National Institute of Business Management

Chennai - 020

THIRD SEMESTER MBA

Subject : Business Environment

Attend any 4 questions. Each question carries 25 marks

(Each answer should be of minimum 2 pages / of 300 words)

ANSWER SHEET

1. What are the three objectives of Business? Explain.

2. Explain the philosophy of system dynamics modeling of

Organizational Structure.

Answer 2:

Dynamics provides a set of tools and techniques to develop shared mental models
of organizational systems, to represent them rigorously, to test their validity
through simulation, and to gauge the impact of policy alternatives via sensitivity
and what-if types of analyses. Dynamics can help companies gain insights into
underlying mechanics that determine the behavioural dynamics of organizational
systems.

This, in turn, can help improve decision-making in today’s integrated value chain.
Approach to modelling management processes is novel, but more than that, it
introduced the notion that the dynamics of an industrial system arises as a result
of its underlying structure. The basic structural element is the feedback loop; the
underlying structure refers to the collection of interacting feedback loops
comprising the system.

This linkage between structure and behaviour remains the guiding principle for
practitioners of systems dynamics. Decisions are made in the information-
feedback structure. A study of the feedback structure could therefore provide a
good understanding of the system’s dynamics. Management experts have tried to
predict the shape of organizational structure in advanced countries. Here we aim
at contemplating the future shape of organizational structure in Indian business
organizations. The purpose here is not to suggest as to which organizational
structure is the most suitable.
The purpose is not prescriptive, but descriptive and analytical. More specially, the
following questions are discussed. What are the views of experts regarding the
various factors influencing the organizational structure? Can we develop a general
model of organizational structure for all types of business organizations in India?
What are the internal and external environmental variables influencing the
organizational structure of Indian business concerns?

Organization theorists and experts have examined the factors influencing the
organizational structure of business concerns. Their reasons vary according to
their backgrounds and beliefs in the theories of organization. The classical
theorists feel that the structure of organization depends on the task or work
organized effectively for accomplishing the objective of the organization. Since
the objective of the organization is to maximize profit, according to classicists,
this goal can be achieved by dividing the activities into groups and subgroups on
the basis of product, process, customer, division, function, etc.

In performing these activities care is taken to see that there should be proper
delegation of authority, coordination and control over the subordinates. In this
case, the fundamental and implicit assumption is that the human beings are
rational and would do their best to perform their work efficiently and effectively.
To perform these activities, there are less number of persons at the top and more
numbers at the bottom. To get the things done from the subordinates, there should
be formal rules and regulations and a reward-punishment system.

Any change in the structure of organization would depend on the

increase/decrease of the activities of the organizations. Despite their eagerness to
maximize profit, the classicists did not pay much attention to the variables which,
to a great extent, influence the productivity and thereby the profitability of the
organization. Stagnant productivity and mounting dissatisfaction among
employees have encouraged some management experts to study the reasons for
this phenomenon. They have found classical approach to be mechanistic and
incompatible with human nature. This search is responsible for the development
of newer organization theories. The theorists point out that the structuring of
organization cannot be framed without taking into account the human being. The
structure should be developed in such a way that the focal point should be the
needs, attitudes, and behaviour of persons and not the work or activity. The
organizational structure should be based on the system of cooperation and should
take into account the action and reaction of employees and its influence on the
structure of organization.

When an individual enters into an organization he enters with his personal needs,
attitudes, and value and try to personalize the organization, but the organization
would also try to socialize the individual. In this fusion process here is a basic
incongruence between the need of a mature individual and the objectives of the
focal organization. An individual plays different roles in the organization and his
roles should be identified. The contribution from organization members and
rationality should be taken into account. Moreover, the relation between good
supervisor and his superior would influence the organizational effectiveness and
each group of the organization should be linked by means of overlapping groups
of supervisors. The releasing of under-utilized energy of individual members
should be taken into consideration for organizational arrangements. In short, they
emphasize that the organizational structure should be framed around human
beings and proper care should be taken regarding the various characteristics of
individuals. In doing these, theorists are primarily emphasizing the internal
variables of the organization. Indirectly, though they are trying to point out that
the individuals as a part of the society carry with them the different needs, values,
and attitudes of such society, they are not considering external pressures directly.
Some of the theorists, no doubt, view the organization as part of a system and of
events, activities, and their components. They try to identify the fundamental
factors and the interrelations between them, if any objective is to be realized.
Simon suggests that the structure of organization should be designed through an
examination of the points on which decisions made and the person’s from whom
information must be required or satisfactory decision. But these theorists are
mainly emphasizing the interrelation of the different parts of organizations and he
inter-relations of individuals with environment found in the system. They try to
look at the organization in its totality.

