(A) Actual Cost

Actual cost is defined as the cost or expenditure which a firm incurs for producing or acquiring a good
or service. The actual costs or expenditures are recorded in the books of accounts of a business
unit. Actual costs are also called as "Outlay Costs" or "Absolute Costs" or "Acquisition Costs".
Examples: Cost of raw materials, Wage Bill etc.

(B) Opportunity Cost

Opportunity cost is concerned with the cost of forgone opportunities/alternatives. In other words, it is
the return from the second best use of the firms resources which the firms forgoes in order to avail of
the return from the best use of the resources. It can also be said as the comparison between the
policy that was chosen and the policy that was rejected. The concept of opportunity cost focuses on
the net revenue that could be generated in the next best use of a scare input. Opportunity cost is also
called as "Alternative Cost".

If a firm owns a land, there is no cost of using the land (ie., the rent) in the firms account. But the firm
has an opportunity cost of using the land, which is equal to the rent forgone by not letting the land out
on rent.

(C) Sunk Cost

Sunk costs are those do not alter by varying the nature or level of business activity. Sunk costs are
generally not taken into consideration in decision - making as they do not vary with the changes in the
future. Sunk costs are a part of the outlay/actual costs. Sunk costs are also called as "Non-Avoidable
costs" or "Inescapable costs".
Examples: All the past costs are considered as sunk costs. The best example is amortization of past
expenses, like depreciation.

(D) Incremental Cost

Incremental costs are addition to costs resulting from a change in the nature of level of business
activity. As the costs can be avoided by not bringing any variation in the activity in the activity, they are
also called as "Avoidable Costs" or "Escapable Costs". More ever incremental costs resulting from a
contemplated change is the Future, they are also called as "Differential Costs"
Example: Change in distribution channels adding or deleting a product in the product line.

(E) Explicit Cost

Explicit costs are those expenses/expenditures that are actually paid by the firm. These costs are
recorded in the books of accounts. Explicit costs are important for calculating the profit and loss
accounts and guide in economic decision-making. Explicit costs are also called as "Paid out costs"
Example: Interest payment on borrowed funds, rent payment, wages, utility expenses etc.

(F) Implicit Cost

Implicit costs are a part of opportunity cost. They are the theoretical costs ie., they are not recognised
by theaccounting system and are not recorded in the books of accounts but are very important in
certain decisions. They are also called as the earnings of those employed resources which belong to
the owner himself. Implicit costs are also called as "Imputed costs".
Examples: Rent on idle land, depreciation on dully depreciated property still in use, interest on equity
capital etc.
 (G) Book Cost
Book costs are those business costs which don't involve any cash payments but a provision is made in
the books of accounts in order to include them in the profit and loss account and take tax advantages,
like provision for depreciation and for unpaid amount of the interest on the owners capital.

(H) Out Of Pocket Costs

Out of pocket costs are those costs are expenses which are current payments to the outsiders of the
firm. All the explicit costs fall into the category of out of pocket costs.
Examples: Rent Payed, wages, salaries, interest etc

(I) Accounting Costs

Accounting costs are the actual or outlay costs that point out the amount of expenditure that has
already been incurred on a particular process or on production as such accounting costs facilitate for
managing the taxationneed and profitability of the firm.
Examples: All Sunk costs are accounting costs

(J) Economic Costs

Economic costs are related to future. They play a vital role in business decisions as the costs
considered in decision - making are usually future costs. They have the nature similar to that of
incremental, imputed explicit and opportunity costs.

(K) Direct Cost

Direct costs are those which have direct relationship with a unit of operation like manufacturing a
product, organizing a process or an activity etc. In other words, direct costs are those which are
directly and definitely identifiable. The nature of the direct costs are related with a particular
product/process, they vary with variations in them. Therefore all direct costs are variable in nature. It is
also called as "Traceable Costs"
Examples: In operating railway services, the costs of wagons, coaches and engines are direct costs.

(L) Indirect Costs

Indirect costs are those which cannot be easily and definitely identifiable in relation to a plant, a
product, a process or a department. Like the direct costs indirect costs, do not vary ie., they may or
may not be variable in nature. However, the nature of indirect costs depend upon the costing under
consideration. Indirect costs are both the fixed and the variable type as they may or may not vary as a
result of the proposed changes in the production process etc. Indirect costs are also called as Non-
traceable costs.
Example: The cost of factory building, the track of a railway system etc., are fixed indirect costs and
the costs of machinery, labour etc

(M) Controllable Costs

Controllable costs are those which can be controlled or regulated through observation by an executive and
therefore they can be used for assessing the efficiency of the executive. Most of the costs are controllable.
Example: Inventory costs can be controlled at the shop level etc.

(N) Non Controllable Costs

The costs which cannot be subjected to administrative control and supervision are called non controllable
costs.
Example: Costs due obsolesce and depreciation, capital costs etc.
(O) Historical Costs and Replacement Costs.
Historical cost or original costs of an asset refers to the original price paid by the management to purchase
it in the past. Whereas replacement costs refers to the cost that a firm incurs to replace or acquire the
same asset now. The distinction between the historical cost and the replacement cost result from the
changes of prices over time. In conventional financial accounts, the value of an asset is shown at their
historical costs but in decision-making the firm needs to adjust them to reflect price level changes.
Example: If a firm acquires a machine for $20,000 in the year 1990 and the same machine costs $40,000
now. The amount $20,000 is the historical cost and the amount $40,000 is the replacement cost.

(P) Shutdown Costs

The costs which a firm incurs when it temporarily stops its operations are called shutdown costs. These
costs can be saved when the firm again start its operations. Shutdown costs include fixed costs,
maintenance cost, layoff expenses etc.

(Q) Abandonment Costs

Abandonment costs are those costs which are incurred for the complete removal of the fixed asset from
use. These may occur due to obsolesce or due to improvisation of the firm. Abandonment costs thus
involve problem of disposal of the asset.

(R) Urget Costs and Postponable Costs

Urgent costs are those costs which have to be incurred compulsorily by the management in order to
continue its operations. If urgent costs are not incurred in time the operational efficiency of the firm falls.
Example: Cost of material, labour, fuel etc

Postponable costs are those which if not incurred in time do not effect the operational efficiency of the
firm. Examples are maintenance costs.

(S) Business Cost and Full Cost

Business costs include all the expenses incurred by the firm to carry out business activities. Costs Include
all the payments and contractual obligations made by the firm together with the book cost of depreciation
on plant and equipment.

Full costs include business costs, opportunity costs, and normal profits. Opportunity costs is the
expected return/earnings from the next best use of the firms resources like capital, land and building,
owners efforts and time. Normal profits is necessary minimum earning in addition to the opportunity costs,
which a firm must receive to remain in its present occupation.

