity, money measurement and cost

  • Entity: the business is separate from its owner. Owner’s money put in is capital; owner’s withdrawals are drawings.
  • Money measurement: only what has a reliable money value is recorded.
  • Cost: assets are shown at what was paid, not at later market value.
  • Cost is objective but understates old assets in inflation.

Remember: Entity: the owner stands apart. Money: only what a rupee can measure. Cost: what you paid.

Dual aspect and the accounting equation

  • Dual aspect: every transaction has a debit and an equal credit.
  • Assets = Liabilities + Capital, and it holds after every transaction.
  • Debit increases assets and expenses; credit increases liabilities, capital and income.
  • Balanced books can still hold wrong entries.

Remember: Two sides, one amount: debit equals credit.

Going concern and periodicity

  • Going concern: the business is assumed to continue, so assets are valued for use and depreciated.
  • Periodicity: a business’s life is divided into equal periods; in India the financial year is 1 April to 31 March.
  • If going concern fails, the basis changes and must be disclosed.
  • Periods force estimates, and the year-end cut-off matters.

Remember: Going concern: the business goes on, so spread the cost. Periodicity: cut the life into years.

Realisation, accrual and matching

  • Realisation: revenue is counted when earned, not when cash is received.
  • Accrual: revenues and costs are counted when they occur, in the period they belong to.
  • Matching: set each period’s costs against the revenue they earned.
  • Profit is not cash; credit sales and unsold stock tie cash up.

Remember: Earn it, count it. Use it, count it. Match cost to the sale.

The four conventions

  • Disclosure: show all material facts, such as contingent liabilities in the notes.
  • Consistency: use the same methods each year; justify and disclose changes.
  • Conservatism: anticipate no profit, provide for all possible losses; stock at lower of cost and net realisable value.
  • Materiality: detail only what could change a user’s decision.

Remember: Disclose it. Keep it consistent. Provide for losses, not for gains. Ignore the trivial.

Accounting standards in India

  • Standards fix how items are recorded, measured, shown and disclosed.
  • ICAI recommends; the Central Government notifies under section 133 of the Companies Act, 2013, after consulting NFRA.
  • AS 2, 3, 9, 19, 20 and Ind AS 109, 110, 113, 115, 116 are the numbers to recall.
  • Ind AS follow IFRS; they apply to listed and larger unlisted companies.

Remember: ICAI recommends, the Government notifies. AS for most, Ind AS for the large and listed.

Don’t confuse it with

  • Entity, money measurement and cost: Don’t confuse the accounting entity with the legal one. A sole proprietor is not legally separate from his shop; he is personally liable for its debts. His accounts still keep the two apart. A company is separate in both law and accounts.
  • Dual aspect and the accounting equation: Don’t think a balanced set of books is a correct one. The two sides can agree and still be wrong. If Ravi books the school fee as a shop expense, debits and credits still match; the mistake is in the choice of account. Chapter 2 lists the errors a trial balance cannot catch.
  • Going concern and periodicity: Don’t read going concern as a promise that the firm will survive. It is a starting assumption. If the firm is likely to close, the accounts must be prepared on a different basis, and the basis must be disclosed. Auditors report a “material uncertainty related to going concern” when there is real doubt.
  • Realisation, accrual and matching: Don’t confuse profit with cash. Meera’s profit is ₹2,00,000 but her cash fell by ₹1,10,000. The difference is ₹1,60,000 owed by customers, ₹1,60,000 tied up in unsold stock, less ₹10,000 of rent not yet paid. This is why a profitable business can still run out of cash.
  • The four conventions: Don’t confuse concepts with conventions. Concepts, like entity and accrual, are basic assumptions about how accounting is structured. Conventions, like consistency and materiality, are accepted practices that shape how information is presented. Textbooks use the two words loosely, so give the example if asked.
  • Accounting standards in India: Don’t mix the two numbering systems. AS 3 and Ind AS 7 both deal with cash flows; AS 9 and Ind AS 115 both deal with revenue. An exam question that gives only a number needs you to know which set it comes from.

Key terms

Accounting Equation
Assets = Liabilities + Equity, the identity that every double entry preserves.
Accrual Concept
Revenues and expenses are recorded when earned or incurred, not when cash is received or paid.
Business Entity Concept
The business is treated as separate from its owner, so the owner’s private affairs stay out of its books.
Conservatism (Prudence)
Provide for expected losses at once, but recognise profits only when realised.
Consistency Convention
The same accounting methods are used from year to year so results can be compared.
Cost Concept
Assets are recorded at what was paid for them, whatever they later become worth.
Disclosure Convention
All material information, including contingent liabilities, must be disclosed fully.
Dual Aspect Concept
Every transaction has two effects, a debit and an equal credit, so Assets = Liabilities + Equity always holds.
Going Concern Concept
The business is assumed to continue, which is why assets are depreciated rather than valued for sale.
Matching Concept
Expenses are set against the revenue they helped earn in the same period.
Materiality Convention
Only items large enough to affect users’ decisions need detailed treatment.
Money Measurement Concept
Only events that can be expressed in money are recorded in the books.
Periodicity Concept
The business’s continuing life is divided into periods, usually a year, for reporting.
Realisation Concept
Revenue is recognised when it is earned, usually on sale, not necessarily when cash arrives.

Unit 4 · Chapter 2Preparation of Financial Statements

What the final accounts contain

  • Balance sheet: position on a date; Assets = Liabilities + Equity.
  • Profit and loss: performance over a period; Income − Expenses = Profit.
  • Cash flow: Closing cash = Opening cash + Net change; changes in equity: Opening + Profit + Shares − Dividends = Closing.
  • Notes explain the figures; Schedule III sets the company layout.

Remember: Position at a date, performance over a period, cash by activity, owners’ funds, and notes.

From first entry to finished statements

  • Steps: record, journal, ledger, trial balance, adjust, adjusted trial balance, statements, approval.
  • Steps 1 to 4 run through the year; 5 to 8 at year-end.
  • The trial balance proves arithmetic only: omission, commission, principle and compensating errors can hide in it.
  • The board approves the statements, and the statutory auditor reports on them.

Remember: Record, journal, ledger, test, adjust, retest, report, approve.

Year-end adjustments

  • Depreciation allocates an asset’s cost over its useful life; it sets no cash aside.
  • Outstanding expense: add it. Prepaid expense: remove the part for the future.
  • Accrued income is earned not received; unearned income is received in advance.
  • A provision is charged to profit for a likely loss; a reserve is profit kept back.

Remember: Wear it, owe it, prepay it, doubt it.

Don’t confuse it with

  • What the final accounts contain: Don’t confuse the balance sheet with the profit and loss account. A balance sheet is a snapshot on one date. The profit and loss account is a film of a whole year. One shows position, the other performance.
  • From first entry to finished statements: Don’t confuse the journal, the ledger and the trial balance. The journal lists transactions in date order. The ledger groups them by account. The trial balance is a check on the ledger, not a statement for outsiders.
  • Year-end adjustments: depreciation, accruals and provisions: Don’t confuse a provision with a reserve. A provision is charged against profit for a loss or liability that is known or likely. A reserve is profit kept back, such as a general reserve, and is not a cost. Don’t confuse depreciation with saving cash, either: depreciation spreads cost and sets no cash aside.

Key terms

Accrued Income
Income earned in the period but not yet received.
Balance Sheet
A statement of what a business owns, owes and has put in by its owners on a single date.
Depreciation
The spreading of an asset’s cost over its useful life; it uses no cash and sets none aside.
Journal Entry
The first record of a transaction, written in date order with its debit and credit.
Ledger Account
A running account to which journal entries are posted, grouped by head such as cash or sales.
Notes to Accounts
Explanatory disclosures with the statements, covering accounting policies, contingent liabilities and the detail behind figures.
Outstanding Expense
A cost already incurred but not yet paid, added to the year’s expenses and shown as a liability.
Prepaid Expense
A cost paid in advance for a later period, taken out of this year’s expenses and shown as an asset.
Provision
An amount charged against profit for a known or likely loss or liability whose size is uncertain.
Reserve
Profit kept back in the business; unlike a provision, it is not a charge against profit.
Schedule III
The layout the Companies Act prescribes for a company’s balance sheet and statement of profit and loss.
Statement of Changes in Equity
A statement showing how owners’ funds moved over the period: profit, share issues, dividends and reserves.
Statement of Profit and Loss
A statement of income, expenses and the resulting profit or loss for a period.
Straight-Line Method
Depreciation of the same amount every year: depreciable amount divided by useful life.
Trial Balance
A list of ledger balances that checks total debits equal total credits before statements are drawn.
Written-Down Value Method
Depreciation at a fixed percentage of the asset’s reducing book value each year.

Unit 4 · Chapter 3Indian Accounting Standards and IFRS

Why accounting standards matter, and who makes them

  • Reasons: uniformity, transparency, global alignment, fraud prevention, guidance for auditors.
  • Two sets in India: AS (2006 Rules) and Ind AS (2015 Rules, converged with IFRS).
  • Convergence means harmony, not copying.
  • ICAI drafts, NFRA advises, the Ministry notifies.

Remember: ICAI drafts, NFRA advises, MCA notifies; convergence is harmony, not copying.

Ind AS, IFRS and the phases of adoption

  • IFRS: IASB, global. Ind AS: notified by the Ministry, India only.
  • Both require a statement of compliance; Indian layouts come from Schedule III.
  • Phases started on 1 April 2016, by net worth and listing; thresholds have been amended.
  • Ind AS use more fair values and estimates, so they depend more on judgement.

Remember: IASB makes IFRS; the Ministry notifies Ind AS; companies join by phase.

The main standards and their counterparts

  • Ind AS 2/AS 2, 7/AS 3, 10/AS 4, 16/AS 10, 19/AS 15, 33/AS 20, 36/AS 28, 37/AS 29, 38/AS 26.
  • Ind AS 115 matches AS 9 (revenue); Ind AS 116 matches AS 19 (leases).
  • Ind AS 109, 110 and 113 have no full AS counterpart.
  • Always check a pairing against the standard; some notes print wrong pairs.

Remember: Same topic, different number, different content.

Don’t confuse it with

  • Why accounting standards matter, and who makes them: Don’t say Ind AS replaced AS everywhere. India has had two sets side by side. Companies covered by Ind AS follow it, and all others continue under AS. The line between them is drawn by net worth and listing, and it has been revised more than once.
  • Ind AS, IFRS and the phases of adoption: Don’t trust a net-worth number from a study note. The thresholds above are the original scheme. The rules have been amended, and the notes that describe them are often out of date. The current limits are in the Companies (Indian Accounting Standards) Rules, 2015, as amended. Treat any number here as a guide to the idea.
  • The main standards and their counterparts: Mind the errors in common notes. Some notes print the wrong pairs: they set Ind AS 27 against AS 21 (AS 21 is the consolidated statements standard, and consolidation is Ind AS 110), and Ind AS 41 against AS 14, which is about amalgamations. They also describe IFRS 9 as ‘replacing IFRS 7’. In fact IFRS 7 still deals with disclosure for financial instruments, and IFRS 9 replaced the older IAS 39. Always check against the standard itself.

Key terms

Accounting Standards (AS)
The older set of Indian accounting standards, which apply to companies not covered by Ind AS.
Carve-Out
A point where India chose a treatment different from the IFRS in its converged standards.
Convergence
Bringing national standards into harmony with IFRS, with changes where local conditions need them, short of full adoption.
GAAP
Generally accepted accounting principles: the rules and conventions a set of accounts is expected to follow.
IASB
The International Accounting Standards Board, which issues IFRS.
IFRS (International Financial Reporting Standards)
Global accounting standards issued by the IASB to make financial statements comparable across countries.
Impairment of Assets
Writing an asset down when it is carried at more than it can recover; covered by Ind AS 36 and AS 28.
Ind AS (Indian Accounting Standards)
India’s accounting standards, converged with IFRS; they apply to companies in notified classes.
NFRA
The National Financial Reporting Authority, which advises the Government on accounting and auditing standards under the Companies Act, 2013.

Unit 4 · Chapter 4Ratio Analysis: Liquidity, Profitability, Activity and Solvency

What ratio analysis does

  • A ratio divides one accounting figure by another so that firms and years can be compared.
  • Four families: liquidity, profitability, activity (turnover) and solvency.
  • Read a ratio against the firm’s trend, similar firms and a standard, never alone.
  • Ratios use past accrual figures; they show that something looks odd, not why.

Remember: Short-term, earning, efficiency, long-term.

Uses, types and limits of ratios

  • Traditional: income statement, balance sheet, composite. Functional: liquidity, profitability, activity, solvency.
  • Different users want different ratios: short-term creditors liquidity, long-term lenders solvency.
  • Advantages: simpler statements, trends, control, links between parts.
  • Limits: qualitative factors, single-year ratios, defective accounting data.

Remember: Where the figures come from, and what the ratio tests.

Liquidity ratios

  • Current ratio = Current assets ÷ Current liabilities; convention about 2 : 1.
  • Quick ratio = (Current assets − Inventory) ÷ Current liabilities; about 1 : 1.
  • Cash ratio = Cash and equivalents ÷ Current liabilities.
  • A very high ratio can mean idle cash, slow stock or unpaid debtors.

Remember: Current: all. Quick: no stock. Cash: cash only.

Profitability ratios

  • Gross profit ratio = Gross profit ÷ Net sales × 100 (30% here).
  • Net profit ratio = Net profit ÷ Net sales × 100 (8.4%).
  • ROA = Net profit ÷ Total assets (10.5%); ROE = Net profit ÷ Equity (17.5%).
  • P/E = Share price ÷ EPS (15); a high ROE built on heavy debt is not a safe one.

Remember: Gross, net, assets, equity: the base moves from sales to what is invested.

Operating ratio, capital employed and EPS

  • Operating ratio + operating profit ratio = 100%.
  • ROCE = EBIT ÷ (Debt + Equity) × 100, also Fixed assets + Working capital.
  • EPS = (Profit after tax − Preference dividend) ÷ Equity shares.
  • A bonus issue lowers EPS without lowering profit.

Remember: Operating ratio plus operating profit ratio makes 100.

Activity (turnover) ratios

  • Inventory turnover = Cost of goods sold ÷ Average inventory.
  • Debtors turnover = Net credit sales ÷ Average receivables; creditors turnover uses credit purchases.
  • Asset turnover = Net sales ÷ Total assets (1.25 for Kaveri).
  • Days = 365 ÷ turnover; stock days + debtors days − creditors days is the cash cycle.

Remember: Stock on cost, debtors on credit sales, creditors on purchases, assets on sales.

Solvency ratios

  • Debt-to-equity = Total debt ÷ Equity (0.42 for Kaveri).
  • Debt ratio = Total debt ÷ Total assets (0.25).
  • Interest coverage = EBIT ÷ Interest (7 times).
  • Debt is not bad in itself; it magnifies both gains and losses.

Remember: Debt against owners, against assets, and profit against interest.

Don’t confuse it with

  • What ratio analysis does: Don’t treat a rule of thumb as a law. The ‘ideal’ current ratio of 2:1 and quick ratio of 1:1 are conventions. A supermarket that sells for cash and pays suppliers on credit runs safely on less. What matters is the pattern in your industry.
  • Uses, types and limits of ratios: Don’t treat a good ratio as proof of a good firm. A ratio can be right and still mislead. Different firms use different accounting policies, and a year-end snapshot can be arranged to look better. Use ratios to find questions to ask, and look for the answer in the business.
  • Liquidity ratios: Don’t confuse the quick ratio with the current ratio. The quick ratio leaves out inventory because stock can take months to turn into cash, and may sell below cost. A firm with a healthy current ratio but a weak quick ratio is relying on its stock being sold.
  • Profitability ratios: Don’t mix up the denominators. ROA divides by all assets, ROE only by the owners’ funds. Gross and net profit ratios both divide by net sales. If a question says ‘return on capital employed’ it uses yet another denominator, so read it.
  • Operating ratio, capital employed and earnings per share: Don’t read a fall in EPS as a fall in profit. If Kaveri issued one bonus share for every four held, its shares would rise from 100,000 to 125,000. Profit is unchanged, but EPS falls from ₹4.20 to ₹3.36. The firm has not become less profitable; its profit is just spread over more shares.
  • Activity (turnover) ratios: Don’t use the wrong figure on top. Inventory turnover uses cost of goods sold, not sales, because stock is valued at cost. Debtors turnover uses credit sales only, since cash sales never create a debtor. Using total sales makes collection look faster than it is.
  • Solvency ratios: Don’t confuse the debt ratio with debt-to-equity. The first divides by total assets, the second by owners’ equity only. Debt-to-equity is always the larger of the two (unless there is no debt). Many sources also differ on what to count as debt, so always check whether short-term borrowings are included.