The new theorists, known as environmentalists, are the first to emphasize the
impact of external environments on the organizational structure. Their main view
is that organization is a system of the main system and since there is
interrelationship and interdependency, the organizational structure would be
shaped by the external environments. The focal organizations learn from the
environments. In studying these environments, the modern organization theorists
emphasize the external pressures, because the organizational structure of a
company is greatly influenced by its external environments. Different
environments would have different impacts on the organizational structure.

Their main hypothesis is that the external environments influencing each

enterprise are different and hence no organization is similar to another. Their
research findings reveal that the socioeconomic, political, technological,
educational, and cultural environments of the country greatly influence the
organizational structure. Thus, the concept of open system is introduced in the
study of organizational structure. In the open system this organization tries to
adjust and adapt. The static environment will lead to static organizational
structure, i.e., mechanistic or bureaucratic structure. The dynamic environment
results in less formal, less bureaucratic, less hierarchical, and more dynamic
organizational structure.

Recently there has been a shift in the emphasis of the influences of total external
environment variables on organization. The new development is that the total
external environment is not crucial in shaping the organizational structure of an
enterprise. There are some external variables which do not influence the
 organizational structure and hence they should not be taken into account in
studying their influence. They feel that only the task environment should be taken
into account because the structure of the organization is mainly influenced by this
environment.

Before discussing the impact of task environment on the organizational structure,

it would be appropriate to understand the meaning of task environment. Task
environment consists of those parts of the environment which are relevant or
potentially relevant to goal-setting and goal attainment. Task environment
includes competitors, suppliers of labour, capital, and other material, customers or
clients, distributors, government agencies, and any other group, which may
influence organization’s goal attainment. These elements do not include the
cultural environment of the society, the environment which may not influence the
organization in the present time. However, it may be emphasized that the task
environment may not be similar for all the enterprises. Winston Oberg has tried to
speculate the impact of task environment on organization in the USA during the
coming decade. By relating he task environment with the model organizational
styles mechanistic vs. organic or Theory X vsTheory Y, system I vs. System IV-he
has tried to predict the probable tends in organizational style and structure in the
USA in1980 he points out that

i. the nation’s continuing commitment to full employment,

ii. increasing levels of social security and maintenance benefits,
iii. the continuing shift from low to high skill job accompanied by the increasing
educational level of employees,
iv. the increasing pace of technological change and growing complexity of jobs,
v. the growing unionization of professional and white-collar employees may lead to
participative Theory Y organization.

He has further mentioned the various environmental pressures which may lead to
mechanistic Theory X organization in the USA. These variables include

i. the current and possibly the future high level of unemployment in the aggregate or
in some labour markets,
ii. the existence of an irreducible minimum of dull, repetitive, non-involving jobs,
and
iii. A possible decline in the pace of technological change. How do these two sets of
environmental forces add up is a big question. Their interrelation and interaction
will decide the nature of organizational structure in the future. From this analysis,
it appears that the will be both the Theory Y and Theory X types of organization;
but the tendency towards Theory Y organizations will be more than Theory X
organization in the USA.

To sum up, there has been a gradual change in the emphasis on the various factors
and variables influencing the organizational structure of the enterprise. The
classical theorists consider the activities; the human relations experts view the
needs, attitudes, and values of the individuals and the group; and the
environmentalists emphasize the external environment as the significant factor
influencing the structure of organization. Besides external variables,
organizational correlates, attitude, value and norms of employees, ascribed and
achieved factors, professionalization of management, management philosophy
and other internal environmental variables also affect the organizational structure.

These variables are, in no sense, less important and less influencing. In the
following pages, an attempt is made to develop a general model indicating the
influences of internal and external variables on centralization and
decentralization, span of control, number of levels, decision centres, project and
committee type structure, etc. of the organizational structure of a firm. These
influences would affect the attitudes towards subordinates and employees, and
people in general, leading to a change in the management philosophy and working
climate of the organization. Whether these changes would result in Theory X or
Theory Y type of organization is the subject matter of this discussion. The model
is analyzed in the context of the present-day environment. Congenial external and
internal environment may influence an organization in different ways compared to
adverse and uncertain internal and external environment. The model has been
explained with the help of a two-dimensional matrix.