(T) Fixed Costs

Fixed costs are the costs that do not vary with the changes in output. In other words, fixed costs are those
which are fixed in volume though there are variations in the output level.. If the time period in volume
under consideration is long enough to make the adjustments in the capacity of the firm, the fixed costs also
vary.
Examples: Expenditures on depreciation costs of administrative, staff, rent, land and buildings, taxes etc.

(U) Variable Costs

Variable Costs are those that are directly dependent on the output ie., they vary with the variation in the
volume/level of output. Variable costs increase in output level but not necessarily in the same proportion.
The proportionality between the variable costs and output depends upon the utilization of fixed facilities
and resources during the production process.
Example: Cost of raw materials, expenditure on labour, running cost or maintenance costs of fixed assets
such as fuel, repairs, routine maintenance expenditure.

(V) Total Cost, Average Cost and Marginal Cost

Total cost (TC) refers to the money value of the total resources/inputs required for the production of goods
and services by the firm. In other words, it refers to the total outlays of money expenditure, both explicit
and implicit, on the resources used to produce a given level output. Total cost includes both fixed and
variable costs and is given by TC = VC + FC

Average Cost (AC) , refers to the cost per unit of output assuming that production of each unit incurs the
same cost. It is statistical in nature and is not an actual cost. It is obtained by dividing Total Cost(TC) by
Total Output(Q)
AC= TC/Q

Marginal costs(MC), refers to the additional costs that are incurred when there is an addition to the existing
output level of goods ans services. In other words, it is the addition to the Total Cost(TC) on account of
producing additional units.

(W) Short Run Cost and Long Run Cost

Both short run and long run costs are related to fixed and variable costs and are often used in economic
analysis.

Short Run Cost: These costs are which vary with the variation in the output with size of the firm as same.
Short run costs are same as variable costs. Broadly, short run costs are associated with variable inputs in
the utilization of fixed plant or other requirements.
Forms of Business Organisation
Introduction
In the previous lesson, you have learnt that business activities consist of industrial and
commercial activities. The units which undertake these activities are known as business
organisations. They are also called business undertakings, enterprises, concerns or firms. We
must look into the formation, of such organisations in order to understand how to organise a
business because the right form of business organisation is largely responsible for the success of
an enterprise. In this lesson, we are going to study business organisations in detail.

Business Organisation
Meaning
Business organisation refers to all necessary arrangements required to conduct a business. It
refers to all those steps that need to be undertaken for establishing relationship between men,
material, and machinery to carry on business efficiently for earning profits. This may be called
the process of organising. The arrangement which follows this process of organising is called a
business undertaking or organisation. A business undertaking can be better understood by
analysing its characteristics.

Characteristics
1. Distinct Ownership : The term ownership refers to the right of an individual or a group of
individuals to acquire legal title to assets or properties for the purpose of running the business. A
business firm may be owned by one individual or a group of individuals jointly.
2. Lawful Business : Every business enterprise must undertake such business which is lawful,
that is, the business must not involve activities which are illegal.
3. Separate Status and Management : Every business undertaking is an independent entity. It
has its own assets and liabilities. It has its own way of functioning. The profits earned or losses
incurred by one firm cannot be accounted for by any other firm.
4. Dealing in goods and services : Every business undertaking is engaged in the production
and/or distribution of goods or services in exchange of money.
5. Continuity of business operations : All business enterprise engage in operation on a
continuous basis. Any unit having just one single operation or transaction is not a business unit.
6. Risk involvement : Business undertakings are always exposed to risk and uncertainty.
Business is influenced by future conditions which are unpredictable and uncertain. This makes
business decisions risky, thereby increasing the chances of loss arising out of business.

Forms of Business Organisation

While establishing a business the most important task is to select a proper form of organisation.
This is because the conduct of business, its control, acquisition of capital, extent of risk,
distribution of profit, legal formalities, etc. all depend on the form of organisation.
The most important forms of business organisation are as follows:
Sole Proprietorship
Joint Hindu Family Business
Partnership
Joint Stock Company
Co-operative Society
Sole Proprietorship
Meaning
When the ownership and management of business are in control of one individual, it is known as
sole proprietorship or sole tradership. It is seen everywhere, in every country, every state,
every locality. The shops or stores which you see in your locality the grocery store, the
vegetable store, the sweets shop, the chemist shop, the paanwala, the stationery store, the
STD/ISD telephone booths etc. come under sole proprietorship. It is not that a sole tradership
business must be a small one. The volume of activities of such a business unit may be quite
large. However, since it is owned and managed by one single individual, often the size of
business remains small.

Characteristics:
1. Ownership : The business enterprise is owned by one single individual, that is the individual
has got legal title to the assets and properties of the business. The entire profit arising out of
business goes to the sole proprietor. Similarly, he also bears the entire risk or loss of the firm.
2. Management : The owner of the enterprise is generally the manager of the business. He has
got absolute right to plan for the business and execute them without any interference from
anywhere. He is the sole decision maker.
3. Source of Capital : The entire capital of the business is provided by the owner. In addition to
his own capital he may raise more funds from outside through borrowings from close relatives or
friends, and through loans from banks or other financial institutions.
4. Legal Status : The proprietor and the business enterprise are one and the same in the eyes of
law. There is no difference between the business assets and the private assets of the sole
proprietor. The business ceases to exist in the absence of the owner.
5. Liability : The liability of the sole proprietor is unlimited. This means that, in case the sole
proprietor fails to pay for the business obligations and debts arising out of business activities, his
personal property can be used to meet those liabilities.
6. Stability : The stability and continuity of the firm depend upon the capacity, competence and
the life span of the proprietor.
7. Legal Formalities : In the setting up, functioning and dissolution of a sole proprietorship
business no legal formalities are necessary. However, a few legal restrictions may be there in
setting up a particular type of business. For example, to open a restaurant, the sole proprietor
needs a license from the local municipality ; to open a chemist shop, the individual must have a
license from the government.

Advantages of Sole Proprietorship:

1. Easy Formation: The biggest advantage of a sole tradership business is its easy formation.
Anybody wishing to start such a business can do so in many cases without any legal formalities.
2. Better Control : The owner has full control over his business. He plans, organises, co-
ordinates the various activities. Since he has all authority, there is always effective control.
3. Prompt Decision Making : As the sole trader takes all the decisions himself the decision
making becomes quick, which enables the owner to take care of available opportunities
immediately and provide immediate solutions to problems.
4. Flexibility in Operations : One man ownership and control makes it possible for change in
operations to be brought about as and when necessary.
5. Retention of Business Secrets : Another important advantage of a sole proprietorship
business is that the owner is in a position to maintain absolute secrecy regarding his business
activities.