Formulas

  • Current ratio: Current assets ÷ Current liabilities
  • Quick (acid-test) ratio: (Current assets − Inventory) ÷ Current liabilities
  • Cash ratio: (Cash + Cash equivalents) ÷ Current liabilities
  • Gross profit ratio: (Gross profit ÷ Net sales) × 100
  • Net profit ratio: (Net profit ÷ Net sales) × 100
  • Return on assets (ROA): (Net profit ÷ Total assets) × 100
  • Return on equity (ROE): (Net profit ÷ Shareholders’ equity) × 100
  • Inventory turnover: Cost of goods sold ÷ Average inventory
  • Debtors turnover: Net credit sales ÷ Average accounts receivable
  • Creditors turnover: Net credit purchases ÷ Average accounts payable
  • Asset turnover: Net sales ÷ Total assets
  • Debt-to-equity: Total debt ÷ Shareholders’ equity
  • Debt ratio: Total debt ÷ Total assets
  • Interest coverage: EBIT ÷ Interest expense

Key terms

Asset Turnover Ratio
Net sales divided by total assets; the sales earned from each rupee of assets.
Capital Employed
The long-term funds in the business: debt plus equity, or fixed assets plus working capital.
Capital Gearing Ratio
Funds carrying a fixed interest or dividend divided by equity funds.
Cash Ratio
Cash and cash equivalents divided by current liabilities; the strictest liquidity test.
Common-Size Statement
A statement with each item shown as a percentage of sales or total assets, to spot changes.
Composite Ratio
A ratio with one figure from the statement of profit and loss and the other from the balance sheet, such as debtors turnover.
Creditors Turnover Ratio
Net credit purchases divided by average payables; how quickly suppliers are paid.
Current Ratio
Current assets divided by current liabilities; a liquidity test with a conventional benchmark of about 2:1.
Debt Ratio
Total debt divided by total assets; the share of assets financed by debt.
Debt-to-Equity Ratio
Total debt divided by shareholders’ equity; a measure of financial leverage.
Debtors Turnover Ratio
Net credit sales divided by average receivables; how quickly customers pay.
Earnings per Share (EPS)
Net profit divided by the number of shares.
Fixed Assets Turnover Ratio
Net sales divided by net fixed assets; sales produced by each rupee of fixed assets.
Gross Profit Ratio
Gross profit as a percentage of net sales.
Interest Coverage Ratio
Earnings before interest and tax divided by interest; how many times interest is covered.
Inventory Turnover Ratio
Cost of goods sold divided by average inventory; how many times stock is sold and replaced.
Net Profit Ratio
Net profit as a percentage of net sales.
Operating Profit Ratio
Operating profit as a percentage of sales; the operating ratio’s complement.
Operating Ratio
Cost of goods sold plus operating expenses, as a percentage of sales.
Price-Earnings (P/E) Ratio
Share price divided by earnings per share; the rupees investors pay for each rupee of earnings.
Proprietary Ratio
Shareholders’ funds divided by total assets; the share of assets paid for by owners.
Quick Ratio (Acid-Test Ratio)
Current assets less inventory, divided by current liabilities; benchmark about 1:1.
Ratio Analysis
Studying relationships between items in the financial statements to judge performance and position.
Return on Assets (ROA)
Net profit as a percentage of total assets.
Return on Capital Employed (ROCE)
Profit before interest and tax as a percentage of capital employed; also called return on investment.
Return on Equity (ROE)
Net profit as a percentage of shareholders’ equity.
Stock-Working Capital Ratio
Closing stock divided by working capital.
Total Assets to Debt Ratio
Total assets divided by long-term debt; how many times assets cover the debt.
Window Dressing
Arranging year-end figures, such as paying creditors early, to make ratios look better.

Unit 4 · Chapter 5Fund Flow Statement

Funds and the flow of funds

  • Funds = working capital = current assets − current liabilities.
  • A flow of funds is a change in working capital.
  • Only current ↔ non-current transactions move funds.
  • Cash is only part of working capital; the cash flow statement covers cash.

Remember: Cross the line, move the funds.

Schedule of changes in working capital

  • Current asset up → working capital up; current asset down → down.
  • Current liability up → working capital down; current liability down → up.
  • The schedule uses current items only, for two balance sheet dates.
  • Its net result must equal the gap between sources and applications.

Remember: Assets up, working capital up. Liabilities up, working capital down.

Sources and applications of funds

  • Sources: funds from operations, issue of shares or debentures, long-term loans, sale of fixed assets.
  • Applications: purchase of fixed assets, repaying loans, dividends, losses.
  • Sources − Applications = change in working capital.
  • Add back non-fund charges such as depreciation; they are not sources.

Remember: Long-term in is a source, long-term out is an application.

Don’t confuse it with

  • Funds and the flow of funds: Don’t confuse funds with cash. Cash is only one part of working capital. Selling goods on credit raises working capital but not cash, and paying a creditor lowers cash without changing working capital. That difference is why the cash flow statement (Chapter 6) was added.
  • Schedule of changes in working capital: Don’t mix up the direction for liabilities. A liability that grows is money a supplier is lending, which sounds like a gain but is a claim to be paid soon. It reduces the net current assets left over, so working capital falls. Most mistakes in this schedule come from reversing this one rule.
  • Statement of sources and applications of funds: Don’t treat depreciation as a source of funds. Depreciation is added back only because it was deducted without using any working capital. The cash does not come from depreciation; it comes from sales. Adding it back stops profit from being understated as a measure of funds from operations.

Key terms

Application of Funds
A long-term outflow that uses funds, such as buying assets, repaying loans or paying dividends.
Current Account
A current asset or liability, such as stock, debtors, cash or creditors.
Flow of Funds
A change in working capital, arising only when a current and a non-current account are both affected.
Fund Flow Statement
A statement of the sources and applications of funds, where funds means working capital.
Funds from Operations
Profit adjusted for non-fund items such as depreciation; the main internal source of funds.
Non-Current Account
A long-term account, such as share capital, reserves, long-term loans or fixed assets.
Schedule of Changes in Working Capital
A table of each current item over two years showing how working capital rose or fell.
Source of Funds
A long-term inflow that raises working capital, such as new shares, loans, asset sales or operating profit.
Working Capital
Current assets less current liabilities; the money tied up in day-to-day running.

Unit 4 · Chapter 6Cash Flow Statement

Cash and the three activities

  • Operating: the main business, including tax; investing: long-term assets; financing: owners and lenders.
  • Cash includes cash in hand, demand deposits and cash equivalents.
  • Non-cash transactions are excluded.
  • The class of an item depends on the firm’s business.

Remember: Operating: the business. Investing: the assets. Financing: owners and lenders.

Direct and indirect method

  • Indirect: profit before tax + non-cash items ± working capital changes − tax paid.
  • Direct: cash received from customers − cash paid to suppliers and employees − tax.
  • A rise in a current asset lowers cash; a rise in a current liability raises it.
  • Both methods give the same answer.

Remember: Asset up, cash down. Liability up, cash up.

Fund flow versus cash flow

  • Funds = working capital; cash = cash and equivalents.
  • Operating + Investing + Financing = Net change in cash.
  • Closing cash = Opening cash + Net change.
  • A firm can grow working capital while its cash falls.

Remember: Funds for the structure, cash for the survival.

Don’t confuse it with

  • Cash and the three activities: Don’t confuse profit with cash from operations. Profit is on the accrual basis and counts sales when made, not when paid. Cash from operations counts only money actually received and paid, so a firm that sells on long credit shows profit but little cash.
  • Direct and indirect method: Don’t add depreciation to the cash flow as if it were a receipt. Depreciation was deducted in arriving at profit without any cash leaving. It is added back only to undo that deduction. Losses on the sale of assets are added back, and gains deducted, for the same reason: the cash from the sale is shown in investing.
  • Fund flow versus cash flow: Don’t treat the two as rivals. The fund flow statement shows how long-term money was raised and used, and the cash flow statement shows whether the firm can pay its bills. A good analysis uses both. In practice, companies covered by the standards present the cash flow statement; the fund flow statement is a management and exam tool.

Key terms

Cash Equivalents
Short-term, highly liquid investments that convert readily into known amounts of cash with little risk.
Cash Flow Statement
A statement of cash and cash equivalents received and paid, classified into operating, investing and financing.
Direct Method
Shows cash received from customers and cash paid out, to arrive at cash from operations.
Financing Activities
Activities that change the size and make-up of owners’ capital and borrowings.
Indirect Method
Starts with profit and adjusts for non-cash items and changes in working capital.
Investing Activities
Buying and selling long-term assets and investments that are not cash equivalents.
Non-Cash Transaction
A transaction that uses no cash, such as buying a machine by issuing shares; left out of the statement.
Operating Activities
The firm’s principal revenue-producing activities and other activities that are not investing or financing.

Unit 4 · Chapter 7Cost Accounting and the Cost Sheet

Cost accounting and its purpose

  • Cost accounting: record, classify, analyse and control costs.
  • Aims: cost control, pricing, inventory valuation, profitability, budgeting.
  • Methods: job, batch, process, contract, ABC. Techniques: standard, marginal, budgetary, uniform.
  • It serves management; financial accounting serves outsiders.

Remember: Methods follow the product; techniques follow the question.

Types and elements of cost

  • Fixed: constant with output. Variable: moves with output. Semi-variable: both.
  • Direct: traceable to a product. Indirect: not.
  • Elements: material, labour, expenses and overheads.
  • Prime cost = DM + DL + direct expenses; total cost = prime cost + overheads.

Remember: Fixed is stuck, variable follows; direct is traced, indirect is shared.

Preparing a cost sheet

  • Prime cost + factory overheads = factory cost.
  • Factory cost + administrative overheads = cost of production.
  • Cost of production + selling and distribution overheads = total cost.
  • Total cost + profit = selling price; check whether profit is on cost or on sales.

Remember: Prime, factory, production, sales, price.

Don’t confuse it with

  • Cost accounting and its purpose: Don’t say cost accounting is free of law. Cost accounting has no single statute for all firms. But the Companies Act 2013 lets the Government require cost records and a cost audit for notified classes of company, so some firms must keep them. Check the notification for the sector.
  • Types and elements of cost: Don’t confuse fixed with direct. ‘Fixed’ and ‘variable’ describe how a cost changes with output. ‘Direct’ and ‘indirect’ describe whether it can be traced to a product. A supervisor’s salary is fixed and indirect; a piece-rate worker’s wages are variable and direct. A cost can be any combination.
  • Preparing a cost sheet: Don’t mix up profit on cost and profit on sales. A 20% profit on cost of ₹8,80,000 is ₹1,76,000. As a share of the selling price of ₹10,56,000 it is only 16.7%. Always check which base the question uses.

Formulas

  • Prime cost = Direct material + Direct labour + Direct expenses
  • Total cost = Prime cost + Overheads

Key terms

Batch Costing
A costing method for goods made in distinct lots.
Contract Costing
A costing method for large, long projects such as construction.
Cost Accounting
Recording, classifying, analysing and controlling costs to find unit cost and support decisions.
Cost Sheet
A statement that builds up cost stage by stage from prime cost to selling price.
Direct Cost
A cost that can be traced to a specific product or job.
Fixed Cost
A cost that stays the same whatever the output, such as rent.
Indirect Cost
A cost that cannot be traced to one product and is shared among products.
Job Costing
A costing method for customised, one-off orders.
Overheads
Indirect costs of production, administration and selling that cannot be traced to a unit.
Prime Cost
Direct material plus direct labour plus direct expenses.
Process Costing
A costing method for continuous, uniform production such as cement.
Semi-Variable Cost
A cost with both a fixed and a variable part, such as an electricity bill.
Uniform Costing
Using the same cost methods across several firms or units so costs can be compared.
Variable Cost
A cost that changes in proportion to output, such as raw materials.

Unit 4 · Chapter 8Activity-Based and Life-Cycle Costing

Activity-based costing: the ideas

  • ABC: resources → activities → products, by cost drivers.
  • Cost pool: indirect costs with similar behaviour. Cost driver: the cause of the cost.
  • Driver rate = Pool cost ÷ Driver units.
  • Drivers: transaction (count), duration (time), intensity (direct charge).

Remember: Activities cause costs; products use activities.

The steps of ABC and a worked example

  • Four steps: identify activities; pool costs; choose drivers; charge products.
  • Four levels: unit, batch, product, facility.
  • ABC changes the split of overhead, not the total.
  • Facility-level costs still have no true driver.

Remember: Pool the cost, find the driver, charge by use.

Life-cycle costing

  • Life cycle cost = acquire + operate + support + dispose, usually discounted.
  • Product LCC: research to withdrawal. Project LCC: purchase to disposal of an asset.
  • Uses: choose between assets, judge benefits, build accurate budgets.
  • The cheapest asset to buy is not always the cheapest to own.

Remember: Count the cost of owning, not just the cost of buying.

Don’t confuse it with

  • Activity-based costing: the ideas: Don’t confuse a cost pool with a cost driver. The pool is the money: all the set-up costs added together. The driver is the cause you divide it by: the number of set-ups. The pool divided by the driver units gives the rate.
  • The steps of ABC and a worked example: Don’t think ABC creates cost. The total overhead, ₹6,00,000, is the same under both methods: ₹4,80,000 + ₹1,20,000 against ₹3,04,000 + ₹2,96,000. ABC only shares it differently, by cause. Only the split between products changes.
  • Life-cycle costing: Don’t decide on purchase price alone. Using the price alone overstates the return on the cheaper asset and understates the budget needed to run it. A budget that leaves out future running costs makes profit look larger than it will be.

Key terms

Activity
A group of tasks tied to a cost object, such as scheduling, set-ups, purchasing or inspection.
Activity-Based Costing (ABC)
Allocates overhead to products according to the activities that cause it.
Batch-Level Activity
An activity done once per batch, such as ordering, set-ups or inspecting a lot.
Cost Driver
The factor that causes the cost of an activity, such as the number of set-ups.
Cost Driver Rate
The cost of an activity pool divided by the number of driver units.
Cost Object
Anything for which a separate measure of cost is wanted, such as a product, service, project or customer.
Cost Pool
A group of indirect costs with similar behaviour, one for each activity.
Cost Unit
A unit of product, service or time for which cost is stated, such as a kilowatt-hour.
Duration Driver
A cost driver based on the time an activity takes, such as set-up hours.
Intensity Driver
A cost driver that charges directly for the resources used each time an activity is done.
Life-Cycle Costing
Adding all the costs of a product or asset from its first idea to its disposal, usually discounted.
Product Life-Cycle Costing
Tracing the costs and revenues of a product from research and design to withdrawal from the market.
Project Life-Cycle Costing
Estimating the cost of owning a physical asset from purchase to disposal; also called whole-life costing.
Transaction Driver
A cost driver that counts how many times an activity is done, such as orders or inspections.

Unit 4 · Chapter 9Target Costing, Kaizen Costing and Just-in-Time

Target costing

  • Target cost = Selling price − Desired profit.
  • Price is set by the market, so cost is managed from the design stage.
  • Steps: research, maximum cost, design, adjust, improve, approve, record, implement.
  • Benefits: profit, innovation, customer satisfaction, efficient production.

Remember: Price first, profit second, cost is what is left.

Kaizen costing

  • Kaizen: continuous improvement by everyone, in small steps.
  • Kaizen costing: regular cost-reduction targets and variance review.
  • Seven wastes: over-production, inventory, waiting, defects, motion, transportation, over-processing.
  • Different from re-engineering (radical) and from standard costing (fixed yardstick).

Remember: Small cuts, every month, by everyone.

Just-in-time (JIT)

  • JIT: the right unit, in the right quantity, at the right time.
  • Origin: Toyota; Taiichi Ohno.
  • Four environments: production, inventory, services, information.
  • Needs reliable suppliers, steady quality and tight schedules.

Remember: The right unit, in the right quantity, at the right time.

Don’t confuse it with

  • Target costing: Don’t confuse target costing with cost-plus pricing. Cost-plus starts with cost and adds profit to reach a price. Target costing starts with the price and takes profit away to reach a cost. The first lets inefficiency pass into the price; the second makes the cost bear the pressure of the market.
  • Kaizen costing: Don’t treat Kaizen as the same as standard costing. A standard cost is a fixed yardstick, and a variance is judged against it. In Kaizen costing the yardstick itself is lowered every period. Kaizen costing is about reducing the cost, while standard costing is about controlling it at the level set.
  • Just-in-time (JIT): Don’t think JIT only means less stock. JIT needs steady quality, short set-ups, reliable suppliers and a tight schedule. A firm that cuts stock without these simply runs out of parts. The stock was hiding problems, and JIT exposes them, so they must be solved.

Formulas

  • Target cost = Selling price − Desired profit

Key terms

Business Process Re-engineering
A radical, one-off redesign of processes, in contrast to the small steps of continuous improvement.
Carrying Cost
The yearly cost of holding stock: storage, insurance, interest and spoilage.
Just-in-Time (JIT)
Bringing materials and making goods exactly when needed, on the view that inventory is waste.
Kaizen
The Japanese word for continuous improvement, in small steps by everyone.
Kaizen Costing
Setting regular cost-reduction targets for existing products and reviewing the variances each period.
Seven Wastes
Over-production, inventory, waiting, defects, motion, transportation and over-processing.
Target Cost
Selling price minus desired profit; the most a product may cost.
Target Costing
Setting the price from the market, taking away the desired profit, and designing the product to the cost that is left.
Value Engineering
Studying each part of a product for what it does for the customer and what it costs, to take out cost without losing value.

Unit 4 · Chapter 10Marginal Costing and Cost-Volume-Profit Analysis

Marginal costing and contribution

  • Contribution = Sales − Variable cost; per unit = Price − Variable cost per unit.
  • P/V ratio = Contribution ÷ Sales × 100.
  • Profit = Contribution − Fixed costs.
  • Absorption costing carries fixed cost into stock, so its profit is higher when stock rises.

Remember: Variable costs go in the product; fixed costs wait in the period.

Marginal cost, its features and limits

  • Marginal cost = variable cost of one more unit; also called variable or contributory costing.
  • Features: only variable costs in product cost; fixed costs charged to the period; stock at variable cost.
  • Advantages: decision data, profit planning, no arbitrary fixed-cost sharing.
  • Limits: semi-variable costs are hard to split; ignores fixed costs in decisions; not for published accounts.

Remember: Extra unit, extra variable cost; fixed cost waits for the contribution.

Break-even and CVP analysis

  • Break-even (units) = Fixed costs ÷ Contribution per unit.
  • Break-even (₹) = Fixed costs ÷ P/V ratio.
  • Margin of safety = Actual sales − Break-even sales.
  • Target profit: add the desired profit to fixed costs before dividing.

Remember: Break-even is where contribution equals fixed cost.

Relationships in CVP and the angle of incidence

  • Marginal cost equation: S − V = F + P; C = F + P.
  • At break-even C = F; in the margin of safety C = P.
  • P/V ratio = Change in profit ÷ Change in sales; MoS = Profit ÷ P/V.
  • Angle of incidence: the angle at which sales cut total cost; wide means high profit-earning capacity.

Remember: Break-even: contribution equals fixed cost. Above it: contribution equals profit.

Using marginal costing for decisions

  • Use only the costs and revenues that change with the decision.
  • Special order: accept if price exceeds variable cost, there is spare capacity and no spill-over.
  • Make or buy: compare the avoidable cost, not the full cost.
  • Marginal pricing cannot be the rule for every sale; fixed costs must be recovered.

Remember: Ask what changes. Ignore what stays.