The influence of environment on organizational structure is described by a two-

dimensional matrix (X, Y), where X denotes the external environment (either
congenial or adverse) and Y denotes the internal environment either congenial or
adverse). A and a represent congenial external and internal environment
respectively. B and b denote adverse external and internal environment
respectively. The resultant effect on the organization may be explained in the
following manner:

aA = Theory Y

bB = Theory X

aB = Theory Y and Theory X

bA = Theory X and Theory Y

Exhibit 1

Environmental Matrix

External Environment (x)

Congenial Congenial Adverse

Internal (a) (A) (B)

Environment

(y) aA aB

Adverse

(b) bA bB

If the internal and external environments are congenial (aA) the organization
would be operating in a democratic manner and would be working on the basis of
Theory Y type of organization. Where the internal and external environments are
adverse and uncertain (bB), Theory X type of organizational; structure may be
noticeable. If the external environment is not favourable, but the internal
environment is conductive (aB), the adverse effect of the external pressure may be
offset to some extent and the overall result may be towards a combination of
Theory Y-theory X type of organization.

If, on the other hand, the internal environment is adverse, but the external pressure
is favourable (bA), it may lead again to a combination of Theory X-Theory Y type
of organization. It may be emphasized that the model or may not be applicable in
every organization. The organizational correlates (age, size, nature of product,
management etc.) professionalization of management, policy and philosophy of
top management of a particular concern may not correspond with the general
internal environment envisaged in this model.

The external environment may not be affecting all the organizations in a similar
manner. Moreover, these internal and external environments are difficult to
quantity and their impact on organizational structure may not be explained in very
specific terms.

Furthermore, the internal environment prevailing in one division or unit of a

company may be different from the other divisions or units. Even in one
divisions, some departments may be moving towards democratic type if
organizations than other departments. Due to these situations, the general model
would be of limited importance and application.
3. Do social obligations conflict with profit objective in business?
Answer 3:

Well, the social obligations do not necessarily conflict with the

profit objective. The first and the foremost social obligation of
management is to utilise the resources of the concern to the
optimum point and most efficiently; and since the other social
obligations are derivative of this basic social obligation, the profit
objective does not come into conflict with social obligations. This
is so because the business management is responsible for the
effective mobilization and utilization of our country’s economic
resources for its industrial development. To achieve this end, the
role of business management with a new sense of accountability
and social responsibility and direction need to be evolved.

To take a few examples, the society expects from business

management to maintain the business in a sound financial
position, to offer the best possible goods and services to the
society, to provide its workers with fair terms of employment, to
pay taxes honestly, etc. More often than not, the society views
the business management’s aim as selfish gain rather than
advancement of the general welfare.

The image can be removed only if management is alive to its

social obligations and helps the society to function in harmony as
one organic whole. This does not mean that the economic
purpose of the business in terms of efficient production and
distribution is to be subordinated to its social function

The business can only function as the representative of socio-

economic institution of the society if it can fulfil its social function
in a manner, which strengthens it as an efficient producer and
distributor.

As Peter Drucker says, a company can make a social contribution

only if it is highly profitable. A bankrupt company is not capable
of attracting and retaining talented personnel, is unlikely to be
an asset for the community and is bound to be pushed into
oblivion by the society itself. Profits are a motive, not a goal.
Emphases upon profits alone can misguide the manager. For
instance, it could lead to a ‘penny wise, pound-foolish’ attitude in
that machines are not adequately maintained, only products with
the low selling prices are promoted, research is ignored or
 eliminated, and short range operations are stressed...the ‘get it
and get out’ type of thinking prevailing.

Personal versus Business Objectives

Personal objectives refer to the aspirations and goals of

individual members of the enterprise and include financial and
non-financial incentives like salaries, allowances, bonus, status in
the organization and the society, chances for promotion, drive for
achievement, etc. Each individual tries to work hard in
consideration of any of these personal objectives. He is
motivated to work harder if he knows that by doing so he would
be achieving his personal objectives better. It shall not be out of
place to suggest that if a business has to achieve its objectives it
must give due consideration to the personal objectives.

There must be a reasonable correlation and congruence in the

personal and business objectives.

Let us take a concrete example. Mr. X is an employee in a cinema

company. His job is to issue tickets. In the interest of the
enterprise he should issue tickets to all those who have come to
see the show; then and then only can the business objectives be
achieved. But suppose he does not issue all the tickets at the
window for the following reasons:

i. He can oblige his friends and relations on the vacant seats;

ii. He can take some money from the visitors illegally;
iii. Certain tickets can be sold at ‘black price’;
iv. The concern might be put to loss, but he would be relieved from
the ticket window tension.

Well, the business organisation can never hope to achieve its

goal till this in congruency exists. As a matter of fact it would be
in the interest of the cinema company and the employee if every
visitor purchases the ticket from the window. Hence, the
management can decide to give some monetary incentive to the
employee on the basis of the amount of tickets sold; this in
congruency will also then disappear.