6. Direct Motivation : The owner is directly motivated to put his best efforts as he alone is the
beneficiary of the profits earned.
7. Personal Attention to Consumer Needs : In a sole tradership business, one generally finds
the proprietor taking personal care of consumer needs as he normally functions within a small
geographical area.
8. Creation of Employment : A sole tradership business facilitates selfemployment and also
employment for many others. It promotes entrepreneurial skill among the individuals.
9. Social Benefits : A sole proprietor is the master of his own business. He has absolute freedom
in taking decisions, using his skill and capability. This gives him high self-esteem and dignity in
the society and gradually he acquires several social virtues like self- reliance, self-determination,
independent thought and action, initiative, hard work etc,. Thus, he sets an example for others to
follow.
10. Equitable Distribution of Wealth : A sole proprietorship business is generally a small scale
business. Hence there is opportunity for many individuals to own and manage small business
units. This enables widespread dispersion of economic wealth and diffuses concentration of
business in the hands of a few.

Disadvantages of Sole Proprietorship :

1. Unlimited Liability : In sole proprietorship, the liability of business is recovered from the
personal assets of the owner. It restricts the sole trader to take more risk and increases the volume
of his business.
2. Limited Financial Resources : The ability to raise and borrow money by one individual is
always limited. The inadequacy of finance is a major handicap for the growth of sole
proprietorship.
3. Limited Capacity of Individual : An individual has limited knowledge and skill. Thus his
capacity to undertake responsibilities, his capacity to manage, to take decisions and to bear the
risks of business are also limited.
4. Uncertainty of duration : The existence of a sole tradership business is linked with the life of
the proprietor. Illness, death or insolvency of the owner brings an end to the business. The
continuity of business operation is, therefore, uncertain.

Suitability of Sole Proprietorship :

Sole proprietorship business is suitable where the market is limited, localised and where
customers give importance to personal attention. This form of organization is suitable where the
nature of business is simple and requires quick decision. For business where capital required is
small and risk involvement is not heavy, this type of firm is suitable. It is also considered suitable
for the production of goods which involve manual skill e.g. handicrafts, filigree works, jewellery,
tailoring, haircutting, etc.

Partnership
Meaning
A partnership form of organisation is one where two or more persons are associated to run a
business with a view to earn profit. Persons from similar background or persons of different
ability and skills, may join together to carry on a business. Each member of such a group is
individually known as partner and collectively the members are known as a partnership
firm. These firms are governed by the Indian Partnership Act, 1932.

Characteristics:
1. Number of Partners : A minimum of two persons are required to start a partnership business.
The maximum membership limit is 10 in case of banking business and 20 in case of all other
types of business.
2. Contractual Relationship : The relation between the partners of a partnership firm is created
by contract. The partners enter into partnership through an agreement which may be verbal,
written or implied. If the agreement is in writing it is known as a Partnership Deed.
3. Competence of Partners : Since individuals have to enter into a contract to become partners,
they must be competent enough to do so. Thus, minors, lunatics and insolvent persons are not
eligible to become partners. However, a minor can be admitted to the benefits of partnership i.e.
he can have a share in the profits.
4. Sharing of Profit and Loss : The partners can share profit in any ratio as agreed. In the
absence of an agreement, they share it equally.
5. Unlimited Liability : The partners have unlimited liability. They are liable jointly and
severally for the debts and obligations of the firm. Creditors can lay claim on the personal
properties of any individual partner or all the partners jointly. Even a single partner may be
called upon to pay the debts of the firm. Of course, he can get back the money due from other
partners. The liability of a minor is, however, limited to the extent of his share in the profits, in
case of dissolution of a firm.
6. Principal-Agent Relationship : The business in a partnership firm may be carried on by all
the partners or any one of them acting for all. This means that every partner is an agent when he
is acting on behalf of others and he is a principal when others act on his behalf. It is, therefore,
essential that there should be mutual trust and faith among the partners in the interest of the firm.
7. Transfer of Interest : No partner can sell or transfer his interest in the firm to anyone without
the consent of other partners.
8. Legal Status : A partnership firm is just a name for the business as a whole. The firm means
partners and the partners mean the firm. Law does not recognise the firm as a separate entity
distinct from the partners.
9. Voluntary Registration : Registration of partnership is not compulsory. But since registration
entitles the firm to several benefits, it is considered desirable. For example, if it is registered, any
partner can file a case against other partners, or a firm can file a suit against outsiders in case of
disputes, claims, disagreements, etc.
10. Dissolution of Partnership : Dissolution of partnership implies not only a complete closure
or termination of partnership business, but it also includes any change in the existing agreement
among the partners due to a change in the number of partners.

Advantages of Partnership Firm :

1. Easy Formation : A partnership can be formed without many legal formality and expenses.
Every partnership firm need not be registered.
2. Larger Resources : As compared to sole proprietorship, a partnership firm can pool larger
financial resources. Thus it can enter into bigger operations and can have more credit facilities. It
can also have better managerial talent.
3. Flexibility in operation : There is flexibility of operation in partnership business due to a
limited number of partners. These partners can change their operations and amend objectives if
necessary by mutual consent.
4. Better Management : Partners take more interest in the affairs of business as there is a direct
relationship between ownership, control and profit. They often meet to discuss the affairs of
business and can take prompt decision.
5. Sharing of Risk: In partnership, risk of loss is easier to bear by individual partners as it is
shared by all the partners.
6. Protection of minority interest : Every partner has an equal say in decision making. A
partner can prevent a decision being taken if it adversely affects his interests. In extreme cases a
dissenting partner may withdraw from partnership and can dissolve it.
7. Better Public Relations : In a partnership firm the group managing the affairs of the firm is
generally small. It facilitates cordial relationship with the public.

Disadvantages of partnership Firm :

1. Instability : A partnership firm does not continue to exist indefinitely. The death, insolvency
or lunacy of a partner may bring about an unexpected end to partnership.
2. Unlimited Liability : As the liability of partners is joint and several to an unlimited extent,
any one of the partners can be called upon to pay all the debts even from his personal properties.
Further, as every partner has a right to take part in the management of the firm, any wrong
decision by a single partner may lead to heavy liabilities for others.
3. Lack of Harmony : Since every partner has equal right, there are greater possibilities of
friction and quarrel among the partners. Differences of opinion may lead to mistrust and
disharmony which may ultimately result in disruption and closure of the firm.
4. Limited Capital : As there is a restriction on the maximum number of partners, the capital
which can be raised is limited.