Don’t confuse it with

  • Marginal costing and contribution: Don’t call contribution profit. Contribution is what is left of sales after variable costs, and is meant to cover fixed costs first. Only the part above fixed costs is profit. Below the break-even point the contribution exists, yet the firm makes a loss.
  • Marginal cost, its features and limits: Don’t mix up marginal cost with the average cost of a unit. Average cost spreads fixed costs over all units, and falls as output rises. Marginal cost is only the extra cost of one more, and is constant when variable cost per unit is. A firm that prices on average cost can turn down an order that would have added profit.
  • Break-even and cost-volume-profit analysis: Don’t use the unit formula when the question gives sales in rupees. Both formulas give the same result: ₹3,00,000 is 6,000 pumps at ₹50. The P/V ratio form works in rupees, which is useful when a firm sells many products at different prices.
  • Relationships in CVP and the angle of incidence: Don’t assume the margin of safety is a profit. The margin of safety is a sales figure. Only the contribution on it, the profit, is money. In the example, the margin of safety is ₹1,00,000 of sales, and the profit is ₹40,000, which is 40% of that.
  • Using marginal costing for decisions: Don’t forget the limits that make the marginal view safe. The export order must use idle capacity, must not be sold in the home market at the lower price, and must not lead other customers to demand a discount. If the order displaces a full-price sale, the lost contribution is a cost of accepting it.

Formulas

  • Contribution: Sales − Variable cost
  • Contribution per unit: Selling price − Variable cost per unit
  • P/V ratio: (Contribution ÷ Sales) × 100
  • Profit: Contribution − Fixed costs
  • Break-even (units): Fixed cost ÷ Contribution per unit
  • Break-even (₹): Fixed cost ÷ P/V ratio
  • Margin of safety: Actual sales − Break-even sales
  • Target profit (units): (Fixed cost + Desired profit) ÷ Contribution per unit
  • Target profit (₹): (Fixed cost + Desired profit) ÷ P/V ratio
  • Marginal cost equation: Sales − Variable cost = Fixed cost + Profit
  • At break-even: Contribution = Fixed cost
  • In the margin of safety: Contribution = Profit
  • Margin of safety: Profit ÷ P/V ratio
  • P/V ratio from two years: Change in profit ÷ Change in sales

Key terms

Absorption Costing
Includes fixed manufacturing overhead in the cost of each unit.
Angle of Incidence
The angle at which the sales line cuts the total cost line at break-even; a wide angle means profit builds fast.
Break-Even Chart
A graph of sales and costs showing the level of activity where there is no profit or loss.
Break-Even Point
The sales level at which contribution equals fixed costs, so there is no profit and no loss.
Contribution
Sales less variable cost; what each sale adds towards fixed costs and profit.
Cost-Volume-Profit (CVP) Analysis
Studies how cost, volume and profit move together.
Margin of Safety
Actual sales less break-even sales; how far sales can fall before a loss.
Marginal Cost
The extra cost of one more unit of output, which is its variable cost.
Marginal Cost Equation
Sales − Variable cost = Fixed cost + Profit.
Marginal Costing
Treats only variable costs as product costs; fixed costs are charged to the period.
P/V Ratio
Contribution as a percentage of sales; also called the profit-volume ratio.
Special Order
A one-off order priced below the usual price; accepted if it adds contribution and does not harm regular sales.
Variable Costing
Another name for marginal costing; only variable costs are charged to products.

Unit 4 · Chapter 11Standard Costing and Variance Analysis

Standard costing and variances

  • Standard cost: predetermined cost under good conditions.
  • Variance = Standard cost − Actual cost; F if actual is lower, A if higher.
  • MCV = MPV + MUV; LCV = LRV + LEV + LITV; VOCV = VOEV + VOEEV; FOCV = FOEV + FOVV.
  • A variance is a question to investigate, not a verdict.

Remember: Set, measure, compare, find the cause, act.

Standards, and the case for standard costing

  • Standard cost: predetermined cost based on a technical estimate for stated conditions.
  • Standard says what cost should be; estimate says what it will be.
  • Kinds: ideal, basic, current, expected, normal.
  • Best for repetitive products; poor for jobbing work.

Remember: Standard: should be. Estimate: will be.

Material and labour variances

  • MPV = AQ × (SP − AP); MUV = SP × (SQ − AQ); MCV is their sum.
  • LRV = AH × (SR − AR); LEV = SR × (SH − AH worked); LITV = idle hours × SR.
  • SQ and SH are the standards for the actual output.
  • Mix and yield together make up the usage variance when several materials are used.

Remember: Price for what you pay, usage for what you use.

Overhead variances

  • VOEV = AH × (SR − AR); VOEEV = SR × (SH − AH).
  • FOEV = Budgeted − Actual; FOVV = Standard − Budgeted; FOCV = Standard − Actual.
  • Standard fixed overhead = standard hours for actual output × standard rate.
  • A volume variance tests the plan more than the spending.

Remember: Variable: spend and speed. Fixed: spend and volume.

Sales variances

  • Sales value variance = Actual sales − Budgeted sales.
  • Price variance = Actual quantity × (Actual price − Standard price).
  • Volume variance = Standard price × (Actual quantity − Budgeted quantity).
  • Sign rule for sales: actual above standard is favourable, the opposite of costs.

Remember: Sales: actual minus standard, so above is favourable.

Don’t confuse it with

  • Standard costing and variances: Don’t compare actual cost with the budget for a different output. Salem’s standards are set for one utensil. The standard cost of the 900 actually made is the yardstick, not the cost of the 1,000 budgeted. Comparing with the budgeted output mixes a volume effect into every variance.
  • Standards, and the case for standard costing: Don’t treat an ideal standard as a fair test. An ideal standard assumes no waste and no breakdowns. Workers can never reach it, so adverse variances will always appear and may be ignored. A current or expected standard, set at attainable levels, is more useful for control.
  • Material and labour variances: Don’t treat idle time as efficiency. Idle time is paid time with no work, and is always adverse. The efficiency variance concerns the hours that were worked. Mixing the two hides a power cut inside a supervisor’s results.
  • Overhead variances: Don’t call the volume variance a spending error. Salem did not overspend on fixed overhead by ₹12,000. The factory made fewer than budgeted, so the fixed cost was spread over fewer units. The cause is the sales or production plan, not the accounts payable desk.
  • Sales variances: Mind the sign when you copy the cost formulas. For costs, a variance is favourable when actual is below standard, so the formula is standard minus actual. For sales it is the opposite: actual above budget is favourable, so it is actual minus standard. Some notes print the cost-style signs for sales, and that makes a lower price look favourable.

Formulas

  • MCV = MPV + MUV | LCV = LRV + LEV + LITV | VOCV = VOEV + VOEEV | FOCV = FOEV + FOVV
  • Cost (MCV): (SQ × SP) − (AQ × AP)
  • Price (MPV): AQ × (SP − AP)
  • Usage (MUV): SP × (SQ − AQ)
  • Cost (LCV): (SH × SR) − (AH × AR)
  • Rate (LRV): AH × (SR − AR)
  • Efficiency (LEV): SR × (SH − AH worked)
  • Idle time (LITV): Idle hours × SR
  • Cost (VOCV): (SH × SR) − (AH × AR)
  • Expenditure (VOEV): AH × (SR − AR)
  • Efficiency (VOEEV): SR × (SH − AH)
  • Cost (FOCV): Standard fixed OH − Actual fixed OH
  • Expenditure (FOEV): Budgeted fixed OH − Actual fixed OH
  • Volume (FOVV): Standard fixed OH − Budgeted fixed OH
  • Value: Actual sales − Budgeted sales
  • Price: Actual quantity × (Actual price − Standard price)
  • Volume: Standard price × (Actual quantity − Budgeted quantity)

Key terms

Actual Cost
The cost actually incurred, compared with the standard.
Basic Standard
A standard fixed for a base year and not revised.
Current Standard
A standard for present conditions, set for a short period and widely used for control.
Estimated Cost
A forecast of what a cost will be, usually from past data; unlike a standard, it is not a yardstick of efficiency.
Expected Standard
A standard that reflects what is expected to be reached in the period ahead.
Fixed Overhead Variance
The difference between standard and actual fixed overhead, split into expenditure and volume.
Ideal Standard
A standard set for the best possible conditions, with no waste or idle time.
Labour Cost Variance (LCV)
Standard labour cost for the actual output less the actual cost; rate, efficiency and idle-time parts.
Labour Efficiency Variance (LEV)
Standard rate times the difference between standard hours and hours actually worked.
Labour Idle Time Variance (LITV)
Idle hours times the standard rate; always adverse.
Labour Rate Variance (LRV)
Hours paid times the difference between standard and actual wage rate.
Material Cost Variance (MCV)
Standard cost of material for the actual output less the actual cost; the sum of price and usage variances.
Material Mix Variance (MMV)
The part of usage variance due to using materials in a different proportion from the standard.
Material Price Variance (MPV)
Actual quantity times the difference between standard and actual price.
Material Usage Variance (MUV)
Standard price times the difference between standard and actual quantity.
Material Yield Variance (MYV)
The part of usage variance due to actual output differing from the output the input should give.
Normal Standard
A standard based on the average of past results.
Overhead Cost Variance
Recovered overhead less actual overhead; the sum of the variable and fixed overhead variances.
Sales Price Variance
Actual quantity sold times the difference between actual and standard selling price.
Sales Value Variance
Actual sales less budgeted sales; the sum of the price and volume variances.
Sales Volume Variance
Standard price times the difference between actual and budgeted quantity sold.
Standard Cost
The predetermined cost of a unit under efficient working conditions.
Standard Costing
Compares predetermined costs with actual costs to find variances and act on their causes.
Variable Overhead Variance
The difference between standard and actual variable overhead, split into expenditure and efficiency.
Variance
The difference between standard and actual cost, favourable if actual is lower and adverse if higher.

Unit 4 · Chapter 12Budgeting and Budgetary Control

Budgeting and budgetary control

  • Budgeting: a financial plan for a period; budgetary control: compare, find variances, act.
  • Functions: planning, coordination, control, performance evaluation, discipline.
  • Steps: objectives, budgets, comparison, variance analysis, corrective action.
  • The key budget factor is the limit that fixes the first budget.

Remember: Plan, act, compare, correct.

Functional budgets and the master budget

  • Sales budget → production budget → materials and purchase budgets → cash budget.
  • Units to produce = Sales + Closing stock − Opening stock.
  • Cash budget methods: receipts and payments, adjusted profit and loss, balance sheet.
  • The master budget is a summary of all, with a projected profit and loss account and balance sheet.

Remember: Sales first, then production, then purchases; cash tells whether it can be paid.

Fixed, flexible and zero-based budgets

  • Fixed budget: unchanged with activity; simple but rigid.
  • Flexible budget: recalculated for actual output; used for fair variance analysis.
  • ZBB: identify decision units, develop packages, rank them, approve and fund.
  • Zero-based means no assumption that past costs are justified.

Remember: Fixed is rigid; flexible follows the work; zero-based starts again.

Don’t confuse it with

  • Budgeting and budgetary control: Don’t confuse budgeting with budgetary control. A budget is the plan. Budgetary control is the continuing process of checking it and acting. A budget with no control is only a forecast, and the saying goes: a budget is a plan, but control makes it work.
  • Functional budgets and the master budget: Don’t add the closing stock the wrong way round. Production is not sales. To end with more stock than you started with, you must make more than you sell. The formula adds the closing stock and subtracts the opening stock, and the same rule holds for materials.
  • Fixed, flexible and zero-based budgets: Don’t think zero-based means starting with no money. Zero-based means starting without assuming last year’s costs are justified. Every activity must show its case again. A useful activity usually survives, but its cost is questioned.

Key terms

Budgetary Control
Continually comparing actual results with budgets, finding variances and acting on them.
Budgeting
Preparing a quantitative financial plan for a period.
Cash Budget
A forecast of cash receipts and payments to manage liquidity.
Fixed Budget
A budget that does not change whatever the level of activity.
Flexible Budget
A budget recalculated for the actual level of activity.
Key Budget Factor
The limiting factor, often sales, that decides which budget is prepared first.
Master Budget
A consolidation of all functional budgets, with a projected profit and loss account and balance sheet.
Production Budget
Units to be made: sales plus closing stock less opening stock.
Purchase Budget
The materials to be bought: material needed plus closing stock less opening stock.
Sales Budget
An estimate of sales in quantity and value; usually the first budget drawn up.
Zero-Based Budgeting (ZBB)
Every item of spending must be justified afresh, with no assumption that last year’s costs continue.

Unit 4 · Chapter 13Financial Management

Financial management and its objectives

  • Financial management: planning, raising, using and controlling funds.
  • Objectives: profit maximisation, wealth maximisation, liquidity, risk minimisation.
  • Three decisions: investment, financing, dividend.
  • Wealth maximisation is the preferred objective in most textbooks.

Remember: Where to invest, how to raise, how much to give back.

Functions, scope and role of the financial manager

  • Seven functions: planning, investment, financing, liquidity, risk, dividend, reporting.
  • The manager plans, raises capital, controls, advises and ensures compliance.
  • The accountant records the past; the financial manager decides the next step.
  • Liquidity is the function that fails first.

Remember: Plan, invest, fund, keep liquid, cover risk, pay out, report.

Capital budgeting and dividend policy

  • Payback ignores the time value of money and cash flows after recovery.
  • NPV > 0: accept. IRR > cost of capital: accept.
  • The cost of capital is the discount rate for NPV and the hurdle for IRR.
  • Residual theory: pay out only what remains after funding good projects.

Remember: Positive NPV adds value; IRR above the cost of capital agrees.

Don’t confuse it with

  • Financial management and its objectives: Don’t treat profit maximisation and wealth maximisation as the same. Profit maximisation looks at this year’s profit, and can be gained by cutting maintenance or taking on risk. Wealth maximisation looks at the value of the business, which also reflects the timing, size and risk of future cash flows. It is the preferred objective in most textbooks.
  • Functions, scope and the role of the financial manager: Don’t confuse the financial manager with the accountant. The accountant records and reports what has happened. The financial manager uses that information to decide what to do next: which projects, what funding, and what risks. The two roles work closely, and in small firms may be one person.
  • Capital budgeting and dividend policy: Don’t rely on payback alone. Payback ignores cash flows after the recovery date and ignores the time value of money. A project with a quick payback but few later returns can look better than one that pays back slowly but earns for twenty years. Use NPV as the main test.

Key terms

Behavioural Finance
The study of how psychological biases influence financial decisions.
Capital Budgeting
Evaluating long-term investment projects using tools such as NPV, IRR and payback.
Dividend Policy
The decision on how much profit to pay out and how much to retain.
Financial Management
Planning, raising, using and controlling a firm’s funds.
Internal Rate of Return (IRR)
The discount rate at which a project’s NPV is zero.
Net Present Value (NPV)
Discounted future cash inflows less the initial outlay; accept a project if positive.
Payback Period
The time taken for a project’s cash inflows to recover its initial outlay.
Profit Maximisation
The aim of increasing profit, usually over a short period.
Residual Theory of Dividends
Dividends are paid only from profit left after all acceptable projects are funded.
Risk Management
Identifying financial risks and reducing them through hedging, insurance and diversification.
Wealth Maximisation
The aim of increasing the value of the firm over time, allowing for the timing and risk of cash flows.

Unit 4 · Chapter 14Sources of Finance

Classifying sources of finance

  • Five bases: time, ownership, origin, nature, control.
  • Long-term: over 5 years; medium: 1–5 years; short: up to 1 year.
  • Owned capital is permanent; borrowed capital is repayable with interest.
  • ‘External’ does not always mean ‘borrowed’.

Remember: Time, ownership, origin, nature, control.

Owned sources of finance

  • Equity: ownership, votes, variable dividend; highest risk and cost.
  • Preference: fixed dividend, priority over equity, usually no vote.
  • Retained earnings: internal, cheap to raise, but with an opportunity cost.
  • Preference shares are shares, not debt, and dividends are not tax-deductible.

Remember: Equity shares the risk, preference shares the order, retention shares nothing.

Borrowed and short-term sources

  • Long-term: debentures and bonds, long bank loans.
  • Medium-term: public deposits, hire purchase, leases.
  • Short-term: trade credit, overdraft, bills discounting, commercial paper, factoring.
  • Interest on debt is tax-deductible; dividends are not.

Remember: Match the life of the money to the life of the need.

Don’t confuse it with

  • Classifying sources of finance: Don’t think ‘external’ always means ‘borrowed’. A new issue of equity shares is an external source, but it is owned capital, not borrowed. The two classifications ask different questions: where the money comes from, and who has a claim on it.
  • Owned sources: equity, preference and retained earnings: Don’t call preference shares debt. Preference shares are shares: the dividend is paid out of profit, not as a tax-deductible interest cost, and holders are not creditors. They rank before equity but after debt on winding up. That in-between position is why past exam papers call them a hybrid.
  • Borrowed sources and short-term finance: Don’t treat debentures as shares. A debenture holder lends money and is owed interest whether or not there is profit. A shareholder owns part of the firm. Interest on debentures is a tax-deductible cost; dividends are not.

Key terms

Bills Discounting
Selling a bill to a bank before it is due, at a discount.
Borrowed Capital
Funds raised from outsiders, repayable with interest.
Commercial Paper
A short-term unsecured promissory note issued by large firms.
Debentures
Long-term borrowing at a fixed rate of interest; holders are creditors, not owners.
Equity Shares
Ownership shares with voting rights and a dividend that varies with profit.
Factoring
Selling receivables to a financial institution for immediate cash.
Hire Purchase
Buying an asset by instalments, with ownership passing after the last one.
Lease Financing
Using an asset for rent without owning it.
Owned Capital
Funds provided by the owners; permanent, with no obligation to repay.
Preference Shares
Shares with a fixed dividend and priority over equity, usually without voting rights.
Public Deposits
Money accepted from the public for a fixed term at interest, often unsecured.
Retained Earnings
Profits kept in the business instead of being paid out as dividends.
Trade Credit
Buying from suppliers now and paying later.

Unit 4 · Chapter 15Cost of Capital

The cost of capital

  • Cost of capital: the required return of providers of finance.
  • Explicit: paid in cash. Implicit: opportunity cost. Specific: one source. WACC: all, weighted.
  • Factors: risk, capital structure, dividend policy, tax, market conditions, credit rating.
  • Accept projects that earn more than the cost of capital.

Remember: Risk up, required return up, cost of capital up.

Specific costs of capital

  • Kd after tax = I(1 − T) ÷ NP; Kp = Dp ÷ NP.
  • Ke by dividend growth, earnings yield or CAPM.
  • Kr ≈ Ke: retained profit has an opportunity cost.
  • Use net proceeds (after issue costs) in the denominator.