Balancing the Objectives

It is also the fitness of things to balance the profits and social

objectives well.
For example, adulteration may be considered as a desirable step
for increasing the profits, but from the standpoint of social
responsibility it can never be advised. Similarly, although there
may be a little decrease in profits, if some money is spent on
research and development, yet it is desirable from the social
responsibility view-point. Moreover, in the long run it is bound to
enhance the profits of the concern.

Peter Drucker has observed that there are few things that
distinguish competent from incompetent managers quite as
sharply as the performance in balancing objectives. It is the job
of an enlightened manager to continuously balance his
objectives without allowing any conflict to arise between two or
more objectives.
Social Responsibilities of Business

By business we mean the total enterprise of the country in

manufacturing industries, finance, banking and commerce and
not one section alone. The term ‘Social Responsibility’ of
business is not a fashionable term; it is gradually gaining
acceptance as a way of life. ‘Social responsibilities of business’
implies the obligations, which a business house owes to the
society, all life is a trust and all power carries with it obligations.

The Gandhian principle of trusteeship expresses the inherent

responsibility of business enterprise to its customers, workers,
shareholders and the community, and the mutual responsibilities
of these to one another. Every business has an over-riding
responsibility to make the fullest possible use of its resources,
both human and material, as has each individual.

An enterprise is a corporate citizen. Like a citizen it is esteemed

and judged by its actions in relation to the community of which it
is a member, as well as by its economic performance.
Management has the main responsibility today for developing
the corporate enterprise which is everywhere replacing the
family and family business as the unit of work in a technological
society.

A company has a responsibility to provide security of

employment with fair wages. Equal opportunity for personal
growth and advancement within the company is a requirement of
justice and the means of securing efficient management.
Collective bargaining and representation by a trade union is the
workers’ right. Responsibility to the consumer means setting up
and maintaining standards of quality and service, in addition to
fair price. If enterprise behaves as a good citizen and with full
knowledge of the facts, the need for legislation is reduced.
4. Describe the impact of internal and external environments prevalent in
business organization in India and how this will affect the organizational
structure in this country.

Answer 4:

After exampling the model, the general pattern of internal and

external environments prevalent in business organizations in India
has been discussed. An attempt is also made to describe the
impact of these environment variables on the future
organizational structure in this country. The description of internal
and external environments is based on personal observation,
discussion with business executives, and empirical studies
conducted by management experts.

External Environment

1. Socio-Political Environment

2. Techno-Economic Environment

3. Educational Environment

Internal Environment

1. Attitude, value and norms of Employee’s

2. Ascribed and achieved factor

3. Organizational variables

(a) Size

(b) Industry

(c) Ownership

(d) Management control

(e) Organization

(f) History of Organization

(g) Compensation Practices

(h) Professionalization of Management

(i) State of Technological

4. Philosophy of Top Management Organizational Goals and

objectives Organizational Structure

Internal Environment

1. Change in attitude, value, and perception of employees

The empirical evidence suggests that there is a definite change

in attitude, value, and perception of industrial workers in India.
Many industrial workers in big towns are second or even third
generation employees who are born and brought up in the
industrial environment. They are dynamic and accept the work as
full-time occupation. Indian industrial worker tends to move away
from the traditional concepts of hierarchy towards the concept of
equality and freedom of choice in his work behaviour. The
attitudes, values, and norms of business executives have also
changed over a period in time.

The executives are now more dynamic, inner-directed persons

that what they were a few years ago. They are becoming more
and more sophisticated and modernized. This trend is bound to
continue in the future. Changes in attitudes, values, and norms
of business executives have also changed over a period in time.
The executives are now more dynamic, inner-directed persons
than what they were a few years ago. They are becoming more
and more sophisticated and modernized. This trend is bound to
continue in the future. Changes in attitudes, values, and norms
or workers and executives would lead to more trust and
confidence by employers in them. This trend may lead towards
greater delegation of authority at the lower levels. Moreover, the
number of levels of management may also increase resulting in
Theory Y type of organization. Foreign subsidiaries and many
dynamic Indian Business organizations have moved in this
direction.