Suitability of Partnership Firm:

In a partnership firm, persons from different walks of life having ability, managerial talent and
skill join together to carry on a business. This increases the administrative strength of the
organisation, the financial resources, the skill and expertise, and reduce risk. Such firms are most
suitable for comparatively small business such as retail and wholesale trade, professional
services, medium sized mercantile houses and small manufacturing units. Generally it is seen
that many organisations are initially started as partnership firms and later, when it is
economically viable and financially attractive for the investors, it is converted into a company.

Joint Stock Company

Meaning:
A Joint Stock Company form of business organisation is a voluntary association of persons to
carry on business. Normally, it is given a legal status and is subject to certain legal regulations. It
is an association of persons who generally contribute money for some common purpose. The
money so contributed is the capital of the company. The persons who contribute capital are its
members. The proportion of capital to which each member is entitled is called his share,
therefore members of a joint stock company are known as shareholders and the capital of the
company is known as share capital. The total share capital is divided into a number of units
known as shares. You may have heard of the names of joint stock companies like Tata Iron &
Steel Co. Limited, Hindustan Lever Limited, Reliance Industries Limited, Steel Authority of
India Limited, Ponds India Limited etc.
The companies are governed by the Indian Companies Act, 1956. The Act defines a company as
an artificial person created by law, having separate entity, with perpetual succession and a
common seal.

Characteristics:
1. Artificial Person : A Joint Stock Company is an artificial person in the sense that it is created
by law and does not possess physical attributes of a natural person. However, it has a legal status.
2. Separate Legal Entity : Being an artificial person, a company has an existence independent
of its members. It can own property, enter into contract and conduct any lawful business in its
own name. It can sue and can be sued in the court of law. A shareholder cannot be held
responsible for the acts of the company.
3. Common Seal : Every company has a common seal by which it is represented while dealing
with outsiders. Any document with the common seal and duly signed by an officer of the
company is binding on the company.
4. Perpetual Existence : A company once formed continues to exist as long as it fulfils the
requirements of law. It is not affected by the death, lunacy, insolvency or retirement of any of its
members.
5. Limited Liability : The liability of a member of a Joint Stock Company is limited by
guarantee or the shares he owns. In other words, in case of payment of debts by the company, a
shareholder is held liable only to the extent of his share.
6. Transferability of Shares : The members of a company are free to transfer the shares held by
them to anyone else.
7. Formation : A company comes into existence only when it has been registered after
completing the formalities prescribed under the Indian Companies Act 1956. A company is
formed by the initiative of a group of persons known as promoters.
8. Membership : A company having a minimum membership of two persons and maximum fifty
is known as a Private Limited Company. But in case of a Public Limited Company, the
minimum is seven and the maximum membership is unlimited.
9. Management : Joint Stock Companies have democratic management and control. Even
though the shareholders are the owners of the company, all of the them cannot participate in the
management process. The company is managed by the elected representatives of shareholders
known as Directors.
10. Capital : A Joint Stock Company generally raises a large amount of capital through issue of
shares.

Advantages of Joint Stock Company:

1. Limited Liability : In a Joint Stock Company the liability of its members is limited to the
extent of shares held by them. This attracts a large number of small investors to invest in the
company. It helps the company to raise huge capital. Because of limited liability, a company is
also able to take larger risks.
2. Continuity of existence : A company is an artificial person created by law and possesses
independent legal status. It is not affected by the death, insolvency etc. of its members. Thus it
has a perpetual existence.
3. Benefits of large scale operation : It is only the company form of organisation which can
provide capital for large scale operations. It results in large scale production consequently
leading to increase in efficiency and reduction in the cost of operation. It further opens the scope
for expansion.
4. Professional Management : Companies, because of complex nature of activities and
operations and large volume of business, require professional managers at every level of
organisation. And because of their financial strength they can afford to appoint such managers.
This leads to efficiency.
5. Social Benefit : A joint stock company offers employment to a large number of people. It
facilitates promotion of various ancillary industries, trade and auxiliaries to trade. Sometimes it
also donates money for education, health, community service and renders help to charitable and
social institutions.
6. Research and Development : A company generally invests a lot of money on research and
development for improved processes of production, designing and innovating new products,
improving quality of product, new ways of training its staff, etc.

Disadvantages of Joint Stock Company:

1. Formation is not easy: The formation of a company involves compliance with a number of
legal formalities under the companies Act and compliance with several other Laws.
2. Control by a Group: Companies are controlled by a group of persons known as the Board of
Directors. This may be due to lack of interest on the part of the shareholders who are widely
dispersed; ignorance, indifference and lack of proper and timely information. Thus, the
democratic virtues of a company do not really exist in practice.
3. Speculation and Manipulation : The shares of a company are purchased and sold in the stock
exchanges. The value or price of a share is determined in terms of the dividend expected and the
reputation of the company. These can be manipulated. Besides there is excessive speculation
which is regarded as a social evil.
4. Excessive government control : A company is expected to comply with the provisions of
several Acts. Non-compliance of these invites heavy penalty. This affects the smooth functioning
of the companies.
5. Delay in Policy Decisions : A company has to fulfill certain procedural formalities before
making a policy decision. These formalities are time consuming and, therefore, policy decisions
may be delayed.
6. Social abuses : A joint stock company is a large scale business organization having huge
resources. This provides a lot of power to them. Any misuse of such power creates unhealthy
conditions in the society e.g. having monopoly of a particular business, industry or product;
influencing politicians and government in getting their work done; exploiting workers,
consumers and investors.

Suitability of Joint Stock Company:

A joint stock company is suitable where the volume of business is quite large, the area of
operation is widespread, the risk involved is heavy and there is a need for huge financial
resources and manpower. It is also preferred when there is need for professional management
and flexibility of operations. In certain businesses like banking and insurance, business can only
be undertaken by joint stock companies.

Co-operative Society
Meaning
Any ten persons can form a co-operative society. It functions under the Cooperative Societies
Act, 1912 and other State Co-operative Societies Acts. A co-operative society is entirely different
from all other forms of organization discussed obove in terms of its objective. The co-operatives
are formed primarily to render services to its members. Generally it also provides some service
to the society. The main objectives of co-operative society are: (a) rendering service rather than
earning profit, (b) mutual help instead of competition, and (c) self help in place of dependence.
On the basis of objectives, various types of co-operatives are formed :

a. Consumer co-operatives : These are formed to protect the interests of ordinary consumers of
society by making consumer goods available at reasonable prices. Kendriya Bhandar in Delhi,
Alaka in Bhubaneswar and similar others are all examples of consumer co-operatives
b. Producers co-operatives : These societies are set up to benefit small producers who face
problems in collecting inputs and marketing their products. The Weavers co-operative society,
the Handloom owners cooperative society are examples of such co-operatives.
c. Marketing co-operatives : These are formed by producers and manufactures to eliminate
exploitation by the middlemen while marketing their product. Kashmir Arts Emporium, J&K
Handicrafts, Utkalika etc. are examples of marketing co-operatives.
d. Housing Co-operatives : These are formed to provide housing facilities to its members. They
are called co-operative group housing societies.
e. Credit Co-operatives : These societies are formed to provide financial help to its members.
The rural credit societies, the credit and thrift societies, the urban co-operative banks etc. come
under this category.
f. Forming Co-operatives : These are formed by small farmers to carry on work jointly and
thereby share the benefits of large scale farming. Besides these types, other co-operatives can be
formed with the objective of providing different benefits to its members, like the construction co-
operatives, transport co-operatives, co-operatives to provide education etc.