Remember: Debt after tax, preference on net proceeds, equity by one of three routes.

Weighted average cost of capital

  • WACC = wdKd + wpKp + weKe + wrKr; weights sum to 1.
  • Debt is taken after tax.
  • Project return above WACC adds value; below it reduces value.
  • Marginal cost of capital is the cost of the next increment.

Remember: Weight each cost by its share, then add.

Don’t confuse it with

  • The cost of capital: Don’t think retained earnings are free. Retained profit has no interest and no issue cost, but shareholders could have used the dividend elsewhere. That forgone return is an implicit cost, and it is why the cost of retained earnings is taken as about equal to the cost of equity.
  • Specific costs: debt, preference, equity and retained earnings: Don’t use the pre-tax interest rate in WACC. Interest is tax-deductible, so the firm bears only the after-tax cost. Preference dividends and equity dividends are paid from profit after tax, and do not get a tax saving. Using 10% where 7.9% belongs overstates the cost of debt.
  • Weighted average cost of capital (WACC): Don’t use book values and market values as if they were the same. Weights can be taken at book value (as above, from the balance sheet) or at market value. Market values are better, because they show what investors currently demand, but they are harder to obtain for debt and unlisted firms. State which you use.

Formulas

  • Debt (before tax): Kd = I ÷ NP
  • Debt (after tax): Kd = I(1 − T) ÷ NP
  • Preference: Kp = Dp ÷ NP
  • Equity: dividend growth: Ke = D1 ÷ P0 + g
  • Equity: earnings yield: Ke = E1 ÷ P0
  • Equity: CAPM: Ke = Rf + β(Rm − Rf)
  • Retained earnings: Kr ≈ Ke
  • WACC = (weight of debt × cost of debt) + (weight of preference × cost of preference) + (weight of equity × cost of equity)

Key terms

Beta
A measure of how much a share’s return moves with the market.
Capital Asset Pricing Model (CAPM)
Estimates the cost of equity as the risk-free rate plus beta times the market risk premium.
Cost of Capital
The minimum return a firm must earn to satisfy those who supply its funds.
Cost of Debt (Kd)
Interest after tax divided by net proceeds: I(1 − T) ÷ NP.
Cost of Equity (Ke)
The return equity holders expect, estimated by dividend growth, earnings yield or CAPM.
Cost of Preference Capital (Kp)
Preference dividend divided by net proceeds.
Cost of Retained Earnings (Kr)
The opportunity cost of keeping profits, taken as about equal to the cost of equity.
Explicit Cost
The out-of-pocket cost of raising funds, such as interest or dividends.
Implicit Cost
The opportunity cost of using funds, such as earnings kept back.
Interest Tax Shield
The tax saved because interest is deductible.
Marginal Cost of Capital (MCC)
The cost of raising the next increment of capital.
Weighted Average Cost of Capital (WACC)
The average cost of all sources of finance, weighted by their share of total capital.

Unit 4 · Chapter 16Capital Structure Theories

Net income and net operating income theories

  • NI: debt up → Ko down → value up; in theory 100% debt.
  • NOI: debt up → Ke up → Ko constant → value constant; V = EBIT ÷ Ko.
  • Both rest on assumptions about investors, not proof.
  • Real firms lie between them.

Remember: NI: more debt, more value. NOI: more debt, same value.

Modigliani–Miller and leverage irrelevance

  • No taxes: VL = VU; capital structure is irrelevant.
  • Ke rises with leverage: Ke = Ko + (Ko − Kd) × D/E.
  • With taxes: VL = VU + T × D; debt adds value via the interest tax shield.
  • Homemade leverage: investors can borrow themselves, so the firm’s mix adds nothing.

Remember: Without taxes: irrelevant. With taxes: debt gives a shield.

Trade-off, pecking order, agency and market timing

  • Trade-off: tax shield ↔ distress costs.
  • Pecking order: internal funds → debt → equity (Myers and Majluf).
  • Agency cost: debt discipline ↔ monitoring costs and conflicts.
  • Market timing: issue equity when overvalued, buy back when undervalued.

Remember: Trade off the shield, peck from inside, discipline with debt, time the market.

Don’t confuse it with

  • Net income and net operating income theories: Don’t treat the NI and NOI theories as findings. They are assumptions about how investors behave. The NI theory assumes shareholders do not mind extra risk from debt; the NOI theory assumes they mind it exactly enough to cancel the saving. Neither is proved, and the next theory tests both.
  • Modigliani–Miller and leverage irrelevance: Don’t read M–M as saying debt is harmless. M–M says that in a world with no taxes, no bankruptcy costs and no information gaps, the mix does not matter. It is a benchmark that shows what must be added to explain real behaviour: taxes, distress costs and agency costs.
  • Trade-off, pecking order, agency cost and market timing: Don’t treat these as rival answers. They answer different questions. Trade-off and agency theories give a target ratio. Pecking order and market timing describe the order and timing of choices. A firm may follow a target ratio loosely while using the pecking order day to day.

Key terms

Agency Cost Theory
Debt disciplines managers through fixed payments, at the price of monitoring costs and conflicts with lenders.
Capital Structure
The mix of debt and equity a firm uses to fund itself.
Financial Distress
The trouble a firm faces when it cannot meet its debts, with costs such as lost customers and forced sales.
Financial Leverage
Using borrowed money to magnify returns to owners, and the risk with them.
Homemade Leverage
Investors borrowing for themselves to copy the effect of a firm’s debt.
Leverage Irrelevance Theory
Financing mix does not affect value in a perfect market, because investors can lever or unlever themselves.
Market Timing Theory
Firms issue equity when they think it is overvalued and avoid it when undervalued.
Modigliani–Miller Proposition I
In a perfect market with no taxes, a firm’s value does not depend on its capital structure.
Modigliani–Miller Proposition II
The cost of equity rises with leverage: Ke = Ko + (Ko − Kd) × D/E.
Net Income (NI) Theory
Holds that more debt lowers the overall cost of capital and raises value.
Net Operating Income (NOI) Theory
Holds that the overall cost of capital and value do not change with the debt-equity mix.
Pecking Order Theory
Firms prefer internal funds, then debt, and new equity last.
Trade-Off Theory
Firms balance the tax benefit of debt against the costs of financial distress.

Unit 6 · Chapter 1Strategy and Strategic Management: Concept and Process

What strategy is

  • Strategy integrates activities, commits resources for the long term and anticipates customers, competitors and employees.
  • Chandler (1962): long-term goals plus courses of action and resources. Thompson and Strickland: means to ends. Porter (1996): being different.
  • Mintzberg's five Ps (1987): plan, ploy, pattern, position, perspective.
  • Operational effectiveness, doing the same things better, is not strategy: rivals can copy it.

Remember: Strategy bridges the gap between where we are and where we want to be.

What strategic management is

  • A stream of decisions and actions, in businesses, cooperatives, government bodies and non-profits.
  • David: formulating, implementing and evaluating cross-functional decisions; strategic planning in the narrow sense is formulation only.
  • It exploits and creates new opportunities, where long-range planning optimises today's trends.
  • Its result is a strategic plan: hard choices among good alternatives that commit the firm.

Remember: Formulate, implement, evaluate, across every function.

The strategic management process

  • Step 1 scanning, step 2 formulation, step 3 implementation, step 4 evaluation.
  • It is a continuing cycle: evaluation feeds back into scanning.
  • Its aim is strategic alignment of resources, structure and capabilities with objectives.
  • Fred David's model has three stages and treats scanning as part of formulation.

Remember: Scan, formulate, implement, evaluate, and begin again.

Modes of strategic decision-making

  • Mintzberg's three modes (1973): entrepreneurial, adaptive and planning.
  • Adaptive mode is Lindblom's ‘muddling through’ (1959).
  • Quinn's logical incrementalism (1980): set the mission, then learn through partial commitments.
  • Mintzberg and Waters (1985): realised strategy mixes deliberate and emergent strategy; some intended strategy is never realised.

Remember: Strategy can be planned, improvised, bargained over or learned along the way.

Don’t confuse it with

  • What strategy is: Don't confuse strategy with operational effectiveness. In Porter's 1996 argument, doing the same activities better than rivals is operational effectiveness. It matters, but rivals can copy it. Strategy means doing different activities, or similar ones in different ways.
  • What strategic management is: Don't confuse strategic management with strategic planning. The two are often used as synonyms, more in business than in academic writing. In the narrower sense, strategic planning means formulation only. Strategic management covers formulation, implementation and evaluation.
  • The strategic management process: Don't confuse formulation with implementation. Formulation chooses what to do; implementation makes it happen through structure, resources and people. Some textbooks, such as Fred David's, describe three stages, formulation, implementation and evaluation, and treat scanning as part of formulation.
  • Modes of strategic decision-making: Don't confuse logical incrementalism with the adaptive mode. Both move in small steps. In logical incrementalism, top management sets a clear mission first and the steps are deliberate experiments toward it. In the adaptive mode there is no clear goal; steps come from bargaining over today's problems. Nor is emergent strategy the same as having no strategy: it is still a consistent pattern, just not one planned in advance.

Key terms

Deliberate Strategy
In Mintzberg's terms, strategy realised as originally intended.
Emergent Strategy
A pattern of action that forms over time without, or despite, deliberate intentions.
Environmental Scanning
The first step of the strategic management process: gathering and analysing information on internal and external factors.
Logical Incrementalism
Quinn's mode of strategy-making: a clear mission, with strategy emerging through experiment and partial commitments.
Strategic Management
The art and science of formulating, implementing and evaluating cross-functional decisions that enable an organisation to achieve its objectives (Fred David).
Strategy
The organisation's plan for using limited resources to reach its long-term objectives: the means to its ends.

Unit 6 · Chapter 2Strategic Intent: Vision, Mission, Goals and Objectives

Strategic intent and the hierarchy of purpose

  • Strategic intent (Hamel and Prahalad, 1989): a long-term aspiration with a strong competitive focus.
  • It stretches resources and competencies, clarifies priorities, focuses effort and motivates people.
  • Hierarchy: vision, mission, goals, objectives, each supporting the one above.
  • The intent fixes the destination and stays steady; the plan says how, and changes.

Remember: Vision, mission, goals, objectives: from aspiration to target.

Vision and mission

  • Vision: where do we want to be? Future; inspires and gives direction. Clear, realistic, memorable and shared.
  • Mission: what do we do, for whom and why? Present; defines scope and frames strategy.
  • A mission has purpose, core values and main goals, and should be feasible, clear, inspiring, precise, distinctive and credible.
  • Vision: the future it wants. Mission: what it does now, for whom, and the goals it is working towards.

Remember: Vision looks ahead; mission says what we do now.

Goals and objectives

  • Goals are precise, measurable, realistic yet challenging, time-bound, and include non-financial results.
  • Objectives are set by top management, multiple, short and long term, flexible, feasible and operational.
  • SMART: specific, measurable, achievable, realistic, time-bound (Doran, 1981, had ‘assignable’).
  • One number invites gaming; pair targets, such as waiting time with errors.

Remember: Goals make the mission concrete; objectives make goals measurable.

Don’t confuse it with

  • Strategic intent and the hierarchy of purpose: Don't confuse strategic intent with a plan. The intent fixes the destination and stays steady for years. The plan says how to get there, and changes as the firm learns. Nor is the intent the same as the vision statement: the vision is one written expression of it.
  • Vision and mission: Don't confuse the mission with the vision. A vision describes the future the organisation wants to reach. A mission describes what it does now, for whom and how, and may include the goals it is working towards.
  • Goals and objectives: Don't confuse goals with objectives. "Improve customer service" is a goal: broad, with no number or date. "Cut the average wait to 12 minutes by 31 March" is an objective. A goal can have several objectives under it.

Key terms

Mission Statement
A statement of the organisation's purpose: what it does, whom it serves and what makes it distinctive.
Objectives (Strategic)
Specific, measurable, time-bound targets that put broader goals into operation.
Strategic Intent
An organisation's ambitious long-term aspiration to win a desired position, which focuses and stretches its resources.
Vision Statement
A statement of the organisation's aspired future state: where it wants to be.

Unit 6 · Chapter 3Strategic Decisions and Levels of Strategy

What makes a decision strategic

  • Strategic decisions commit major resources, define scope, involve major change, are made at the top and carry risk.
  • Ansoff: strategic (long term, infrequent), administrative (medium term, periodic), operational (short term, daily).
  • Example: enter a new line or compete on cost (strategic), reorganise to do it (administrative), schedule shifts (operational).
  • Strategic is not the same as expensive; and strategy can also emerge from many small decisions.

Remember: Strategic decisions are few, far-reaching and hard to reverse.

Four levels of strategy

  • Corporate: which industries and markets, and how to divide resources; made by top management and the board.
  • Business: how this business competes; made by SBU heads.
  • Functional: how each department supports the business strategy. Operational: how a plant, territory or section meets immediate targets.
  • Each level is formulated in line with the one above; in a single-business firm corporate and business merge.

Remember: Corporate: where to compete. Business: how to compete. Functional and operational: how to deliver.

Business-level strategy: competing and cooperating

  • Business strategy uses competitive and cooperative strategies to gain an advantage; it must be sustainable to last.
  • Porter's generic strategies: cost leadership, differentiation, cost focus, differentiation focus; avoid being stuck in the middle.
  • Blue ocean strategy creates uncontested space; key success factors decide who can compete.
  • Focus is a deliberate choice of segment, not just being small.

Remember: Low cost or different; broad or focused.

Don’t confuse it with

  • What makes a decision strategic: Don't confuse "strategic" with "expensive". Replacing a worn-out machine can cost lakhs, yet it changes neither direction nor scope, so it is not strategic. Study notes sometimes swap the time spans and frequencies of the last two types. Administrative decisions are medium term and periodic; operational ones are short term and daily.
  • Four levels of strategy: Don't confuse corporate strategy with business strategy. Corporate strategy asks which businesses to be in. Business strategy asks how one of them wins. In a single-business firm the two levels merge.
  • Business-level strategy: competing and cooperating: Don't confuse a focus strategy with simply being small. Focus is a deliberate choice of a narrow segment, served on cost or on uniqueness. A small firm that sells a bit of everything to everyone has no focus.

Key terms

Blue Ocean Strategy
Kim and Mauborgne's approach of creating uncontested market space instead of competing in existing (‘red ocean’) markets.
Business-Level Strategy
Strategy for how one business unit will compete in its market, made by SBU heads.
Competitive Advantage
A firm's ability to outperform rivals, through lower cost, differentiation or a well-defended focus.
Corporate Strategy
Top-level strategy setting the scope of the firm: which businesses to compete in and how to allocate resources among them.
Differentiation Strategy
Porter's generic strategy of winning by offering unique features customers value and will pay a premium for.
Focus Strategy
Porter's generic strategy of competing in a narrow segment, through cost focus or differentiation focus.
Functional Strategy
Departmental strategy (production, marketing, finance, HR) that supports the business strategy and maximises resource productivity.
Generic Strategies
Porter's three broad routes to competitive advantage: cost leadership, differentiation and focus.
Key Success Factors
The few factors in an industry that most determine a firm's ability to compete successfully.
Operational Strategy
The lowest level of strategy, for a plant, territory or section to meet immediate targets, made by operating managers.
Strategic Decision
A long-term, high-risk decision made at the top in line with the mission, committing major resources and setting direction.

Unit 6 · Chapter 4External Analysis: PESTEL, Five Forces and Industry Life Cycle

What external analysis is

  • Its purpose is to find the opportunities and threats that drive profitability, growth and volatility.
  • Industry level: competitive structure, the firm's position, dynamics and history. Macro level: economic, global, political, social, demographic and technological conditions.
  • Elements include supply chain, industry, economic trends, competitors, demographics, life cycle and PESTEL.
  • External analysis finds opportunities and threats; internal analysis finds strengths and weaknesses. Strategy needs both.

Remember: Look outside for opportunities and threats.

PEST and PESTEL analysis

  • PEST: political, economic, social, technological; PESTEL adds environmental and legal.
  • Used in corporate planning and to weigh the pros and cons of a strategy.
  • Rank the changes by likelihood and impact; the top few become the opportunities and threats in a SWOT.
  • Political is business and government; legal is the laws that define what business may do.

Remember: Political, Economic, Social, Technological, Environmental, Legal.

Porter's five forces

  • Forces: new entrants, supplier power, buyer power, substitutes, rivalry (Porter, 1979).
  • Intense forces (airlines) leave little profit; mild forces (soft drinks) leave room for higher returns.
  • A low concentration ratio, such as a CR4 of 20%, signals intense rivalry.
  • A substitute meets the same need in a different way; a rival sells the same product.
  • Complementors are sometimes added as a sixth force; Porter treats them as a factor affecting the five.

Remember: Entrants, suppliers, buyers, substitutes, rivalry.

The industry life cycle

  • Simple version: introduction, growth, maturity, decline; profitability usually peaks in growth and maturity.
  • Hill and Jones: embryonic, growth, shakeout, maturity, decline.
  • Entry threat is highest in growth, though fast growth keeps rivalry low; rivalry is intense in shakeout and decline.
  • Growth: build scale and brand. Maturity: segment and protect margins. Decline: lead what remains or leave early.

Remember: Embryonic, growth, shakeout, maturity, decline.

Don’t confuse it with

  • What external analysis is: Don't confuse external analysis with internal analysis. External analysis asks how outside factors, such as industry trends, affect the business; it finds opportunities and threats. Internal analysis looks at the business itself, its resources, processes and culture; it finds strengths and weaknesses. Strategy needs both.
  • PEST and PESTEL analysis: Don't confuse political with legal factors. Political factors concern the relationship between business and government. Legal factors are the laws that define what a business may or may not do. They meet when government passes legislation that changes how businesses operate.
  • Porter's five forces: Don't confuse substitutes with rivals. A rival sells the same product: another airline on the same route. A substitute meets the same need in a different way: a train, a bus, or a video call instead of the trip.
  • The industry life cycle: Don't say the threat of entry is low in the growth stage. It is a common mistake. In Hill and Jones's account it is at its highest then, though fast growth keeps rivalry low. Also, don't confuse the industry life cycle with the product life cycle: one describes a whole industry, the other a single product.