2. Achieved and ascribed factors

With the expansion and increasing competition of business and

non-availability of trained personnel in the family and among the
relations, second generation owner-managers of Indian business
houses are recruiting professional mangers and are emphasizing
the performance of the employees for higher promotion. Formal
training and development programmes are becoming quite
popular with organizations. Many public sector concerns have
started recruiting management trainees for managerial positions.
The trainees’ promotion depends on their performance on the
job. A medium sized company managed by a joint family hired
MBAs recently on the basis of tests given to the applicants. Their
selection was made strictly on merit. They did not hire less
qualified persons available in their community. Such tendency is
bound to lead the organization towards theory y type of
organization. There is very possibility that this trend will continue
in the future. In spite of these developments, the ascribed factors
still play a dominant role in the placement and promotion of a
person in a few organizations.

3. Organizational variables

The organizational variables of a company such as size, age,

nature of product, profitability, ownership and management,
control and communication system, leadership pattern, etc.,
affect the organizational structure. The bigger size companies
are decentralizing their operations and have started independent
and autonomous divisions for their different products. The
growing size and competition have also compelled many
companies to move from family-managed concerns to
professionally – managed organizations. To cope up with these
developments, they have introduced modern management
techniques, procedures, and controls in the organization. Many
public sector enterprises and private sector companies have
introduced many changes in their organizational structure in
recent years. They have decentralized the authority system and
have improved internal communication and control system. If the
trend continues many organizations would be moving towards
theory X type of organization.

However, there are many companies which are manufacturing

traditional products and are not expanding their plant and
machinery. The control of these firms is also in the hands of
family dominated management. The internal environment is
static and uncongenial. Gaps in communication system exist
between workers and management, between white-collar and
blue-collar and between young managers and experienced
managers. The superiors do not trust their subordinates. The
decision-making power is concentrated in a few hands at the top
level and they are operating on. Theory Y type of organizations.

Environmental Variables and Organizational Structure

Despite education, industrial background, and modernization,
many employees do not show motivational behaviour and have
developed indifferent attitude. The Indian managers have
significantly lower needs for achievement than managers of most
developed countries. This phenomenon is observed in the case of
public sector organizations, particularly in nationalized banks,
despite the fact that delegation of authority is more at a lower
level in the public sector than in the private sector, but the
bureaucratic ser-up and avoidance of taking responsibility at the
lower level encourage the management to centralize the
decision-making of authority is frequently seen in the public
sector in India.

4. Philosophy of Management

Alfred Chander has indicated the relationship between the

strategy a business adopts and the structure of its organization.
The manner in which work is organized and authority is
delegated, the system of communication and control is designed,
depend upon the philosophy of management. Thus, the general
philosophy of top management plays a decisive role in
influencing the organizational structure of the company. Due to
growing management education various management
development programmes offered by the universities, institutions
and company training programmes, the philosophy of
management is changing fast in recent years. The better
performance of well-managed foreign subsidiaries has also
influenced the thinking of top management of Indian companies.

Top management philosophy has undergone significant changes

regarding the selection and requirement of young executives, in
recent years. Earlier the recruitment of junior mangers was
mainly done on the basis of either personal interview or through
recommendation. Now management trainees are recruited on
the basis of though screening including written test, group
discussion, and interview.

The nationalized banks, public sector companies, foreign

subsidiaries, and some private sector companies have
emphasized this policy on a large scale. Moreover, the top
management of Indian concerns is also keeping representatives
of special interest groups as directors on their boards. There is
also growing awareness regarding the benefits of executive
development programmes. They send their mangers to executive
development programmes organized by the Indian Institutes of
Management and university departments of management.
During the past ten years, many private companies have
organized in-company training programmes for their executives.
There are hardly any good public and private sector enterprises,
which are not having their own executive development
programmes.

Top management is also taking keen interest in social

responsibilities in improving the quality of life. A recent study
indicates that a few public sector companies are quite aware of
the responsibility towards the workers welfare. Many private
sector companies are also following the this trend.. These
developments would lead towards professionalization of
management and democratization of organizational structure.
P.L.Tandon has rightly pointed out that professional management
is one of our best achievements in the past twenty-five years.
Due to these developments, managements have developed
confidence in your managers and are willing to delegate
decision-making power to them.

However, many family-owned business concerns and small-scale

organizations have not changed much in this respect. They
depend on their family members and relatives for managing the
concerns. All decisions are made at the top level. They have not
delegated their authority to the lower level. Moreover, some of
the business houses strictly adhere to Theory X type of
organization due to the fact that they have been indulging in
many unethical and socially undesirable business practices, the
knowledge of which they would like to keep restricted to few
people. They are traditional not necessarily because of culture
and personal values or it being a more suitable management
practice, but because it helps them achieve their personal goals
of doubtful social values.