Characteristics:
1. Voluntary association : Individuals having common interest can come together to form a co-
operative society. Any person can become a member of such an organisation an leave the same.
2. Membership : The minimum membership required to form a co-operative society is ten and
the maximum number is unlimited. At times the cooperatives after their formation fix a
maximum membership limit.
3. Body corporate : Registration of a society under the Co-operative Societies Act is a must.
Once it is registered, it becomes a body corporate and enjoys certain privileges just like a joint
stock company. Some of the privileges are:
(a) The society enjoys perpetual succession.
(b) It has its own common seal.
(c) It can own property in its name.
(d) It can enter into contract with others.
(e) It can sue others in court of law.
4. Service Motive : The primary objective of any co-operative organization is to render services
to its members in particular and to the society in general.
5. Democratic Set up : Every member has a right to take part in the management of the society.
Each member has one vote. Generally the members elect a committee known as the Executive
Committee to look after the day to day administration and the said committee is responsible
to the general body of members.
6. Sources of Finances : A co-operative organisation starts with a fund contribute by its
members in the form of units called shares. It can also raise loans and secure grants from the
government easily. One fourth of the profits of the co-operative are transferred to its fund every
year.
7. Return on capital : The return on capital subscribed by the members is in the form of a fixed
rate of dividend after deduction from the profit.

Advantages of Co-operative Society:

1. Easy Formation : Formation of a co-operative society is easy as compared to a company. Any
10 persons can voluntarily form an association and get themselves registered with the Registrar
of Co-operative societies.
2. Limited Liability : The liability of the members is limited to the extent of capital contributed
by them.
3. Open Membership : There is no restriction on any individual to be a member of any co-
operative.
4. State Assistance : Co-operatives get a lot of patronage in the form of exemptions and
concessions in taxes and financial assistance from the state governments which no other
organisation gets.
5. Middlemans Profit Eliminated : Through the co-operative the consumers control their own
supplies and by this means the middlemans profit is eliminated.
6. Management : A co-operative functions in a democratic manner. Each member has only one
vote.
7. Winding up : The dissolution of a co-operative firm is quite difficult. It does not cease to exist
in case of death, or insolvency or resignation of a member. It has thus a fairly stable life.

Disadvantages of Co-operatives :
1. Limited Capital : The amount of capital that a co-operative can generate is limited because of
the membership remaining confined to a locality or region or a particular section of people.
2. Problems in Management : Generally it is seen that co-operative do not function efficiently
due to lack of managerial talent.
3. Lack of Motivation : Co-operatives are formed to render service to its members than to earn
profit. This does not provide enough motivation to manage the co-operatives effectively.
4. Lack of Co-operation : Co-operatives are formed with the very idea of co-operation. But, it is
often seen that there is lot of friction and bickering among the members due to personality
differences, ego clash etc.
5. Lack of Secrecy : Maintenance of business secrecy is one of the important factors for the
success of enterprise which the co-operatives always lack.
6. Dependence on Government : The inadequacy of capital and various other limitations make
co-operatives dependant on the government for support and patronage in terms of grants, loans
and subject themselves to interference.
Suitability of Co-operatives :
When the purpose of business is to provide service than to earn profit and to promote common
economic interest, the co-operative society is the only alternative. Co-operatives are also
preferred as it is easier to raise capital through assistance from financial institutions and
government. Generally it seems that a co-operative society is suitable for small and medium size
operations. However, the large sized IFFCO [Indian Farmers and Fertilisers Cooperative] and
the Kaira Co-operative Processing Milk under the brand name AMUL are the illustrious
exceptions.
HUMAN RESOURCE MANAGEMENT ( H R M )

Definit io n 1 Inte gratio n

HRM is a series of integrated decisions that form the employment relationships; their
quality contributes to the ability of the organizations and the employees to achieve their
objectives.

Definit io n 2 Influe ncing

HRM is concerned with the people dimensions in management. Since every organization is
made up of people, acquiring their services, developing their skills, motivating them to
higher levels of performance and ensuring that they continue to maintain their commitment
to the organization are essential to achieving organizational objectives. This is true,
regardless of the type of the organization government, business, education, health,
recreational, or social action.

Definit io n 3 Applicabil ity

HRM planning, organizing, directing and controlling of the procurement, development,
compensation, integration, maintenance and separation of human resources to the end that
individual, organizational and social objectives are accomplished.

MEANING OF HRM: -

HRM is management function that helps managers to recruit, select, train and develop
members for an organization. Obviously HRM is concerned with the peoples dimensions in
organizations. HRM refers to set of programs, functions, and activities designed and carried
out

Co r e elem ent s o f H RM
Peo ple: Organizations mean people. It is the people who staff and manage
organizations.
M a na gem ent : HRM involves application of management functions and principles for
acquisitioning, developing, maintaining and remunerating employees in organizations.
I nt egr at io n & Co nsist enc y: Decisions regarding people must be integrated and
consistent.
I nfluenc e: Decisions must influence the effectiveness of organization resulting into
betterment of services to customers in the form of high quality products supplied at
reasonable cost.
A pplic a bilit y: HRM principles are applicable to business as well as non-business
organizations too, such as education, health, recreation and the like.
OBJECTIVES OF HRM: -

1. So c iet a l Objec t ives: To be ethically and socially responsible to the needs and
challenges of the society while minimizing the negative impact of such demands upon the
organization.
2. Or ga niz at io na l Objec t ives: To recognize the role of HRM in bringing about
organizational effectiveness. HRM is only means to achieve to assist the organization with its
primary objectives.
3. Func t io na l Objec t ives: To maintain departments contribution and level of services
at a level appropriate to the organizations needs.
4. Per so na l Objec t ives: To assist employees in achieving their personal goals, at least
in so far as these goals enhance the individuals contribution to the organization. This is
necessary to maintain employee performance and satisfaction for the purpose of
maintaining, retaining and motivating the employees in the organization.