Key terms

Complementors
Firms whose products add value to an industry's own; sometimes called a sixth force.
Entry Barriers
Obstacles such as scale economies, capital needs, brand loyalty and regulation that deter new firms from entering an industry.
Industry Life Cycle
The stages an industry passes through: embryonic, growth, shakeout, maturity and decline (or, simply, introduction, growth, maturity, decline).
PESTEL Analysis
A framework for the macro-environment: political, economic, social, technological, environmental and legal factors.
Porter's Five Forces
A model of industry competition: threat of new entrants, supplier power, buyer power, threat of substitutes and rivalry.

Unit 6 · Chapter 5Internal Analysis: Resources, Capabilities and SWOT

What internal analysis is

  • Internal analysis examines the firm's own resources, assets and processes, tangible and intangible.
  • It finds strengths and structural weaknesses, and how ready the firm is for opportunities and threats.
  • Tools: gap analysis, strategy evaluation, SWOT, VRIO, OCAT, 7-S, core competencies, value chain.
  • Value chain (Porter, 1985): five primary and four support activities; margin is what customers pay minus what the activities cost.

Remember: Find the gap, then trace it along the chain.

The resource-based view

  • Advantage comes from inside: resources and capabilities, not industry position.
  • Tangible resources can be bought; intangible ones are hard to imitate and give lasting advantage.
  • Resources are heterogeneous and immobile; core competences pass three tests (Prahalad and Hamel).
  • Criticism: the argument comes close to a circle, and it says little about building resources.

Remember: Look inside: lasting advantage lies in what rivals cannot buy or copy.

The VRIO framework

  • Barney (1991): VRIN; later recast as VRIO, with organisation replacing non-substitutability.
  • Not valuable: disadvantage; not rare: parity; easy to imitate: temporary; not organised: unused.
  • Ask the questions in order; the first "no" gives the result.
  • Answers are judgements, and the result holds only until the market changes.

Remember: Valuable, Rare, costly to Imitate, Organised.

The McKinsey 7-S framework

  • Waterman, Peters and Phillips (1980): seven interdependent elements.
  • Hard: strategy, structure, systems. Soft: shared values, style, staff, skills.
  • Shared values are the glue; a change in one element needs changes in the others.
  • The model says what must fit, not how or in what order to change it.

Remember: Hard: strategy, structure, systems. Soft: shared values, style, staff, skills.

SWOT and TOWS

  • SWOT: internal strengths and weaknesses, external opportunities and threats.
  • TOWS (Weihrich, 1982): SO maxi-maxi, ST maxi-mini, WO mini-maxi, WT mini-mini.
  • SWOT gives no weights; lists are often long, vague and unused.
  • Build it from external analysis, the value chain and VRIO, not from opinion.

Remember: SWOT lists the factors; TOWS turns them into strategies.

Don’t confuse it with

  • What internal analysis is: Don't confuse internal analysis with external analysis. External analysis (PESTEL, the five forces) studies the environment and the industry, which the firm cannot control. Internal analysis studies what the firm can control. Nor is the value chain the supply chain: the value chain is the activities inside one firm; the supply chain links many firms from raw material to customer.
  • The resource-based view: Don't confuse the RBV with the positioning view. Porter's five forces work outside-in: pick an attractive industry and a defensible position in it. The RBV works inside-out: build on what the firm has that rivals lack. Nor is a resource the same as a capability. A resource is something the firm has; a capability is what it can do by combining resources.
  • The VRIO framework: Don't confuse VRIO with VRIN. Both start valuable, rare, inimitable. VRIN's fourth test asks whether a substitute exists; VRIO folds substitutes into "costly to imitate" and adds organisation, whether the firm can actually use what it has.
  • The McKinsey 7-S framework: Don't confuse the 7 S's with the 7 Ps. The 7 Ps (product, price, place, promotion, people, process, physical evidence) are the marketing mix for services. The 7 S's describe a whole organisation. Within the 7 S's,
  • SWOT and TOWS: Don't confuse a strength with an opportunity. Strengths and weaknesses are inside the firm and under its control. Opportunities and threats are outside. Growing use of delivery apps is an opportunity for the chai chain, not a strength; being on those apps would be a strength.

Key terms

Core Competence
Prahalad and Hamel's bundle of skills and technologies that lets a firm deliver distinctive value across several businesses and is hard to imitate.
McKinsey 7-S Framework
A model of seven interdependent elements to be aligned: strategy, structure, systems, shared values, style, staff and skills.
OCAT
Organisational Capacity Assessment Tool: a diagnostic that rates internal performance on specific dimensions to find gaps and capacity.
Resource-Based View
The theory that lasting competitive advantage comes from valuable, rare, hard-to-imitate internal resources rather than industry position alone.
SWOT Analysis
An audit of internal strengths and weaknesses and external opportunities and threats, bridging analysis and strategy formulation.
TOWS Matrix
Weihrich's extension of SWOT that pairs internal and external factors to generate SO, ST, WO and WT strategies.
Value Chain
Porter's division of a firm's activities into primary and support activities, to locate the sources of cost and value.
VRIO Framework
Barney's four tests for a resource that can give sustained advantage: valuable, rare, costly to imitate, and organised to capture value.

Unit 6 · Chapter 6Business Portfolio Analysis: BCG and GE–McKinsey Matrices

Designing the business portfolio

  • The business portfolio is the collection of businesses and products that make up the company (Kotler and Armstrong).
  • Two steps: analyse the current portfolio, then shape the future one with growth and downsizing strategies.
  • The unit of analysis is the SBU: a division, product line or brand that can be planned on its own.
  • Each SBU is rated on market attractiveness and the strength of its position; businesses also share costs, so ratings start the argument, not end it.

Remember: Rate each business on market attractiveness and its own strength.

The BCG growth-share matrix

  • Axes: market growth rate (attractiveness) and relative market share, own share ÷ largest rival's (strength).
  • Star: build or hold; cash cow: hold or harvest; question mark: build or phase out; dog: harvest or divest.
  • SBUs often move from question mark to star to cash cow to dog; cash cows fund the rest.
  • Limits: one measure per axis, share is not always profit, a dog may still have strategic value, and market definition shifts the result.

Remember: Stars, cash cows, question marks, dogs: build, hold, harvest, divest.

The GE–McKinsey nine-cell matrix

  • Developed by McKinsey for General Electric in the early 1970s.
  • Axes are weighted scores: industry attractiveness (external) and business unit strength (internal).
  • Each score: multiply weight by rating for every factor, add, then call it high, medium or low.
  • Zones: invest/grow, selectivity/hold, harvest/divest; richer but more subjective than BCG.

Remember: Nine cells, three zones: grow, hold, harvest.

Don’t confuse it with

  • Designing the business portfolio: Don't confuse an SBU with a department. An SBU faces its own customers and competitors and can be planned on its own. A department, such as finance or HR, serves the whole firm and has no market of its own.
  • The BCG growth-share matrix: Don't confuse relative market share with market share. A 20% share makes a firm a leader if the next rival has 10% (relative share 2.0). The same 20% makes it a follower if the leader has 40% (relative share 0.5).
  • The GE–McKinsey nine-cell matrix: Don't confuse the GE–McKinsey matrix with the BCG matrix. The BCG uses one measure on each axis (market growth, relative share) and four cells. The GE–McKinsey uses composite, weighted scores and nine cells, so it is richer but more subjective.

Formulas

  • Relative market share = the SBU's market share ÷ the share of its largest competitor

Key terms

BCG Growth-Share Matrix
The Boston Consulting Group's portfolio tool, placing each business unit by market growth rate and relative market share into stars, cash cows, question marks and dogs.
Business Portfolio Analysis
Evaluating and balancing a diversified firm's mix of business units with tools such as the BCG and GE–McKinsey matrices.
Cash Cow
A BCG cell: high market share in a low-growth market, generating surplus cash for other units.
Dog
A BCG cell: low market share in a low-growth market; usually harvested or divested.
GE–McKinsey Matrix
A 3 × 3 portfolio grid plotting industry attractiveness against business unit strength, with invest, hold and harvest zones.
Question Mark
A BCG cell: low market share in a high-growth market; needs heavy investment to build, or else is phased out.
Star
A BCG cell: high market share in a high-growth market; earns much but needs heavy investment.
Strategic Business Unit (SBU)
A division, product line or brand with its own mission and objectives that can be planned independently.

Unit 6 · Chapter 7Corporate Strategies: Growth, Integration and Diversification

Grand strategies: the strategy wheel

  • Corporate strategy sets which businesses to be in and how to allocate resources among them.
  • The wheel: stability, growth, integration, diversification, cooperation, retrenchment, combination.
  • Glueck's grouping: stability, expansion, retrenchment and combination; the other options are routes to expansion.
  • Grand strategy chooses businesses; business strategy chooses how to compete in one.

Remember: Stability, expansion, retrenchment, or a combination.

Expansion strategy and concentration

  • Expansion seeks growth, profit, share and scale; strategists must tell desirable from undesirable expansion.
  • Five routes: concentration, integration, diversification, cooperation, internationalisation.
  • Concentration takes three forms: market penetration, market development and product development.
  • Its risk is dependence: one shift in the market can undo it.

Remember: Concentrate: penetrate the market, develop the market, or develop the product.

Ansoff's product-market growth matrix

  • Ansoff (1957): grow by changing products, markets or both.
  • Market penetration (lowest risk), product development, market development, diversification (highest risk).
  • Penetration sells more to the same buyers; development finds new buyers for the same product.
  • The grid shows direction, not payoff; related diversification lowers the risk.

Remember: Penetration, product development, market development, diversification: risk rises as you leave home.

Integration strategies

  • Backward: acquire or control suppliers; reliable supply, better control of quality and cost.
  • Forward: acquire or control distributors and retailers; market access, higher margins.
  • Horizontal: merge with or acquire competitors; share, scale, less competition.
  • Costs: capital tied up, less flexibility, and competition-law review for large horizontal deals.

Remember: Backward to suppliers, forward to customers, horizontal to rivals.

Diversification strategies

  • Related (concentric): synergies in technology, brand, channels and competencies; lower risk.
  • Unrelated (conglomerate): spreads risk across sectors; higher risk, and new skills needed.
  • Ansoff's horizontal: new products for existing customers; concentric: draws on existing technology or marketing.
  • Judge an example by what the new business shares with the old.

Remember: Related for synergy; unrelated for spreading risk.

Don’t confuse it with

  • Grand strategies: the strategy wheel: Don't confuse grand strategy with business strategy. Grand (corporate) strategy decides which businesses to be in. Business-level strategy, such as cost leadership or differentiation, decides how to compete within one of them. Nor is stability the same as doing nothing: a stable firm still makes small improvements.
  • Expansion strategy and concentration: Don't confuse concentration with stability. Both stay in the present business. Stability keeps scope and effort roughly as they are. Concentration pushes substantially harder in that business in order to grow.
  • Ansoff's product-market growth matrix: Don't confuse market penetration with market development. Penetration sells more of the same product to the same kind of buyer. Development finds a new kind of buyer, a new use or a new region for the same product. Selling sweets to existing customers at Diwali is penetration; selling them in Delhi is development.
  • Integration strategies: Don't confuse horizontal integration with horizontal diversification. Horizontal integration buys a rival that makes the same product. Horizontal diversification adds a new product for the firm's existing customers.
  • Diversification strategies: Don't confuse the two meanings of ‘horizontal’. In Ansoff's own terms,

Key terms

Ansoff Matrix
Igor Ansoff's 2 × 2 grid of growth strategies: market penetration, product development, market development and diversification, by existing or new products and markets.
Backward Integration
A vertical integration strategy in which a firm acquires or controls its suppliers and sources of inputs.
Diversification
Growth by entering new products and markets; related (seeking synergy) or unrelated (conglomerate).
Expansion Strategy
A grand strategy of growth through greater market presence, sales or scope.
Forward Integration
A vertical integration strategy in which a firm gains control over distribution and direct access to customers.
Horizontal Integration
Merging with or acquiring competitors at the same stage of the value chain.
Integration Strategy
Combining activities along the value chain, backward, forward or horizontally, to reduce cost and increase control.
Market Development
An Ansoff strategy of taking existing products into new markets.
Market Penetration
An Ansoff strategy of selling more existing products in existing markets; the lowest-risk option.
Product Development
An Ansoff strategy of offering new products to existing markets.
Related Diversification
Entering new but related businesses to exploit synergies with existing operations.
Unrelated Diversification
Entering industries unrelated to existing ones, mainly to spread risk.

Unit 6 · Chapter 8Cooperative, International and Retrenchment Strategies

Cooperative strategies

  • Merger: A + B = C. Acquisition: A + B = A.
  • Joint venture: a new jointly owned company, parents continue. Alliance: cooperation with no new company.
  • Co-opetition (Brandenburger and Nalebuff, 1996): competing and cooperating at once.
  • On average, acquisitions do little for the buyer's own performance; buyers often overpay.

Remember: Merge, acquire, venture jointly, or ally.

Internationalisation strategies

  • Entry ladder: exporting, licensing, joint venture, local manufacturing, wholly owned subsidiary.
  • Two pressures (after Bartlett and Ghoshal): cost reduction and local responsiveness.
  • Global (cost high, local low); multi-domestic (local high, cost low); international (both low); transnational (both high).
  • Many firms skip stages; born-global firms sell abroad from the start.

Remember: Global, multi-domestic, international, transnational.

Retrenchment and combination strategies

  • Turnaround (minor crisis), divestment (moderate), liquidation (serious, the last resort).
  • Harvest: cut investment and draw cash before exit.
  • Divestment sells a running business; liquidation sells assets piece by piece.
  • Combination (Glueck): stability, expansion and retrenchment in different units or over time.

Remember: Turn around, divest, harvest, or liquidate; or combine.

Don’t confuse it with

  • Cooperative strategies: Don't confuse a joint venture with a strategic alliance. A joint venture creates a new company that the partners own together. An alliance creates no new company: the partners simply agree to work together. Study notes sometimes give Maruti Udyog and Tata Starbucks as strategic alliances. Both began as joint ventures, since each created a jointly owned company: Maruti Udyog was formed by the Government of India with Suzuki in 1982, and Tata Starbucks is owned equally by its two partners. Maruti Suzuki today is a Suzuki subsidiary.
  • Internationalisation strategies: Don't confuse the international strategy with internationalisation. Internationalisation is the whole process of going abroad. The international strategy is one cell of the grid: low pressure on both cost and local responsiveness, so the firm exports what works at home.
  • Retrenchment and combination strategies: Don't confuse divestment with liquidation. Divestment sells a unit as a running business, and the buyer carries it on. Liquidation ends the business and sells its assets piece by piece. Harvest is different again: the firm keeps the unit for now and draws cash from it before leaving.

Key terms

Acquisition
A cooperative strategy in which one firm buys a controlling interest in another, which loses its independent identity.
Co-opetition
Brandenburger and Nalebuff's term for firms competing and cooperating at the same time.
Combination Strategy
Following several strategies at once across different units, such as expanding one business while retrenching another.
Divestment
A retrenchment strategy of selling or shedding a business unit that no longer fits the corporate strategy.
Global Strategy
An international strategy of standardised products worldwide for maximum efficiency.
Harvest Strategy
Deliberately reducing investment in a business unit to maximise short-term cash flow before exit.
Internationalisation
Expanding operations beyond the home market, typically from exporting through joint ventures to local production.
Joint Venture
A cooperative strategy in which two or more firms create a new, jointly owned entity, sharing investment, risk and profit.
Liquidation
A retrenchment strategy of shutting a business down and selling its assets when recovery is impossible.
Merger
A cooperative strategy in which two firms combine into one entity.
Multi-Domestic Strategy
An international strategy that tailors products and marketing to each local market.
Retrenchment
A grand strategy of reducing the scope or size of operations to stabilise the firm, through turnaround, divestment or liquidation.
Strategic Alliance
A cooperative agreement between firms on specific goals, in which each remains independent.
Transnational Strategy
An international strategy that combines high global efficiency with high local responsiveness.
Turnaround Strategy
A retrenchment strategy of restructuring an underperforming business to return it to profitability.

Unit 6 · Chapter 9Strategy Implementation and Evaluation

Strategy implementation

  • Implementation turns strategy into actions, tasks and programmes.
  • It involves structure, resources, policies, people, culture, leadership, and information and reward systems.
  • Formulation is intellectual and before action; implementation is operational and during action.
  • The two overlap: what is learned in implementing reshapes the strategy.

Remember: A strategy is only as good as its execution.

Challenges and forms of implementation

  • Common challenges: weak strategy, poor goals, misalignment, poor training, lack of resources, poor communication, no follow-through, people not connected, no measures.
  • ‘You manage what you measure’: set measurable goals and leading indicators.
  • Three forms: structural, behavioural (leadership) and functional and operational.

Remember: Clear goals, alignment, training, resources, communication, follow-through, measures.

Five approaches to implementation

  • Commander and organisational change: top management decides and drives it through.
  • Collaborative: senior managers formulate together; cultural: employees empowered, managers coach.
  • Crescive: strategy grows from lower-level ideas; top management judges.
  • They are five approaches, not four challenges; real leaders mix them.

Remember: Commander, change, collaborative, cultural, crescive.

Applying the McKinsey 7-S model

  • Uses: organisational change, implementing a new strategy, anticipating future change, aligning units in a merger.
  • Each element has diagnostic questions; all seven deserve equal attention.
  • Steps: identify misalignment, design the optimum, plan changes, make them, review continuously.
  • The model shows what must fit, not how or in what order to change it.

Remember: Find the misfits, design the fit, plan, change, keep reviewing.

Strategy evaluation and control

  • Fred David: review the factors, measure performance, take corrective action.
  • Strategic control: premise, implementation, surveillance, special alert.
  • Balanced scorecard (Kaplan and Norton, 1992): financial, customer, internal process, learning and growth.
  • Financial measures lag; the other three perspectives give early warning.

Remember: Review the premises, measure the results, correct the course.

Don’t confuse it with

  • Strategy implementation: Don't treat implementation as a separate step that begins when planning ends. The two overlap. What people learn while implementing often reshapes the strategy, which is Henry Mintzberg's point about emergent strategy.
  • Challenges and forms of implementation: Don't confuse the forms of implementation with the approaches to it. The three forms are the areas the work covers: structure, leadership and functional plans. Bourgeois and Brodwin's five approaches, in the next section, are the ways a chief executive drives that work.
  • Five approaches to implementation: Don't confuse approaches with challenges. They are sometimes listed as four ‘challenges’; they are approaches, and there are five. Nor is collaborative the same as crescive: in the collaborative approach senior managers shape strategy together; in the crescive approach ideas come up from lower-level employees.
  • Applying the McKinsey 7-S model: Don't treat the hard elements as the main ones. They are easier to see and change, so plans often stop at a new structure or system. The soft elements decide whether people use them.
  • Strategy evaluation and control: Don't confuse strategic control with operational control. Operational control checks this month's output and costs against the budget. Strategic control asks whether the strategy itself still holds. Within strategic control, premise control checks named assumptions; surveillance is a broad, unfocused watch.