There is another paradox in management philosophy. There are

organizations which are modern in the “science of Management”,
but traditional in “the art of management”. That is, they use very
modern tools and techniques of management science for
decision-making, planning, and control particularly at middle
level, but they remain as orthodox as ever in the art of
management, i.e., in getting the work done through and with
other people resulting in concentration of line authority only in a
few hands at the top. The net results in theory X type of
organization where the authority of most managers, apart from a
few at the top, is so much diluted as to reduce them almost to
staff position. The growing competition and realization of the
importance of professionalization may compel them to change
their philosophy in their respect.

External environment

The external environment may be divided into two parts, i.e.,

Indian external environment and international environment. The
external environment has been discussed under three headings.

1. Socio –political environment

The socio-political environment has greatly changed since

independence. Greater emphasis on democratization as opposed
to totalitarianism, rising expectations of the youth, white and
blue collar workers, and junior officers, re-emphasis on Gandhian
philosophy and rural development, emergence of strong trade
union and professionalization of labour force, increasing
government participation in business and manufacturing
operations, restrictions on expansion and growth of large
business houses, greater social awareness of people and
awareness of social responsibility among companies, greater
social and occupational mobility, increasing urbanization, change
in attitude, norms and value of people have affected the socio-
political environment in this country. These changes would affect
our attitudes towards philosophy of life and working norms. The
recent government policy on worker’s participation at various
levels in management may lead towards active participation of
the workers in the managerial decision—making. The
contemporary political environment in India-as a strong reaction
to autocracy during the Emergency-gives added importance to
constitutionalism and rule of law as opposed to the personal
whims of top men where organizational power is concentrated.

This power base is more likely to be diluted as a result of the

recent political trends. It will also result in Theory Y type of
relationship and some sort of a committee type of organizational
structure at middle and lower levels. The probable impact of
these changes would be towards participative management
leading to Theory Y type of organizational structure. However,
uncertainties and frequent changes in industrial licensing,
taxation import and export policies, possibilities of
nationalization of industry, restriction on expansion and
diversification of big business houses may encourage
centralization of decision-making power in the organization. The
continuance of family domination in business, parental form of
authority, rigid attitude towards occupational mobility and caste
system, agrarian outlook, respect for age and authority, high
degree of need dependency on organization, growing social
conflict may hinder our progress towards democratic
organization.

2. Techno-economic environment

Increase in per capita income, better employment facilities,

growing emphasis on industrial development, emergence of
many small units, development of infrastructure, increasing
economic influence of public sector enterprises, availability of
large public funds through financial institutions and public sector
banks have a positive impact on our economic environment. The
increasing emphasis of the present government on rural
employment and small-scale industry should diversify our
economic development in the future. The setting up of foreign
subsidiaries by Indian concerns and also in collaboration with
multinational corporations, assignment of many foreign turnkey
projects to Indian companies, opening trade channels, etc. would
go a long way in increasing congenial environment in this
country.

The technological development in agriculture and industry,

modernization of plant and machinery, growing emphasis on
research and development by companies and government’s urge
for relevant technology, emphasis on human engineering and
public health, growing use of computer technology, recent
developments in television and electronics industry, explosion of
atomic bomb great emphasis on solar energy, the well-developed
technological research institutions have changed the
technological environment and have given the much-needed
confidence to our scientists and technologists. These
developments would necessitate more and more delegation of
authority, decentralization of decision-making at lower level and
project and committee type management to handle complex
problems.

However, chronic unemployment, specially the educated

unemployment, low level of per capita income and uneven
distribution of income, high rate of inflation, high, disparity in the
income of managers and workers, private monopoly in
distribution system, continuous shortage of essential goods and
services, lack of proper transport facilities, continuation of
seller’s market and lack of proper transport facilities,
continuation of seller’s market and lack of acute competition
dependence on imported technology, and increasing brain drain
have created unfavourable conditions in our techno economic
environment. These situations would perpetuate the
centralization of authority in the hands of a few managers.
3. Educational environment

The educational environment has drastically changed since

independence. The increasing level of education of people
including workers and the growing contacts with foreign
operating companies in India have changed the aspiration level
of employees. The operating of Indian Institute of Management
and Departments of Business Management in Indian universities
in the early 60s has helped in producing M.B.As for possible
employment in managerial cadre in organizations. The growing
emphasis on executive development programmes and in
company training programmes has accelerated the pace of
professionalization of management. There may be hardly any
company which may not be sending its managers for executive
development programmes. These developments have shifted
emphasis from traditional management to professional
management. These shifts have resulted in decentralization of
authority, increasing number of levels of management and
decision centres.