SCOPE OF HRM: -

From Entry to the Exit of an employee in the organization

Scope of HRM can be described based on the following activities of HRM. Based on these
activities we can summarize the scope of HRM into 7 different categories as mentioned
below after the activities. Lets check out both of them.

HRM Activities
1. HR Planning
2. Job Analysis
3. Job Design
4. Recruitment & Selection
5. Orientation & Placement
6. Training & Development
7. Performance Appraisals
8. Job Evaluation
9. Employee and Executive Remuneration
10. Motivation
11. Communication
12. Welfare
13. Safety & Health
14. Industrial Relations

7 Categories of Scope of HRM

1. Introduction to HRM
2. Employee Hiring
3. Employee and Executive Remuneration
4. Employee Motivation
5. Employee Maintenance
6. Industrial Relations
7. Prospects of HRM

ROLE OF HRM

1. Advisory Role: HRM advises management on the solutions to any problems affecting
people, personnel policies and procedures.
a. Personnel Policies: Organization Structure, Social Responsibility, Employment
Terms & Conditions, Compensation, Career & Promotion, Training & Development and
Industrial Relations.
b. Personnel Procedures: Relating to manpower planning procedures, recruitment
and selection procedures, and employment procedures, training procedures, management
development procedures, performance appraisal procedures, compensation procedures,
industrial relations procedures and health and safety procedures.

2. Functional Role: The personnel function interprets and helps to communicate

personnel policies. It provides guidance to managers, which will ensure that agreed policies
are implemented.

3. Service Role: Personnel function provides services that need to be carried out by full
time specialists. These services constitute the main activities carried out by personnel
departments and involve the implementation of the policies and procedures described
above.

Role of HR Managers (Today)

1. Humanitarian Role: Reminding moral and ethical obligations to employees

2. Counselor: Consultations to employees about marital, health, mental, physical and
career problems.
3. Mediator: Playing the role of a peacemaker during disputes, conflicts between
individuals and groups and management.
4. Spokesman: To represent of the company because he has better overall picture of his
companys operations.
5. Problem Solver: Solving problems of overall human resource management and long-
term organizational planning.
6. Change Agent: Introducing and implementing institutional changes and installing
organizational development programs
7. Management of Manpower Resources: Broadly concerned with leadership both in the
group and individual relationships and labor-management relations.

Role of HR Managers (Future)

1. Protection and enhancement of human and non-human resources

2. Finding the best way of using people to accomplish organizational goals
3. Improve organizational performance
4. Integration of techniques of information technology with the human resources
5. Utilizing behavioral scientists in the best way for his people
6. Meeting challenges of increasing organizational effectiveness
7. Managing diverse workforce

FUNCTIONS OF HRM ALONG WITH OBJECTIVES

HRM Objectives Supporting HRM Functions

Social Objectives (3) Legal Compliance

Benefits

Union Management Relations

Organizational Objectives (7) Human Resource Planning

Employee Relations

Recruitment & Selection

Training & Development

Performance Appraisals

Placement & Orientation

Employee Assessment

Functional Objectives (3) Performance Appraisals

Placement & Orientation

 Employee Assessment

Personal Objectives (5) Training & Development

Performance Appraisals

Placement & Orientation

Compensation

Employee Assessment

Managerial Functions of HRM

1. Planning: Plan and research about wage trends, labor market conditions, union
demands and other personnel benefits. Forecasting manpower needs etc.
2. Organizing: Organizing manpower and material resources by creating authorities and
responsibilities for the achievement of organizational goals and objectives.
3. Staffing: Recruitment & Selection
4. Directing: Issuance of orders and instructions, providing guidance and motivation of
employees to follow the path laid-down.
5. Controlling: Regulating personnel activities and policies according to plans.
Observations and comparisons of deviations

Operational Functions of HRM

1. Procurement: Planning, Recruitment and Selection, Induction and Placement

2. Development: Training, Development, Career planning and counseling.
3. Compensation: Wage and Salary determination and administration
4. Integration: Integration of human resources with organization.
5. Maintenance: Sustaining and improving working conditions, retentions, employee
communication
6. Separations: Managing separations caused by resignations, terminations, lay offs,
death, medical sickness etc.

RECRUITMENT & SELECTION

RECRUI TM EN T

Definit io n Of Rec r uit m ent : Find ing and Attr acting Applica tio ns
Recruitment is the Process of finding and attracting capable applicants for employment. The
Process begins when new recruits are sought and ends when their applications are
submitted. The result is a pool of application from which new employees are selected.

M EA NI N G OF RECRUI TM EN T:

Recruitment is understood as the process of searching for and obtaining applicants for jobs,
from among them the right people can be selected. Though theoretically recruitment
process is said to end with the receipt of applications, in practice the activity extends to the
screening of applications so as to eliminate those who are not qualified for the job.

PURPOSE AN D I M PORTA N CE OF RECRUI TM EN T: -

1. Determine the present and future requirements in conjunction with personnel planning
and job analysis activities
2. Increase the pool of job candidates at minimum cost
3. Help increase success rate of selection process by reducing number of under-qualified or
over-qualified applications.
4. Reduce the probability that job applicants once selected would leave shortly
5. Meet legal and social obligations
6. Identify and prepare potential job applicants
7. Evaluate effectiveness of various recruitment techniques and sources for job applicants.

FA CTORS GOVERN I N G RECRUI TM EN T

External Factors:
Demand and Supply (Specific Skills)
Unemployment Rate (Area-wise)
Labor Market Conditions
Political and Legal Environment (Reservations, Labor laws)
Image
Internal Factors
Recruitment Policy (Internal Hiring or External Hiring?)
Human Resource Planning (Planning of resources required)
Size of the Organization (Bigger the size lesser the recruitment problems)
Cost
Growth and Expansion Plans

RECRUI TM EN T PROCESS

Recruitment Planning
Number of contacts
Types of contacts
Recruitment Strategy Development
Make or Buy Employees
Technological Sophistication
Where to look
How to look
Internal Recruitment (Source 1)
Present employees
Employee referrals
 Transfers & Promotions
Former Employees
Previous Applicants
Evaluation of Internal Recruitment
External Recruitment (Source 2)
Professionals or Trade Associations
Advertisements
Employment Exchanges
Campus Recruitment
Walk-ins Interviews
Consultants
Contractors
Displaced Persons
Radio & Television
Acquisitions & Mergers
Competitors
Evaluation of External Recruitment
Searching
Source activation
Selling
Screening of Applications
Evaluation and Cost Control
Salary Cost
Management & Professional Time spent
Advertisement Cost
Producing Supporting literature
Recruitment Overheads and Expenses
Cost of Overtime and Outsourcing
Consultants fees
Evaluation of Recruitment Process
Return rate of applications sent out
Suitable Candidates for selection
Retention and Performance of selected candidates
Recruitment Cost
Time lapsed data
Image projection

IN TERN A L RECRUI TM EN T
A dva nta ges Disa dva nt a ges
1. Less Costly 1. Old concept of doing things
2. Candidates already oriented towards 2. It abets raiding
organization 3. Candidates current work may be
3. Organizations have better knowledge affected
about internal candidates 4. Politics play greater roles
4. Employee morale and motivation is 5. Morale problem for those not
enhanced promoted.