Key terms

Balanced Scorecard
Kaplan and Norton's framework linking strategy to measures from four perspectives: financial, customer, internal process, and learning and growth.
Commander Approach
Bourgeois and Brodwin's implementation approach in which top management decides the strategy and instructs others to carry it out.
Crescive Approach
Bourgeois and Brodwin's implementation approach in which strategy grows from ideas proposed by lower-level employees.

Unit 7 · Chapter 1Marketing: Core Concepts, Philosophies and the Marketing Mix

What marketing is

  • The AMA (2017) and Kotler define marketing as creating and exchanging value with others; Kotler and Keller: “meeting needs profitably”.
  • Need is felt deprivation; want is the form it takes; demand is a want backed by ability and willingness to pay.
  • Marketing works through exchange and adds form, place, time, possession and information utility.
  • Drucker: the aim of marketing is to make selling superfluous.

Remember: Need, want plus buying power, demand.

States of demand

  • Marketing management is demand management: the level, timing and composition of demand.
  • Negative demand needs conversional marketing; no demand, stimulational; latent, developmental; declining, remarketing.
  • Irregular demand needs synchromarketing; full demand, maintenance marketing.
  • Overfull demand needs demarketing; unwholesome demand, countermarketing.

Remember: Negative, none, latent, declining, irregular, full, overfull, unwholesome.

How marketing philosophies evolved

  • Six philosophies: production, product, selling, marketing, societal and holistic; all still exist today.
  • Marketing myopia (Levitt, 1960) defines a business by its product, not the need it meets.
  • Levitt: selling serves the seller's need, marketing the buyer's. Kotler and Armstrong: selling is inside-out, marketing outside-in.
  • Holistic marketing: relationship, integrated, internal and performance marketing (once called socially responsible).

Remember: Production, product, selling, marketing, societal, holistic.

The marketing mix: 4Ps, 4Cs and 4As

  • The marketing mix is a set of controllable tools; Borden popularised the term, McCarthy (1960) gave the 4Ps.
  • Lauterborn's 4Cs (1990): consumer wants and needs, cost, convenience, communication.
  • Sheth and Sisodia's 4As: acceptability, affordability, accessibility, awareness.
  • Services add people, process and physical evidence.

Remember: Product, price, place, promotion, seen from the buyer's side.

Forces reshaping marketing

  • Forces: network technology, globalisation, deregulation and privatisation, competition, convergence, retail transformation, disintermediation.
  • Consumers have more buying power, information and voice, and more resistance.
  • Traditional firms answer disintermediation with re-intermediation: brick-and-click.
  • New capabilities: online channels, richer data, social and mobile marketing, permission marketing, mass customisation, cost savings.

Remember: Technology, globalisation and empowered buyers keep changing the task.

Don’t confuse it with

  • What marketing is: Don't confuse marketing with selling. Marketing is sometimes described as the art of selling. Peter Drucker argued the opposite: the aim of marketing is to know and understand the customer so well that the product fits and sells itself, which makes selling superfluous. Nor is a want the same as a need: marketers shape wants, but the need was there first.
  • States of demand: Don't confuse demarketing with countermarketing. Demarketing cuts demand for a wanted product for a while, because supply cannot keep up. Countermarketing tries to end demand for a harmful product. Likewise, latent demand is a need with no product to meet it; no demand is a product that buyers do not care about.
  • How marketing philosophies evolved: Don't confuse societal marketing with holistic marketing. Societal marketing adds society's long-term well-being to consumer wants and company profit. Holistic marketing is wider: it treats all marketing activity as one connected system, and social responsibility is one part of it, under performance marketing.
  • The marketing mix: 4Ps, 4Cs and 4As: Don't confuse the 4Cs with the 4As. Both look from the buyer's side. Lauterborn's 4Cs rename each P: price, for instance, becomes the customer's whole cost, not only the money. Sheth and Sisodia's 4As are tests the offer must pass with customers: acceptable, affordable, accessible and known.
  • Forces reshaping marketing: Don't confuse disintermediation with re-intermediation. Disintermediation removes the middleman: the buyer deals with the seller directly online. Re-intermediation is the traditional firm's reply: it adds online channels of its own, so a pure-click rival meets a brick-and-click one.

Key terms

4As
Sheth and Sisodia's buyer-side view of the marketing mix: acceptability, affordability, accessibility and awareness.
4Cs
Lauterborn's customer-side restatement of the 4Ps: customer solution, cost, convenience and communication.
Holistic Marketing
Kotler and Keller's view of marketing as one connected system: relationship, integrated, internal and performance marketing.
Marketing Concept
The philosophy that success comes from knowing target customers' needs and satisfying them better than competitors.
Marketing Mix
The controllable tools, product, price, place and promotion, that a firm blends to get the response it wants.
Marketing Myopia
Levitt's term for defining a business by its product rather than by the need it serves.
Societal Marketing Concept
The philosophy that a firm should serve both customers' wants and society's long-term well-being.
Utility (Marketing)
The value that makes a product able to satisfy a want: form, place, time, possession or information utility.

Unit 7 · Chapter 2Segmentation, Targeting and Positioning

Market segmentation

  • STP: segmentation, targeting and positioning; segmentation comes first.
  • Levels run from mass marketing through segment and niche to local and individual marketing.
  • Consumer bases: geographic, demographic, psychographic, behavioural; business markets use Bonoma and Shapiro's nested approach.
  • Useful segments are measurable, substantial, accessible, differentiable and actionable.

Remember: Geographic, demographic, psychographic, behavioural.

Targeting

  • Segments are evaluated on size and growth, structural attractiveness, and fit with objectives and resources.
  • Five patterns (Abell, 1980): single-segment concentration, selective specialisation, product specialisation, market specialisation, full coverage.
  • Product specialisation: one product, many markets. Market specialisation: many products, one market.
  • Strategies run from undifferentiated through differentiated and concentrated to micromarketing.

Remember: Evaluate the segments, then choose a pattern of coverage.

Positioning

  • Ries and Trout: positioning is what you do to the prospect's mind.
  • Keller's PODs give a reason to choose; POPs remove reasons not to.
  • Five winning value propositions: more for more, more for the same, more for less, the same for less, less for much less.
  • Brands can be positioned on attributes, benefits, use, user, competitor, product class, or price and quality.

Remember: Positioning lives in the customer's mind, not in the product.

Differentiation and the brand bull's-eye

  • Five bases of differentiation: product, services, personnel, channel, image.
  • A point of difference must be desirable, deliverable and differentiating.
  • Points of parity are category, correlational or competitive.
  • The bull's-eye: brand mantra and key POPs and PODs at the centre, then reasons to believe, then values and executional properties.

Remember: Differentiate on product, services, people, channel or image.

Don’t confuse it with

  • Market segmentation: Don't confuse segmentation with targeting. Segmentation describes the groups in a market; targeting chooses which of them to serve. Keep the bases apart too: usage rate and loyalty are behavioural variables, not demographic ones. The word
  • Targeting: Don't confuse product specialisation with market specialisation. Product specialisation sells one product to many customer groups, like the nuts and bolts. Market specialisation sells many products to one customer group, like everything an ice-cream maker buys.
  • Positioning: Don't confuse positioning with differentiation. Differentiation makes the offer actually different. Positioning decides which difference to stress, and how buyers should see it. And a point of parity is not a weakness: it is the minimum a buyer expects.
  • Differentiation and the brand bull's-eye: Don't confuse a point of difference with any difference. A difference counts only if it passes all three tests. Some study notes list only two kinds of points of parity, category and competitive; Kotler and Keller add a third, correlational, for the weakness a brand's own strengths create.

Key terms

Market Segmentation
Dividing a market into distinct groups of buyers with similar needs, characteristics or behaviour.
Niche Marketing
Focusing on a narrow, well-defined and often underserved group.
Points of Difference (PODs)
Attributes or benefits customers strongly associate with a brand and believe they could not find to the same extent in competitors.
Points of Parity (POPs)
Associations, not unique to the brand, that it needs to be credible in its category or to neutralise a rival's advantages.
Positioning
Designing an offering and image to occupy a distinct, valued place in the target customer's mind.
STP
Segmentation, targeting and positioning: the sequence at the heart of marketing strategy.
Targeting
Evaluating segments and choosing which to serve.
Value Proposition
The full set of benefits on which a brand is positioned and that it promises to deliver.

Unit 7 · Chapter 3Product Decisions: Levels, New Products and the Life Cycle

Product levels and classification

  • Kotler and Armstrong: core, actual and augmented product.
  • Kotler and Keller: five levels, from core benefit to potential product.
  • Consumer products are classed by buying behaviour: convenience, shopping, specialty and unsought.
  • When actual products look alike, firms compete on the augmented level.

Remember: Core benefit, actual product, augmented product.

Product mix and product lines

  • Product item, product line and product mix (assortment).
  • Width: number of lines. Length: total items. Depth: variants per product. Consistency: how related the lines are.
  • Average line length = length ÷ width; depth multiplies sizes by flavours or formulations.
  • A line is too short if adding items would raise profit, too long if dropping them would.

Remember: Width: lines. Length: items. Depth: variants. Consistency: relatedness.

New product development and adoption

  • Eight NPD steps: idea generation, screening, concept testing, marketing strategy, business analysis, product development, test marketing, commercialisation.
  • Screening drops poor ideas early because costs rise later; short lists often skip marketing strategy development.
  • Concept testing uses a description; test marketing sells the real product in a few places.
  • Rogers (1962): innovators 2.5%, early adopters 13.5%, early and late majority 34% each, laggards 16%.

Remember: Generate, screen, test the concept, plan the strategy, analyse, develop, test-market, launch.

The product life cycle

  • Sales: low, rising fast, peak, falling; profit starts negative, peaks before sales, then declines.
  • Objectives: awareness and trial, maximise share, maximise profit while defending share, cut spending and milk the brand.
  • Product classes, forms and brands age at different speeds; styles cycle, fashions fade slowly, fads collapse.
  • Stages are hard to identify, and treating a product as declining can make it decline.

Remember: Introduce, grow, mature, decline: change the mix at each stage.

Don’t confuse it with

  • Product levels and classification: Don't confuse the core product with the actual product. The core is the benefit, staying connected. The actual product is the thing that delivers it: the phone, its brand and its box. Also keep the two models apart: Kotler and Armstrong use three levels, Kotler and Keller five.
  • Product mix and product lines: Don't confuse length with depth. Length counts items across all lines. Depth counts the variants of one product inside a line. Nor is a product line the product mix: the mix is all the lines together.
  • New product development and adoption: Don't confuse concept testing with test marketing. A concept test shows customers a description before the product exists. A test market sells the real product, with its real marketing, in a few places. Also, many study notes list seven steps and leave out step 4, marketing strategy development; Kotler and Armstrong give eight.
  • The product life cycle: Don't confuse a product class, a product form and a brand. The PLC can describe any of them, but they age differently. A class, such as packaged snacks, can stay mature for decades; a form, such as baked chips, or a single brand moves through the stages faster. Nor is a fashion a fad: a fashion declines slowly, a fad collapses.

Key terms

Augmented Product
The product level that adds services and benefits such as delivery, warranty and after-sales service.
Core Product
The basic benefit or need the customer is really buying.
New Product Development (NPD)
The process of taking a product from idea generation to commercialisation, in eight steps.
Product Life Cycle
The stages a product's sales and profits pass through: introduction, growth, maturity and decline.
Product Line
A group of closely related products made or sold by the same firm.
Product Mix
All the product lines and items a firm offers, measured by width, length, depth and consistency.

Unit 7 · Chapter 4Brand Management: Equity, Strategy and Loyalty

Brands and brand equity

  • AMA: a brand identifies one seller's goods and differentiates them from competitors.
  • Keller: customer-based brand equity is the differential effect of brand knowledge on consumer response.
  • Equity lives in customers' minds; value is a money figure. Equity can be positive or negative.
  • Aaker's five components and Keller's pyramid (salience, meaning, response, resonance) are two models of equity.

Remember: Equity lives in customers' minds; value is what the brand is worth in money.

Brand equity models

  • BAV: differentiation, relevance, esteem, knowledge; strength (forward) and stature (backward) form the power grid.
  • BrandZ: presence, relevance, performance, advantage, bonding.
  • Keller: identity, meaning, response, relationships, on six blocks from salience to resonance.
  • Aaker: equity as assets and liabilities, under five heads.

Remember: BAV's four pillars, BrandZ's pyramid, Keller's resonance, Aaker's five assets.

Major brand strategy decisions

  • Four decisions: positioning, name selection, sponsorship, development.
  • Position on attributes, benefits or, strongest, beliefs and values.
  • Sponsorship: manufacturer's, private, licensed or co-branding.
  • Naming: individual, blanket family, separate family, or corporate with individual names.

Remember: Position, name, sponsor, develop.

Brand portfolios

  • A brand portfolio is all the brands and lines a firm offers in a category or segment.
  • Reasons: shelf space, variety-seekers, internal competition, economies of scale.
  • Roles: flankers, cash cows, low-end entry brands, high-end prestige brands.
  • Too big if dropping a brand raises profit; too small if adding one would.

Remember: Flankers, cash cows, entry brands, prestige brands.

Brand extensions

  • Parent, family or master brands, and sub-brands such as Cadbury Dairy Milk Silk.
  • Grid: line extensions, brand extensions, multibrands, new brands.
  • Gains: lower risk, lower cost, wider coverage. Risks: dilution, confusion, retailer resistance, cannibalisation.
  • Kotler and Keller use ‘brand extension’ for both line and category extensions; Kotler and Armstrong for a new category only.

Remember: Extend the line, extend the brand, add brands, or start anew.

Brand loyalty

  • Loyalty: a commitment to buy again and recommend, despite rivals' efforts.
  • Aaker (1991): switchers, habitual buyers, satisfied buyers with switching costs, brand likers, committed buyers.
  • Repeat buying is not the same as loyalty; the order follows Aaker, and study notes often muddle it.

Remember: Switchers, habitual, switching costs, likers, committed.

Don’t confuse it with

  • Brands and brand equity: Don't confuse brand equity with brand value. Equity lives in customers' minds and shows in how they respond. Value is a money figure put on the brand, for example when a firm is bought. Strong equity usually raises value, but the two are measured differently.
  • Brand equity models: Don't confuse brand strength with brand stature. Strength (differentiation and relevance) looks forward; stature (esteem and knowledge) looks back. Keep the two pyramids apart too: BrandZ has five levels, from presence to bonding; Keller's has four steps on six blocks, from salience to resonance.
  • Major brand strategy decisions: Don't confuse brand sponsorship with sponsoring an event. Here sponsorship means whose brand name the product carries. Keep brand line and brand mix apart too: a line is all products under one brand; the mix is all the lines a seller offers.
  • Brand portfolios: Don't confuse a flanker with an entry-level brand. Both may be cheap. A flanker exists to fight a rival and protect the flagship; an entry brand exists to bring new buyers in and trade them up later. A cash-cow brand is also not the BCG matrix's cash cow, which is a business with a high share of a slow-growing market.
  • Brand extensions: Don't confuse the two uses of ‘brand extension’. In Kotler and Keller, brand extension is the umbrella term, covering both line and category extensions. In Kotler and Armstrong's grid, a brand extension means a new category only, and a line extension is a separate choice. Check which usage a question follows.
  • Brand loyalty: Don't confuse repeat buying with loyalty. A habitual buyer repeats out of convenience and leaves when a rival makes switching easy; a committed buyer stays and recommends. Study notes often give the levels in a muddled order; the version here follows Aaker.

Key terms

Brand
A name, term, sign, symbol or design, or a combination, that identifies a seller's goods and differentiates them from competitors'.
Brand Equity
The added value a brand gives a product in customers' minds, shown in their perceptions, preferences and behaviour.
Brand Extension
Using an established brand name to enter a new product category.
Brand Portfolio
All the brands and brand lines a firm offers in a category or segment, each with a role such as flanker or prestige brand.
Brand Resonance Model
Keller's pyramid of brand building: salience, performance and imagery, judgements and feelings, and resonance.
BrandAsset Valuator
Young and Rubicam's brand equity model with four pillars: energised differentiation, relevance, esteem and knowledge.
Category Extension
Using a brand to enter a product category different from its original one.
Co-Branding
Putting two or more established brand names on one product.
Flanker Brand
A lower-priced ‘fighter’ brand launched to protect a flagship brand from competitors.
Line Extension
A new item in an existing product category under the same brand name, such as a new flavour or size.
Loyalty Pyramid
Aaker's levels of brand loyalty: switchers, habitual buyers, satisfied buyers with switching costs, brand likers, committed buyers.
Multibrand Strategy
Launching new brands in an existing category to capture different segments.
Sub-brand
A brand formed by combining a new name with an existing brand name, as in Cadbury Dairy Milk Silk.

Unit 7 · Chapter 5Pricing Decisions: Objectives, Factors and Strategies

Pricing objectives and factors

  • Price is the sum of the values customers give up; it is the only revenue-producing element of the mix.
  • Objectives: survival, maximum current profit, maximum market share, maximum skimming, product-quality leadership.
  • Costs set the floor, customer value and demand the ceiling, competitors' prices a point of comparison between.
  • Internal factors (costs, objectives, mix, brand image) and external ones (value and demand, competitors, economy, regulation, channels).

Remember: Costs set the floor, customer value the ceiling, competitors the range between.

Setting the price

  • Buyers act on perceived prices, judged against reference prices, with lower and upper thresholds.
  • Six steps: objective, demand, costs, competitors, method, final price.
  • Methods: cost-based (mark-up, target-return, break-even), value-based (perceived value, value pricing), competition-based (going-rate, sealed-bid).
  • Mark-up price = unit cost ÷ (1 − return on sales); target-return price = unit cost + (return × capital) ÷ unit sales.

Remember: Objective, demand, costs, competitors, method, final price.