Professional managers are changing the inputs of decision-

making. To cope up with new developments in these areas, quite
a few organizations have established new departments or
organization development in their concerns. These developments
provide the good sign for democratization of organizational
structure.

However, many family-dominated business concerns are still

relying on less educated employees for their management. The
small and medium scale industries are still managed by illiterate
people. Less educated top management in private sector
undertakings prefers less educated but more experienced
employees. Availability of educated unemployed people at lower
salary and promotion on the basis of ascribed factors has
hindered the professionalization of management in many
concerns. This tendency has increased the centralization of
authority and authoritative attitude in these organizations.

On the basis of the above description it would be difficult to

categorize Indian business organizations either as Theory X or
Theory Y type of organizations. Some business organizations
such as foreign subsidiaries, many public sector organizations,
and some private sector companies have moved towards theory
Y type of organizations. There are many cases as medium size
companies, family-dominated large business organizations, and
 small-scale units where the companies are still following Theory
X type of organization. However, there is a definite change
towards delegation of authority and democratization of
organizational structure of companies in India. Quite a few
companies have already restructured their organizations to meet
the new internal and external environments.

Companies have set up special committees to review the

suitability of the existing organizational structure to adapt to the
new environmental demands. These developments do not mean
that business organizations will dissolve the existing structure for
building up a new structure. The new structure would be
developed alongside the existing structure or it may be
integrated with the existing one.

5. There is a close relationship between a business firm and its surrounding

environment. Explain the key factors of environment.
6. What are the characteristics and basic principles of objectives of a business?

Answer 6:

1. OBJECTIVES OF BUSINESS:

The main objectives of business may be studied under three

captions: economic, social and human.

I. Economic Objectives:

The first and the foremost objective of business is economic. In

other words, business enterprise is brought into existence only
with a view to earn profit. “Management is that activity”, wrote
Percival White, ‘-whereby economic forces (i.e., land, labour and
capital) are utilized in combination, always with a view to profits
of one kind or another.” According to Peter Drucker, “It is the
purpose, nature and necessity of this institution to take risks, to
create risks. Unless we provide for risk, we are going to destroy
capacity to produce. And, therefore, a minimum profitability,
adequate to the risks which we, by necessity assume and create,
is an absolute condition of survival not only for the enterprise but
for society.” It is but human psychology that none will take any
risk unless he is assured of adequate return. Once a business is
started, it must, sooner or later, yield profits. It is, thus, different
from a government organization which has no profit motive but
which exists to serve the public and/or maintain law and order in
the society. Profit is the ultimate test of business performance. It
is a criterion of efficiency. The more efficient a business is, the
greater the profit it earns. Greater and better profits also
facilitate the future expansion of business. The broad economic
objective of making profits can be set down in the form of
specific goals in concrete terms. Within the framework of an
overall objective for the entire business organization, there may
be well-defined goals for its each component part. These
departmental goals serve as guides for action for subordinate
units.

II. Social Objectives:

A social objective of a business implies the obligations which a

business house owes to the society. In this case, the goal is not
profit, or security, or bigness, but a dedication to advancing
industrial relations, creating jobs for people, developing public
relations, serving the community, and helping employees to
become society adjusted. Society can never permit business
enterprises, which are harmful to the public interest. The opium
seller or the ‘Nirodh’ peddler is not allowed to set up a legal
business because the objectives of such a business are harmful
to society although the profits may be very high. Although
business is an economic enterprise and it must justify itself on
economic performance, yet it is true that a business is an organ
of society and as such it must justify its continuance by fulfilling
its role and responsibilities to society. As a matter of fact, a
business enterprise is a trust of the community, which must
discharge its obligations towards the various sections of the
community. The social objectives of business demand that good
quality goods be produced and they should be available to the
consumers at reasonable rates. Society is organized with beliefs
in some ethical principles and promises to its members; business
has to conform to these beliefs and promises. Business also aims
at positively contributing to the well-being and uplift of the
community in which it is situated. The importance of social
objectives can be judged from the following considerations:

(a) Ordinarily business organizations acquire considerable power

over the physical and human resources of a country. It is, indeed,
a power delegated by society to business for a specific purpose.
The counterpart of power is ‘obligation’—obligation to use the
power properly and without detriment to others; (d) Managers
are industrial leaders and as such they are responsible for major
social issues and problems. Social objectives help in solving such
problems; (c) Business managers, as custodians of national
resources, have to pursue long term-enlightened self-interest,
which includes a vital concern for social obligations. That is why
the American automobile manufacturers are now working on a
car engine, which does not discharge smoke etc., polluting the
atmosphere. Similarly, a number of enlightened Indian
businessmen are running social institutions like schools, hospitals
and cultural centers to discharge their responsibility towards the
society as a whole.