EXTERN A L RECRUI TM EN T
A dva nta ges Disa dva nt a ges
1. Benefits of new skills and talents 1. Better morale and motivation
2. Benefits of new experiences associated with internal recruiting is
3. Compliance with reservation policy denied
becomes easy 2. It is costly method
4. Scope for resentment, jealousies, and 3. Chances of creeping in false positive
heartburn are avoided. and false negative errors
4. Adjustment of new employees takes
longer time.
SEL ECTI ON : -

M EA NI N G OF SEL ECTI ON :

Selection is the process of picking up individuals (out of the pool of job applicants) with
requisite qualifications and competence to fill jobs in the organization. A formal definition of
Selection is as under

Definit io n o f Selec t io n: Pr o ce ss o f diffe r e ntiat ing

Selection is the process of differentiating between applicants in order to identify and hire
those with a greater likelihood of success in a job.

DI FFEREN CE BETW EEN RECRUI TM EN T A N D SEL ECTI ON :

Recruitment
1. Recruitment refers to the process of
identifying and encouraging prospective
employees to apply for jobs.
2. Recruitment is said to be positive in
its approach as it seeks to attract as
many candidates as possible.
Selection
1. Selection is concerned with picking up
the right candidates from a pool of
applicants.
2. Selection on the other hand is
negative in its application in as much as
it seeks to eliminate as many unqualified
applicants as possible in order to identify
the right candidates.

PROCESS / STEPS I N SEL ECTI ON

1. Pr elim ina r y I nt er view: The purpose of preliminary interviews is basically to

eliminate unqualified applications based on information supplied in application forms. The
basic objective is to reject misfits. On the other hands preliminary interviews is often called
a courtesy interview and is a good public relations exercise.
2. Selec t io n Test s: Jobseekers who past the preliminary interviews are called for tests.
There are various types of tests conducted depending upon the jobs and the company.
These tests can be Aptitude Tests, Personality Tests, and Ability Tests and are conducted to
judge how well an individual can perform tasks related to the job. Besides this there are
some other tests also like Interest Tests (activity preferences), Graphology Test
(Handwriting), Medical Tests, Psychometric Tests etc.
3. Em plo ym ent Int er view: The next step in selection is employment interview. Here
interview is a formal and in-depth conversation between applicants acceptability. It is
considered to be an excellent selection device. Interviews can be One-to-One, Panel
Interview, or Sequential Interviews. Besides there can be Structured and Unstructured
interviews, Behavioral Interviews, Stress Interviews.
4. Refer enc e & Ba c kgr o und Chec ks: Reference checks and background checks are
conducted to verify the information provided by the candidates. Reference checks can be
through formal letters, telephone conversations. However it is merely a formality and
selections decisions are seldom affected by it.
5. Selec t io n Dec isio n: After obtaining all the information, the most critical step is the
selection decision is to be made. The final decision has to be made out of applicants who
have passed preliminary interviews, tests, final interviews and reference checks. The views
of line managers are considered generally because it is the line manager who is responsible
for the performance of the new employee.
6. Physic a l Ex a m ina t io n: After the selection decision is made, the candidate is
required to undergo a physical fitness test. A job offer is often contingent upon the
candidate passing the physical examination.
7. J ob Offer : The next step in selection process is job offer to those applicants who have
crossed all the previous hurdles. It is made by way of letter of appointment.
8. Co nt r ac t o f Em plo ym ent : After the job offer is made and candidates accept the
offer, certain documents need to be executed by the employer and the candidate. Here is a
need to prepare a formal contract of employment, containing written contractual terms of
employment etc.

ESSEN TI A L S OF A GOOD SEL ECTI ON PRA CTI CE

1. Detailed job descriptions and job specifications prepared in advance and endorsed by
personnel and line management
2. Trained the selectors
3. Determine aids to be used for selection process
4. Check competence of recruitment consultants before retention
5. Involve line managers at all stages
6. Attempt to validate the procedure
7. Help the appointed candidate to succeed by training and management development

BA RRI ERS TO EFFECTI VE SEL ECTI ON : -

1. Per c ept io n: We all perceive the world differently. Our limited perceptual ability is
obviously a stumbling block to the objective and rational selection of people.
2. Fa ir ness: Barriers of fairness includes discrimination against religion, region, race or
gender etc.
3. Va lidit y: A test that has been validated can differentiate between the employees who
can perform well and those who will not. However it does not predict the job success
accurately.
4. Relia bilit y: A reliable test may fail to predict job performance with precision.
5. Pr essur e: Pressure brought on selectors by politicians, bureaucrats, relatives, friends
and peers to select particular candidate are also barriers to selection.
TRAINING & DEVELOPMENT
Definit io n o f Tr a ining & Develo pm ent : Impr o ve per fo r mance
Training & Development is any attempt to improve current or future employee performance
by increasing an employees ability to perform through learning, usually by changing the
employees attitude or increasing his or her skills and knowledge.

M EA NI N G OF TRA I NI N G & DEVEL OPM EN T: -

The need for Training and Development is determined by the employees performance
deficiency, computed as follows.
Training & Development Need = Standard Performance Actual Performance

We can make a distinction among Training, Development and Education.

Dist inc t io n bet ween Tr a ining a nd Educ a t io n

Training Education
Application oriented Theoretical Orientation
Job experience Classroom learning
Specific Task in mind Covers general concepts
Narrow Perspective Has Broad Perspective
Training is Job Specific Education is no bar

Training: Training refers to the process of imparting specific skills. An employee undergoing
training is presumed to have had some formal education. No training program is complete
without an element of education. Hence we can say that Training is offered to operatives.

Education: It is a theoretical learning in classrooms. The purpose of education is to teach

theoretical concepts and develop a sense of reasoning and judgment. That any training and
development program must contain an element of education is well understood by HR
Specialists. Any such program has university professors as resource persons to enlighten
participants about theoretical knowledge of the topics proposed to discuss. In fact
organizations depute or encourage employees to do courses on part time basis. CEOs are
known to attend refresher courses conducted by business schools. The education is more
important for managers and executives rather than low cadre workers. Anyways education
is common to all employees, their grades notwithstanding.