Pricing strategies

  • Cost-plus, target-return, value-based and going-rate set price from cost, return, value or rivals.
  • Skimming starts high and cuts in steps; penetration starts low to win share and need not rise later.
  • Premium, customary, EDLP, psychological, differential and bundle pricing use image, habit, perception, segments and combinations.

Remember: Skim when buyers pay for novelty; penetrate when volume lowers cost.

Adapting the price

  • Geographical pricing, including countertrade: barter, compensation deals, buyback arrangements and offsets.
  • Discounts and allowances: cash, quantity, functional, seasonal, and allowances.
  • Promotional pricing, from loss leaders to psychological discounting.
  • Differentiated pricing (customer-segment, product-form, image, channel, location, time) is price discrimination: prices not proportional to cost.

Remember: Geography, discounts, promotions, differentiation.

Price-quality strategies

  • Buyers who lack information take price as a signal of quality.
  • Diagonal strategies (premium, medium-value, economy) can coexist.
  • High-value, super-value and good-value attack the diagonal; overcharging, rip-off and false economy overprice and are hard to sustain.

Remember: Diagonal coexists, above it attacks, below it overprices.

Don’t confuse it with

  • Pricing objectives and factors: Don't confuse a pricing objective with a pricing method. The objective is what the firm wants from price, such as market share. The method is how it calculates the figure, such as a mark-up on cost. One method can serve several objectives.
  • Setting the price: Don't confuse a mark-up on cost with a mark-up on price. 20% on the ₹1,300 cost gives ₹1,560; 20% of the selling price gives ₹1,625. Also keep target costing apart from cost-plus: cost-plus starts from cost and adds a margin, while target costing starts from the price and works back to the cost.
  • Pricing strategies: Don't confuse penetration with a launch offer. A common definition says penetration pricing means launching low and then raising the price. Penetration aims to win share with a low price; it does not require a later rise, and many penetration prices stay low. Nor is skimming the same as premium pricing: a premium price stays above rivals for good, while a skimming price is meant to come down.
  • Adapting the price: Don't confuse price discrimination with prices that differ because costs differ. Charging more to deliver to a distant town covers real freight; charging students less for the same museum visit does not reflect cost. Only the second is price discrimination. Also keep a functional discount, paid for work the channel does, apart from a quantity discount, paid for volume.
  • Price-quality strategies: Don't confuse the super-value strategy with the economy strategy. Both charge a low price. Economy gives low quality for it and sits on the diagonal; super-value gives high quality for it and attacks the brands above.

Key terms

Cost-Plus Pricing
Setting price by adding a standard mark-up to cost.
Penetration Pricing
Launching at a low price to win market share quickly.
Psychological Pricing
Pricing that works on perceptions, such as odd prices, reference prices and price as a signal of quality.
Skimming Pricing
Launching at a high price for buyers who value novelty, then lowering it over time.
Value-Based Pricing
Setting price by the customer's perceived value rather than by cost.

Unit 7 · Chapter 6Place: Distribution Channels, Logistics and Supply Chains

Distribution channels

  • A channel transfers ownership from production to consumption; it is part of a wider value network.
  • Intermediaries are merchants (take title), agents (negotiate, no title) or facilitators (neither).
  • Channels are direct, indirect or hybrid, and run from zero-level to three-level.
  • Intensity is intensive, selective or exclusive. Levels measure length; intensity measures breadth.

Remember: Direct or through intermediaries; intensive, selective or exclusive.

Channel systems and push and pull

  • Conventional channels breed conflict; a VMS unifies them by ownership (corporate), contract (contractual) or power (administered).
  • Franchises: manufacturer-sponsored retailer, manufacturer-sponsored wholesaler, service-firm-sponsored retailer.
  • Horizontal systems join firms at the same level without merging; multichannel marketing uses several channels at once.
  • Push through the trade, or pull through consumers; reverse-flow and service channels matter too.

Remember: Owned, contracted or led; push through the trade, pull through the buyer.

Market logistics

  • Also called physical distribution; it starts at the factory, and has grown into supply chain management.
  • Inbound brings inputs in, outbound sends finished goods out, reverse brings goods back.
  • No system both maximises service and minimises cost, so decide on a total-system basis, for profit.
  • Kotler and Keller's four steps: value proposition, network, operational excellence, implementation.

Remember: Right goods, right place, right time, lowest cost: trade-offs throughout.

The four logistics decisions

  • Order processing aims to shorten the order-to-payment cycle.
  • Warehousing trades delivery speed against cost; storage warehouses hold, distribution warehouses move goods out.
  • Inventory: the reorder point says when, the order quantity says how many; EOQ balances ordering and carrying costs.
  • Transport weighs speed, dependability and cost across modes and private, contract or common carriers.

Remember: Order processing, warehousing, inventory, transportation.

Supply chain management

  • Logistics is part of SCM; SCM coordinates many organisations for competitive advantage.
  • SCOR: plan, source, make, deliver, return.
  • Hugos' drivers (production, inventory, location, transportation, information) are set for responsiveness or efficiency.
  • Tight coordination brings dependence: one supplier's failure can stop the chain.

Remember: Plan, source, make, deliver, return; responsive or efficient.

Don’t confuse it with

  • Distribution channels: Don't confuse channel levels with distribution intensity. Levels count the intermediaries in the chain, its length. Intensity counts the outlets at the end of it, its breadth. A two-level channel can be intensive (biscuits) or selective (refrigerators). Also, merchants take title to the goods; agents do not.
  • Channel systems and push and pull: Don't confuse a horizontal marketing system with a merger. It is sometimes called a merger, but it is cooperation, and the firms usually stay separate. And keep the three franchise forms apart: most short accounts mention only the second, the bottler kind.
  • Market logistics: Don't confuse physical distribution with supply chain management. Physical distribution starts at the factory gate: choosing stocking points and carriers. Supply chain management starts earlier, with buying the right inputs and converting them efficiently into finished products. Physical distribution has since grown into it.
  • The four logistics decisions: Don't confuse the reorder point with the order quantity. The reorder point says when to order (at 300 fans); the order quantity says how many (1,000). Also keep storage warehouses, which hold goods for long periods, apart from distribution warehouses, which move them out fast.
  • Supply chain management: Don't confuse supply chain management with logistics. Logistics moves and stores goods, mainly inside one firm. SCM coordinates every firm in the chain, from buying inputs to returns. Logistics is one part of it.

Key terms

Channel Intermediary
A wholesaler, retailer, agent or broker that helps move a product from producer to consumer.
Common Carrier
A transport firm serving set routes on a schedule, open to all shippers at standard rates.
Distribution Channel
The set of organisations, direct or through intermediaries, through which a product passes from producer to final consumer.
Exclusive Distribution
Distribution through one or very few dealers in each area; typical of luxury and specialty goods.
Horizontal Marketing System
Cooperation between unrelated firms at the same level of a channel to exploit an opportunity.
Intensive Distribution
Placing a product in as many outlets as possible; typical of convenience goods.
Inventory Carrying Costs
The costs of holding stock: storage, capital, taxes and insurance, depreciation and obsolescence.
Market Logistics
Planning, implementing and controlling the physical flow of goods and information from origin to point of use, to meet customer needs at a profit; also called physical distribution.
Order Point
The stock level at which a new order is placed, balancing the risk of stockout against the cost of overstock.
Reverse Logistics
Managing returns, recalls, repairs, recycling and excess stock back through the supply chain.
Selective Distribution
Distribution through more than one but fewer than all willing outlets; typical of shopping goods.
Supply Chain Management
Managing the whole chain from procurement through manufacturing to delivery, across organisations.
Trade-off (Logistics)
The tension between customer service level and total logistics cost: more of one usually means more of the other.
Vertical Marketing System
A channel in which producer, wholesaler and retailer act as one unified system: corporate, contractual or administered.
Wholesaler
An intermediary that buys in bulk from producers and resells to retailers or other businesses.
Zero-Level Channel
A direct channel in which the producer sells straight to the consumer.

Unit 7 · Chapter 7Promotion Decisions: The Communication Mix and Budget

The promotion mix

  • Five tools: advertising, sales promotion, personal selling, public relations, direct and digital marketing.
  • Kotler and Keller list eight modes, adding events and experiences, interactive and word-of-mouth marketing.
  • IMC keeps every brand contact relevant and consistent over time.
  • Push works through channel members; pull works through final consumers.

Remember: Advertising, sales promotion, personal selling, PR, direct marketing.

Developing effective communications

  • Steps: audience, objectives, design, channels, budget, mix, results, managing IMC.
  • Objectives: category need, brand awareness, brand attitude, brand purchase intention.
  • Design: message, creative (informational or transformational) and source.
  • Channels are personal (advocate, expert, social) or non-personal (media, atmospheres, events).

Remember: Audience, objectives, design, channels, budget, mix, results.

Setting the promotion budget

  • Affordable: what is left after other costs; ignores the effect on sales.
  • Percentage of sales treats sales as the cause; competitive parity copies rivals and aims at share of voice.
  • Objective and task costs the tasks needed to reach the objectives.
  • Share of voice is a brand's share of category promotion spending, not of sales.

Remember: Objective and task is the most logical method.

Advertising

  • Paid, non-personal, by an identified sponsor; pervasive, expressive, impersonal and controlled.
  • 5 Ms: mission, money, message, media, measurement.
  • Objectives: inform, persuade, remind, reinforce.
  • Media weigh reach, frequency and impact; GRPs = reach × frequency.

Remember: Mission, money, message, media, measurement.

Sales promotion and personal selling

  • Sales promotion: consumer, trade and sales-force promotions; attention, incentive and invitation.
  • Consumer tools include samples, coupons, rebates, price packs, premiums and prizes; trade tools include price-offs, allowances and free goods.
  • Price packs eat margin fast; frequent deals teach buyers to wait.
  • Personal selling is two-way, trusted and persuasive, but costly and limited in reach.

Remember: Sales promotion buys action now; personal selling builds conviction.

Don’t confuse it with

  • The promotion mix: Don't confuse the promotion mix with the marketing mix. Promotion is one of the 4Ps; the promotion mix is the set of tools inside that one P. Likewise, sales promotion is one tool in the promotion mix, not another name for it.
  • Developing effective communications: Don't confuse informational with transformational appeals. Informational appeals argue from the product: what it does and why it is better. Transformational appeals argue from feelings and image: who you become by using it. A demonstration is informational even when it is entertaining.
  • Setting the promotion budget: Don't confuse share of voice with market share. Share of voice measures a brand's share of the category's promotion; market share measures its share of the category's sales. A small brand can shout loudly and still sell little.
  • Advertising: Don't confuse advertising with publicity. Advertising is paid for, carries the sponsor's name and says what the sponsor chooses. Publicity is coverage the firm does not pay for and does not control, which is why it is more credible. Also keep reminder (buy again) apart from reinforcement (you chose well).
  • Sales promotion and personal selling: Don't confuse sales promotion with advertising. Advertising gives a reason to buy; sales promotion gives an incentive to buy now. Also: a contest judges entries, a sweepstakes draws names; a price pack cuts the price on the pack, a coupon is a certificate for a stated saving.

Formulas

  • GRPs = reach (% of target audience) × average frequency

Key terms

Advertising
Any paid, non-personal presentation of ideas, goods or services by an identified sponsor.
AIDA
A response model: attention, interest, desire, action; usually credited to E. St. Elmo Lewis.
Integrated Marketing Communications
Coordinating all promotion tools to deliver one clear, consistent message.
Objective-and-Task Method
Setting the promotion budget by costing the tasks needed to reach defined objectives; the most logical method.
Personal Selling
Face-to-face presentation by a salesperson to make sales and build relationships.
Promotion Mix
The blend of advertising, sales promotion, personal selling, public relations and direct marketing.
Pull Strategy
Promoting to final consumers so that they ask channel members for the product.
Push Strategy
Promoting to channel members, who then promote to final buyers.
Reach and Frequency
In media planning, how many people see an ad at least once, and how often the average person sees it.
Sales Promotion
Short-term incentives to encourage trial or purchase, aimed at consumers, the trade or the sales force.

Unit 7 · Chapter 8Consumer and Industrial Buying Behaviour

Consumer behaviour and its influences

  • Consumer behaviour covers searching for, buying, using, evaluating and disposing of products.
  • Four sets of factors: cultural, social, personal and psychological, from the broadest to the most personal.
  • Buying roles: initiator, influencer, decider, buyer and user; the payer is often not the chooser.

Remember: Cultural, social, personal, psychological.

The buying decision process

  • Stages: need recognition, information search, evaluation of alternatives, purchase, post-purchase behaviour.
  • Awareness set, evoked (consideration) set, choice set.
  • Cognitive dissonance is doubt about the choice, eased by reassurance, guarantees and after-sales contact.
  • Satisfaction depends on the gap between expectations and perceived performance.

Remember: Need, search, evaluate, buy, reflect.

Types of buying behaviour

  • Two dimensions: the buyer's involvement and the differences between brands.
  • Complex (car) and dissonance-reducing (carpet) are high involvement.
  • Variety-seeking (biscuits) and habitual (salt) are low involvement.
  • Involvement belongs to the buyer, not the product.

Remember: High involvement and real differences make buying complex.

Decision rules and models of buyer behaviour

  • Non-compensatory rules: conjunctive (every minimum), disjunctive (any high standard), lexicographic (top attribute first).
  • Compensatory rules, such as Fishbein's expectancy-value model, weigh all attributes so strengths offset weaknesses.
  • Models: economic, psychological, sociological, and comprehensive (Nicosia, Engel–Kollat–Blackwell, Howard–Sheth).

Remember: Conjunctive: every minimum. Disjunctive: one high standard. Lexicographic: the top attribute first.

Industrial (organisational) buying behaviour

  • Business markets: fewer, larger buyers, professional purchasing, several influencers, derived demand.
  • Buyclasses: straight rebuy, modified rebuy, new task; crossed with eight buyphases in the buygrid (Robinson, Faris and Wind, 1967).
  • Buying centre: users, influencers, buyers, deciders, gatekeepers, plus initiators and approvers.
  • Influences: environmental, organisational, interpersonal and individual (Webster and Wind).

Remember: Straight rebuy, modified rebuy, new task.

Don’t confuse it with

  • Consumer behaviour and its influences: Don't confuse the buyer with the user or the decider. The person who pays is often not the person who chooses or the person who uses. Marketers must find out who plays each role, because each needs a different message.
  • The buying decision process: Don't confuse cognitive dissonance with dissatisfaction. Dissatisfaction means the product performed below expectations. Dissonance is doubt about the choice, and it can arise even when the product works well, because the rejected options also had attractions.
  • Types of buying behaviour: Don't confuse dissonance-reducing with complex buying. Both are high involvement. In complex buying the brands differ, so the buyer studies them first. In dissonance-reducing buying they look alike, so the buyer decides quickly and seeks comfort afterwards. Variety-seeking is also not dissatisfaction: the buyer switches for a change, not because the last brand failed.
  • Decision rules and models of buyer behaviour: Don't confuse conjunctive with disjunctive. Conjunctive means “and”: every attribute must pass its minimum. Disjunctive means “or”: passing a high standard on any key attribute is enough.
  • Industrial (organisational) buying behaviour: Don't confuse the buyer with the decider. The buyer has formal authority to choose suppliers and arrange terms. The decider has the power to settle the choice, and in a big purchase that is often someone more senior.

Key terms

AIO Model
A way of profiling consumer lifestyle through activities, interests and opinions.
Attitude (Consumer)
A learned predisposition to respond favourably or unfavourably toward a product, brand or idea.
Buyclass Framework
Robinson, Faris and Wind's classification of business purchases into straight rebuy, modified rebuy and new task.
Buygrid Model
Robinson, Faris and Wind's grid crossing the three buyclasses with eight stages (buyphases) of the industrial buying process.
Buying Centre
Everyone involved in an organisational purchase: users, influencers, buyers, deciders and gatekeepers, with initiators and approvers.
Cognitive Dissonance
Discomfort after a purchase caused by doubt about the choice; ‘buyer's remorse’.
Conjunctive Rule
A decision rule in which a product must meet a minimum acceptable level on every attribute.
Derived Demand
Demand for business goods that comes from demand for the consumer goods they help produce.
Disjunctive Rule
A decision rule in which a product is accepted if it meets a high standard on any one key attribute.
Evoked Set
The brands a buyer actively considers when evaluating alternatives.
Gatekeeper
A buying-centre member who controls the flow of information to the others.
Habitual Buying
Low-involvement buying where brands differ little, needing minimal decision-making; salt is the usual example.
Industrial Buying Behaviour
The process by which organisations establish needs and choose among products and suppliers for production, operations or resale.
Lexicographic Rule
A decision rule that compares brands on the most important attribute first.
Modified Rebuy
A business buying situation in which products, prices or suppliers are re-evaluated because needs have changed.
New Task Buying
A first-time organisational purchase needing extensive research and many decision-makers.
Straight Rebuy
A routine business purchase from an established supplier with little evaluation.
Variety-Seeking Buying
Low-involvement buying where buyers switch among clearly different brands for variety.
Webster and Wind Model
A model of organisational buying in which environmental, organisational, interpersonal and individual factors influence the buying centre.

Unit 7 · Chapter 9Services Marketing

Services and their characteristics

  • A service is essentially intangible and results in no ownership (Kotler).
  • Five characteristics: intangibility, inseparability, variability, perishability, lack of ownership; Kotler and Keller list the first four.
  • Responses: tangible evidence, trained staff, standard processes, yield management, membership.
  • Offerings range from pure tangible goods to pure services.

Remember: Intangible, inseparable, variable, perishable, not owned.

The services marketing mix: 7Ps

  • The 4Ps: product, price, place, promotion.
  • Booms and Bitner (1981) added people, process and physical evidence.
  • People answers inseparability, process answers variability, physical evidence answers intangibility.
  • People include staff, the customer and other customers present.

Remember: The 4Ps plus people, process and physical evidence.

Service quality and SERVQUAL

  • SERVQUAL (1988): reliability, assurance, tangibles, empathy, responsiveness.
  • Score per dimension: perception minus expectation; a negative score is a shortfall.
  • Gaps model (1985): knowledge, standards, delivery and communication gaps lead to the customer gap.
  • Zone of tolerance (1993) lies between desired and adequate service; Oliver's expectancy disconfirmation (1980).