III. Human Objectives

Thirdly, understanding the human needs is another important

objective of business. Motivation has no meaning outside the
needs of subordinates. Efforts to provide a motive, not related to
needs would have zero results. Therefore, it is essential to
understand the needs of subordinates. Motivation can then be
 supplied through satisfying or withholding satisfaction of these
needs high and low values of the same variable-with the purpose
of achieving the desired kind of work. This human objective
ultimately rebounds to the benefit of the organization through
increased productivity. Where morale is high, output is bound to
be high. An illuminating example of human relations is provided
by a story once narrated by Sri Ghanshyam Dass Birla. Once
there was a big strike in one of the Birla concerns and when
everyone failed to arrive at a settlement, Sri G. D. Birla went to
address the strikers. He only said, “You are my children. I am
your father; please resume work.” The strikers resumed their
duties.

Besides the socio-economic cum-human-objectives, there are

certain subsidiary objectives also, which may be discussed as
below:

1. Market Standing. A firm must set a minimum market standing

as an objective. It may be imprudent to have a larger market
standing than a certain maximum. In India the Monopolies and
Restrictive Trade Practices Act controls certain firms who control
a large share of market than certain specified limits. Thus, the
firm may decide not to have higher market standing than a
certain limit.

2. Innovation Objective. It refers to the introduction of new ideas

and new techniques. Innovations accelerate the growth of an
enterprise. Automobile manufacturers in U.S.A. have set for their
factories innovation targets, e.g., a smoke-free engine by a
particular date. All progressive concerns spend large sums of
money on research and development for achieving the objective
of innovation.

3. Productivity Objective and Contributed Value. It refers to

the contribution which a particular enterprise has made towards
enhancing the value of goods and services. For example, if the
total value of goods and services produced by a concern is, say,
Rs. 100 lakhs and the total value of raw material, electricity cost,
etc. is Rs. 80 lakhs, we can say that the concern has contributed
value of Rs. 20 lakhs. This addition in the value of goods and
services is known as ‘Contributed Value’. The managements can
set up their productivity objectives in terms of - Contributed
Value’- Input-output ratio can also be a measure of productivity;
a firm can, thus. set for itself an input/output ratio as its target.
4. Physical and Financial Resources. Physical resources stand
for plants, machines, materials, offices, etc., and financial
resources refer to requirements of capital. A notable example of
having a physical resource objective could be that of a sugar mill
company whose aim is to ensure the continuous supply of
sugarcane—the main raw material for his products. Similarly,
financial resource objective may be with regard to the continuous
supply of working capital. Many concerns keep definite growth
rate targets as their objective and keep ploughing back a part of
their profits in order to reach this objective.

5. Management Development. For the long-term survival of a

business unit, management development is a must. A business
must automatically keep producing managers and solve the
problems of continuity. Thus, training and control over the
performance of managers is an essential objective of business.
The following inscription on the grave of Andrew Carnegie
deserves special mention: ‘-Here lies a man who knew how to
enlist in his service better men than himself.”

6 Employee’s Attitude and Performance. Last but not the

least; the business enterprise must discharge its responsibility
towards its employees by setting up objectives which keep the
performance and attitudes of workers at an optimum level. The
management may also have objectives in regard to various other
indicators of worker performance and attitudes like turnover,
safety, absenteeism, health, participation, grievances, etc.
Certain companies try to measure their relationship with workers
through employee-relations index which takes into account all
these factors.

7 Profitability Objective. Profit serves three purposes. It

measures the net effectiveness and soundness of a business’s
efforts. It is indeed the ultimate test of business performance. It
is the ‘risk premium’ that covers the costs of staying in business
—replacement, obsolescence, market risk and uncertainty. Seen
from this point of view, there is no such thing as ‘profit’; there
are only ‘costs of being in business’ and ‘costs of staying in
businesses. And the task of a business is to provide adequately
for these ‘costs of staying in business’ by earning an adequate
profit—which not enough businesses do. Finally, profit insures the
supply of future capital for innovation and expansion, either
directly by providing the means of self-financing out of retained
earnings or, indirectly, through providing sufficient inducement
for new outside capital in the form in which it is best suited to
the enterprise’s objectives. None of these three functions of
profit has anything to do with the economist’s maximization of
profit. All the three are indeed ‘minimum’ concepts—the
minimum of profit needed for the survival and prosperity of the
enterprise. A profitability objective therefore measures not the
maximum profit the business can produce, but the minimum it
must produce.