Remember: Reliability, Assurance, Tangibles, Empathy, Responsiveness.

The service triangle

  • External marketing: company to customers; making promises.
  • Internal marketing: company to employees; enabling staff to keep promises.
  • Interactive marketing: employees to customers; keeping promises in the service encounter.
  • Clients judge technical quality (what) and functional quality (how).

Remember: External, internal, interactive: promise, enable, deliver.

Excellence in services and service brands

  • A customer-obsessed strategic concept and top-management commitment (QSCV).
  • High standards, profit tiers, and monitoring through voice-of-the-customer measures and mystery shopping.
  • On average about 40 per cent of customers with a bad experience leave; complaints handled well keep them.
  • Brand experience: sensory, affective, behavioural, intellectual.

Remember: Customer-obsessed, committed, high standards, tiers, monitoring, complaints welcomed.

Don’t confuse it with

  • Services and their characteristics: Don't confuse intangibility with lack of ownership. Intangibility is about judging before you buy: you cannot inspect a haircut in advance. Lack of ownership is about what you hold afterwards: a hotel guest uses the room but never owns it. Kotler and Keller list only the first four characteristics; some textbooks add lack of ownership as a fifth.
  • The services marketing mix: 7Ps: Don't confuse process with place. Place is where and how customers reach the service: a branch, an app, a centre. Process is the steps the service follows once they arrive: token, queue, verification, payment.
  • Service quality and SERVQUAL: Don't confuse the five dimensions with the five gaps. The dimensions (RATER) are what customers judge. The gaps are where the firm goes wrong. SERVQUAL measures gap 5 on each dimension; gaps 1 to 4 are its causes inside the firm. Also keep reliability (doing what was promised) apart from assurance (inspiring trust).
  • The service triangle: Don't confuse internal marketing with internal communication. Internal marketing treats staff as a first market. It hires, trains, equips and rewards them so they can keep the promises external marketing makes. A circular to staff is communication; giving the agent authority to reverse the charge is internal marketing.
  • Excellence in services and service brands: Don't confuse profit tiers with yield management. Yield management varies price by time and demand, to fill capacity that would otherwise perish. Profit tiers vary the level of service by how valuable the customer is.

Formulas

  • SERVQUAL gap = perception score − expectation score

Key terms

Heterogeneity (Service)
The variability of service quality depending on who provides it, when, where and how.
Inseparability
The service characteristic that production and consumption happen together.
Intangibility
The service characteristic that it cannot be seen, touched or tried before purchase.
Interactive Marketing
The employee-customer side of the service triangle, where the service is delivered.
Internal Marketing
Hiring, training and motivating employees to serve customers well.
Perishability
The service characteristic that it cannot be stored; unused capacity is lost.
Service Brand
A brand built mainly on delivering a service, which depends on consistently high service delivery.
Service Triangle
The links between company, employees and customers: internal, external and interactive marketing.
SERVQUAL
A model measuring the gap between expected and perceived service on five dimensions: reliability, assurance, tangibles, empathy, responsiveness.
Seven Ps of Services
Booms and Bitner's services mix: product, price, place, promotion, people, process and physical evidence.
Yield Management
Managing demand and capacity so the right services reach the right customers at the right places, times and prices.
Zone of Tolerance
The range between desired and adequate service within which variations in service go largely unnoticed.

Unit 7 · Chapter 10Customer Relationship Marketing

Relationship marketing and CRM

  • Relationship marketing (Berry, 1983): attracting, maintaining and enhancing customer relationships.
  • CRMk is the strategy; CRM manages detailed information about customers and every touch point to maximise loyalty (Kotler and Keller).
  • Retention usually costs less than acquisition: cutting defections 5 per cent raised profits 25 to 85 per cent (Reichheld and Sasser, 1990).
  • CLV is the present value of a customer's future profits; churn is the rate at which customers leave.

Remember: CRMk is the strategy; CRM is the technology.

One-to-one and permission marketing

  • Peppers and Rogers (1993): IDIC, identify, differentiate, interact, customise; focus on most valuable customers.
  • Permission marketing (Godin, 1999): anticipated, personal and relevant messages to people who want them; the opposite of interruption marketing.
  • Participatory marketing: firm and customer work out together how to satisfy the customer.
  • Friends and family remain the strongest influence; reviews and influencers matter more and more, and favours should be disclosed.

Remember: Identify, Differentiate, Interact, Customise.

Customer retention and loyalty

  • Retention rate: the share of customers at the start of a period still buying at its end; churn is the share who leave.
  • Customer base management: reduce churn, lengthen relationships, raise share of wallet by cross-selling and up-selling, focus on high-value customers.
  • The marketing funnel and conversion rates show where customers drop out.
  • Loyalty activities: interaction, loyalty programmes, institutional ties. Berry and Parasuraman (1991): financial, social, structural.

Remember: Financial, social, structural: each binds more tightly.

The CRM value chain and process

  • Buttle (2004): portfolio analysis, customer intimacy, network development, value proposition, customer lifecycle management.
  • Supports: leadership and culture, data and IT, people, processes. Shorter versions often leave out customer intimacy.
  • Process: awareness, leads, conversion, support, upselling; tools include buyer personas and lead scoring.
  • CRM systems keep one shared customer history, and raise conversion and productivity.

Remember: Awareness, leads, conversion, support, upselling.

Don’t confuse it with

  • Relationship marketing and CRM: Don't confuse relationship marketing with CRM software. Relationship marketing (CRMk) is the strategy: which customers to keep, and how. CRM is the system that records data and touch points to carry the strategy out. A firm can buy the software and still treat every customer as a one-off sale.
  • One-to-one and permission marketing: Don't confuse permission marketing with one-to-one marketing. One-to-one marketing is about tailoring the offer to each customer. Permission marketing is about consent to be contacted at all. A firm can personalise a message that nobody agreed to receive; that is still interruption.
  • Customer retention and loyalty: Don't confuse cross-selling with up-selling. Cross-selling sells a related product: a bank sells a home-loan customer an insurance policy. Up-selling sells a higher-value version of the same thing: a premium account instead of a basic one.
  • The CRM value chain and process: Don't confuse the value chain with the five-step process. Buttle's value chain is a strategic model: five stages resting on four supports. The five-step process, from awareness to upselling, is a sales routine. Shorter versions of the value chain often leave out customer intimacy; Buttle's has five primary stages.

Key terms

Buyer Persona
A fictional profile of an ideal customer, used to target marketing.
Churn
The rate at which customers stop doing business with a firm over a period.
Customer Lifetime Value (CLV)
The present value of the profits a customer will bring over the whole relationship.
IDIC Model
Peppers and Rogers' one-to-one marketing steps: identify, differentiate, interact, customise.
Marketing Funnel
The stages from awareness to loyalty, with conversion rates between them that reveal where customers drop out.
One-to-One Marketing
Treating each customer as a segment of one.
Permission Marketing
Seeking customers' consent before sending them marketing messages.
Relationship Marketing
Building long-term relationships with customers, employees and partners rather than focusing on single transactions.
Upselling
Persuading a customer to buy a higher-value version or an add-on.

Unit 7 · Chapter 11Retail Marketing

Retailing and store retailers

  • Retailing: selling directly to final consumers for personal, non-business use; anyone can do it.
  • The retailer is the final link in the channel and passes feedback back up.
  • Service levels: self-service, self-selection, limited service, full service.
  • Store types range from specialty and department stores to supermarkets, discounters and superstores with category killers.
  • Low margin with high volume can earn more rupees than high margin with low volume.

Remember: By service, by product line, by price, by organisation.

Non-store and corporate retailing

  • Non-store: direct selling (in person), direct marketing (through media), automatic vending, buying services.
  • Corporate forms: corporate and voluntary chains, retailer and consumer cooperatives, franchises, conglomerates.
  • Voluntary chain: organised by a wholesaler. Retailer cooperative: organised by the retailers. Consumer cooperative: owned by customers.
  • Private labels give the retailer control of price and quality, higher margins and loyalty.

Remember: Chain, voluntary chain, cooperative, franchise, conglomerate.

Trends in Indian and world retail

  • Organised retail: registered chains; unorganised: kiranas, owner-run shops and vendors.
  • Demographic change, convenience, online retail, technology and digital payments drive change; kiranas are modernising.
  • FDI: 100 per cent single-brand (automatic, 2018); up to 51 per cent multi-brand (approval, 2012).
  • Worldwide: new combinations, intertype competition, giant and global retailers, shopper marketing, store experience.

Remember: Organised, online, digital and reaching smaller towns.

Don’t confuse it with

  • Retailing and store retailers: Don't confuse an off-price retailer with a discount store. A discount store sells regular, standard goods cheaply by accepting a lower margin. An off-price retailer sells leftover, surplus or irregular branded goods, bought below regular prices. In the same way, a category killer is not a specialty store: both go deep in one line, but the category killer is a superstore.
  • Non-store and corporate retailing: Don't confuse a voluntary chain with a retailer cooperative. Both give independent shops group buying. A wholesaler organises a voluntary chain; in a retailer cooperative the retailers set up the buying body themselves. Study notes sometimes give Lijjat Papad as a consumer cooperative. In fact it is a cooperative of the women who make its products, not one owned by its customers. Direct selling also differs from direct marketing: direct selling uses a salesperson in person, direct marketing reaches buyers through media.
  • Trends in Indian and world retail: Don't confuse single-brand with multi-brand retail FDI. Single-brand retail is a firm selling only its own brand in its stores; foreign firms may own all of it through the automatic route, with no prior government approval. Multi-brand retail is a store selling many brands, like a supermarket; foreign ownership is capped at 51 per cent and needs government approval.

Key terms

Automatic Vending
Non-store retailing through unmanned machines that sell around the clock.
Discount Store
A retailer selling standard goods at low prices, with low margins and high volume.
Franchise Organisation
A contractual system of outlets run under a franchisor's brand and system, for a fee.
Kirana Store
A traditional Indian neighbourhood store, now modernising with self-service, credit, home delivery and digital ordering.
Merchandising Conglomerate
A corporation owning several diversified retail brands and formats.
Non-Store Retailing
Selling to consumers outside fixed stores: direct selling, direct marketing, vending and buying services.
Off-Price Retailer
A store selling leftover, surplus or irregular branded goods below regular prices.
Private Label
A brand created and owned by a retailer or wholesaler; a store brand.
Retailer Cooperative
Independent retailers who set up a joint buying organisation and run joint promotions.
Shopper Marketing
Influencing buyers at the point of purchase, where most purchase decisions are made.
Voluntary Chain
Independent retailers organised by a wholesaler for group buying and common merchandising.

Unit 7 · Chapter 12International Marketing

Going international

  • International marketing: planning, pricing, promoting and directing goods to buyers in more than one nation for a profit (Cateora and Graham).
  • Reasons: growth, scale, spreading risk, competitive advantage, following global customers. Risks: preferences, culture, regulation, instability, currency.
  • Uppsala stages (Johanson and Wiedersheim-Paul, 1975): domestic, agents, export department and subsidiaries, production abroad. Born globals skip them.
  • Global marketing process: opportunities, entry strategy, marketing programme, implementation, monitoring and control.

Remember: Domestic, agents, subsidiaries, production abroad.

Selecting foreign markets

  • Criteria: product suitability, geographic proximity, economic potential, political stability; a weighted score compares them.
  • Psychic proximity: similar language, culture and legal system. It differs from geographic distance, and can hide real differences.
  • Waterfall: one by one, lower risk, learning. Sprinkler: many at once, first-mover advantage, higher investment.
  • Emerging markets such as the BRICS need affordable prices, adapted products and local marketing.

Remember: Similar markets first, or many at once.

Modes of entry

  • Indirect exporting (through intermediaries at home) and direct exporting (own export department or branches): low to medium commitment.
  • Licensing, including franchising and contract manufacturing: low investment and control; the licensee may become a competitor.
  • Joint venture: shared ownership, risk and profit, plus local know-how. Direct investment: full control at very high investment.
  • A franchise is a fuller licence: the brand plus the whole way of running the business.

Remember: Export, license, joint venture, invest: more commitment, more control.

Don’t confuse it with

  • Going international: Don't confuse international marketing with exporting. Exporting is one way to enter a market. International marketing is the whole job: choosing markets, choosing how to enter, and adapting the product, price, promotion and distribution for each.
  • Selecting foreign markets: Don't confuse psychic distance with geographic distance. Geographic distance is kilometres. Psychic distance is how different the market feels. A far country can be psychically close, as the UK and Australia are for US firms, and a neighbour can be psychically distant.
  • Modes of entry: Don't confuse licensing with franchising. A licence gives the right to use one asset, such as a patent, process or trademark. A franchise is a fuller form of licensing: the franchisee gets the brand and the whole way of running the business, and must follow it.

Key terms

Exporting
Entering a foreign market by selling home-produced goods there, directly or through intermediaries.
FDI (Foreign Direct Investment)
Entering a foreign market by building or buying production facilities there: the highest risk and full control.
Joint Venture (Market Entry)
Entering a foreign market in partnership with a local firm, sharing ownership, control and risk.
Licensing
Entering a foreign market by letting a local firm use a process, trademark or patent for a royalty.
Psychic Proximity
A preference for entering countries with a similar language, culture and legal system.
Sprinkler Approach
Entering many countries at the same time to gain first-mover advantage.
Waterfall Approach
Entering foreign markets one at a time, in sequence, for controlled expansion and learning.

Social marketing and green marketing

  • Social marketing (Kotler and Zaltman, 1971): audience, behaviour change, exchange theory, marketing mix.
  • Exchange theory: the change must offer benefits that outweigh its perceived costs.
  • Green marketing: eco-friendly products, sustainable processes, eco-labelling, green advertising.
  • Greenwashing breeds scepticism; social marketing is not the societal marketing concept.

Remember: Sell behaviour change for society; sell sustainability honestly.

Green marketing in practice

  • Green products conserve resources and avoid pollution; firms check materials, product and packaging.
  • Green 4Ps: a premium only for visible added value; availability shapes who buys.
  • Strategies: green design, positioning, pricing and disposal.
  • Kotler and Armstrong's five principles are of sustainable marketing, which green marketing applies; beware greenwashing.

Remember: Green product, price, place and promotion.

Online and direct marketing

  • Online components: SEO, content, social media, email, PPC.
  • Strategies: inbound, affiliate, influencer and performance marketing; challenges include data privacy.
  • Cost per order = ad spend ÷ orders; ads pay while it stays below the margin per order.
  • Direct marketing: one-to-one, immediate measurable response; not the same as direct selling.

Remember: Targeted, measurable and paid for by results.

Digital marketing

  • Internet marketing sits within e-marketing, which sits within digital marketing.
  • Methods include SEO, SEM, PPC, social media, email, affiliate, content, native ads and automation.
  • Benefits: reach, low entry cost, measurable ROI, targeting, flexibility; budgets scale from basic to advanced.
  • Strategy: goals, sales process, personas, channels, benchmarks, adjustment.

Remember: Goals, sales process, personas, channels, benchmarks, adjustment.

Rural marketing

  • Needs: efficient distribution, affordable small packs and sachets, adapted products, local languages.
  • Four As: availability, affordability, acceptability, awareness.
  • Census: urban means a statutory town, or 5,000+ people, 400+ per sq km and 75%+ of male main workers outside farming.
  • Rural marketing runs both ways; agricultural marketing moves farm produce to buyers.

Remember: Available, affordable, acceptable, known.

Guerrilla and roadblock marketing

  • Guerrilla (Levinson, 1984): street, viral and experiential tactics for attention and recall; hard to measure.
  • Roadblock: the same message on many channels at once for maximum reach; costly, risk of ad fatigue.
  • Ambush marketing is one guerrilla tactic: linking a brand to an event without sponsoring it.
  • Choose by budget and goal: guerrilla for local buzz, a roadblock for one big moment.

Remember: Guerrilla surprises cheaply; roadblock saturates expensively.

Don’t confuse it with

  • Social marketing and green marketing: Don't confuse social marketing with societal marketing, or with social media marketing. Social marketing sells a behaviour for society's good, often for a government or NGO. The societal marketing concept is a firm's philosophy of balancing customers' wants, its profit and society's long-term interest. Social media marketing is simply marketing on social platforms.
  • Green marketing in practice: Don't confuse green marketing principles with sustainable marketing principles. These are often presented as principles of green marketing; they are Kotler and Armstrong's principles of sustainable marketing, which green marketing applies. Nor is
  • Online and direct marketing: Don't confuse direct marketing with direct selling. Direct marketing reaches customers through media, such as mail, phone or email, and asks for a response. Direct selling is selling face to face away from a shop, as in door-to-door or network selling.
  • Digital marketing: Don't confuse SEO with SEM. SEO improves where a site appears in the free search results, and it costs effort, not a fee per click. SEM buys paid placement in search results. Firms often use both.
  • Rural marketing: Don't confuse rural marketing with agricultural marketing. Agricultural marketing moves farm produce from farmers to buyers. Rural marketing runs both ways: goods and services into villages, produce out of them, and trade within them.
  • Guerrilla and roadblock marketing: Don't confuse guerrilla marketing with ambush marketing. Ambush marketing is one guerrilla tactic: a brand links itself to an event, such as a cricket tournament, without paying to sponsor it. Guerrilla marketing is the wider family of low-cost, unconventional tactics.

Key terms

Direct Marketing
One-to-one communication designed to get an immediate, measurable response.
Exchange Theory
In social marketing, the idea that a behaviour change must offer benefits that outweigh its perceived costs.
Green Marketing
Marketing environmentally sustainable products and practices.
Green Product
A product whose making, purchase and use allow economic development without polluting or depleting natural resources.
Greenwashing
Making false or exaggerated environmental claims about a product.
Guerrilla Marketing
Unconventional, low-cost tactics designed to surprise audiences and create buzz.
Marketing Automation
Software that automates routine marketing tasks such as scheduling posts, nurturing leads and tracking campaigns.
Native Advertising
Paid content that blends into its surrounding medium and should be labelled as sponsored.
Performance Marketing
Marketing in which the advertiser pays only when a measurable action, such as a click, lead or sale, occurs.
Roadblock Marketing
Advertising on many channels at the same time so the audience meets the message wherever it turns.
Rural Marketing
Marketing designed for rural consumers, often framed by availability, affordability, acceptability and awareness.
Social Marketing
Using marketing techniques to influence behaviour that benefits individuals and society.