Development: Development means those learning opportunities designed to help

employees to grow. Development is not primarily skills oriented. Instead it provides the
general knowledge and attitudes, which will be helpful to employers in higher positions.
Efforts towards development often depend on personal drive and ambition. Development
activities such as those supplied by management development programs are generally
voluntary in nature. Development provides knowledge about business environment,
management principles and techniques, human relations, specific industry analysis and the
like is useful for better management of a company.

Objectives of (MDP) Management Development Programs OR

Advantages of Development

1. Making them
Self-starters
Committed
 Motivated
Result oriented
Sensitive to environment
Understand use of power
2. Creating self awareness
3. Develop inspiring leadership styles
4. Instill zest for excellence
5. Teach them about effective communication
6. To subordinate their functional loyalties to the interests of the organization

Difference between Training and Development

Training
Training is skills focused
Training is presumed to have a formal
education
Training needs depend upon lack or
deficiency in skills
Trainings are generally need based
Training is a narrower concept focused on
job related skills
Training may not include development
Training is aimed at improving job related
efficiency and performance
Development
Development is creating learning abilities
Development is not education dependent
Development depends on personal drive
and ambition
Development is voluntary
Development is a broader concept
focused on personality development
Development includes training wherever
necessary
Development aims at overall personal
effectiveness including job efficiencies

What are the Training Inputs?

Skills
Education
Development
Ethics
Problem Solving Skills
Decision Making
Attitudinal Changes

Importance of Training & Development

Helps remove performance deficiencies in employees
Greater stability, flexibility and capacity for growth in an organization
Accidents, scraps and damages to machinery can be avoided
Serves as effective source of recruitment
It is an investment in HR with a promise of better returns in future
Reduces dissatisfaction, absenteeism, complaints and turnover of employees

Need of Training
Individual level
Diagnosis of present problems and future challenges
Improve individual performance or fix up performance deficiency
Improve skills or knowledge or any other problem
To anticipate future skill-needs and prepare employee to handle more challenging tasks
To prepare for possible job transfers
Group level
 To face any change in organization strategy at group levels
When new products and services are launched
To avoid scraps and accident rates

Identification of Training Needs (Methods)

Individual Training Needs Identification

1. Performance Appraisals
2. Interviews
3. Questionnaires
4. Attitude Surveys
5. Training Progress Feedback
6. Work Sampling
7. Rating Scales

Group Level Training Needs Identification

1. Organizational Goals and Objectives

2. Personnel / Skills Inventories
3. Organizational Climate Indices
4. Efficiency Indices
5. Exit Interviews
6. MBO / Work Planning Systems
7. Quality Circles
8. Customer Satisfaction Survey
9. Analysis of Current and Anticipated Changes

Benefits of Training Needs Identification

1. Trainers can be informed about the broader needs in advance

2. Trainers Perception Gaps can be reduced between employees and their supervisors
3. Trainers can design course inputs closer to the specific needs of the participants
4. Diagnosis of causes of performance deficiencies can be done

Methods of Training

On the Job Trainings: These methods are generally applied on the workplace while
employees is actually working. Following are the on-the-job methods.

Advantages of On-the-Job Training:

It is directly in the context of job
It is often informal
It is most effective because it is learning by experience
It is least expensive
Trainees are highly motivated
It is free from artificial classroom situations

Disadvantages of On-the-Job Training:

Trainer may not be experienced enough to train
It is not systematically organized
Poorly conducted programs may create safety hazards
On the Job Training Methods

1. Job Rotation: In this method, usually employees are put on different jobs turn by
turn where they learn all sorts of jobs of various departments. The objective is to give a
comprehensive awareness about the jobs of different departments. Advantage employee
gets to know how his own and other departments also function. Interdepartmental
coordination can be improved, instills team spirit. Disadvantage It may become too much
for an employee to learn. It is not focused on employees own job responsibilities. Employees
basic talents may remain under utilized.
2. Job Coaching: An experienced employee can give a verbal presentation to explain
the nitty-grittys of the job.
3. Job Instruction: It may consist an instruction or directions to perform a particular
task or a function. It may be in the form of orders or steps to perform a task.
4. Apprenticeships: Generally fresh graduates are put under the experienced
employee to learn the functions of job.
5. Internships and Assistantships: An intern or an assistants are recruited to
perform a specific time-bound jobs or projects during their education. It may consist a part
of their educational courses.

Off the Job Trainings: These are used away from work places while employees are not
working like classroom trainings, seminars etc. Following are the off-the-job methods;
Advantages of Off-the-Job Training:
Trainers are usually experienced enough to train
It is systematically organized
Efficiently created programs may add lot of value
Disadvantages of Off-the-Job Training:
It is not directly in the context of job
It is often formal
It is not based on experience
It is least expensive
Trainees may not be highly motivated
It is more artificial in nature

Off the Job Training Methods

1. Classroom Lectures: It is a verbal lecture presentation by an instructor to a large
audience. Advantage It can be used for large groups. Cost per trainee is low.
Disadvantages Low popularity. It is not learning by practice. It is One-way communication.
No authentic feedback mechanism. Likely to boredom.
2. Audio-Visual: It can be done using Films, Televisions, Video, and Presentations etc.
Advantages Wide range of realistic examples, quality control possible,. Disadvantages
One-way communication, No feedback mechanism. No flexibility for different audience.
3. Simulation: creating a real life situation for decision-making and understanding the
actual job conditions give it. Following are some of the simulation methods of trainings
a. Case Studies: It is a written description of an actual situation and trainer is
supposed to analyze and give his conclusions in writing. The cases are generally based on
actual organizational situations. It is an ideal method to promote decision-making abilities
within the constraints of limited data.
b. Role Plays: Here trainees assume the part of the specific personalities in a
case study and enact it in front of the audience. It is more emotional orientation and
improves interpersonal relationships. Attitudinal change is another result. These are
generally used in MDP.
c. Sensitivity Trainings: This is more from the point of view of behavioral
assessment, under different circumstances how an individual will behave himself and
towards others. There is no preplanned agenda and it is instant. Advantages increased
ability to empathize, listening skills, openness, tolerance, and conflict resolution skills.
Disadvantage Participants may resort to their old habits after the training.
4. Programmed Instructions: Provided in the form of blocks either in book or a
teaching machine using questions and Feedbacks without the intervention of trainer.
Advantages Self paced, trainees can progress at their own speed, strong motivation for
repeat learning, material is structured and self-contained. Disadvantages Scope for
learning is less; cost of books, manuals or machinery is expensive.
5. Computer Aided Instructions: It is extension of PI method, by using computers.
Advantages Provides accountabilities, modifiable to technological innovations, flexible to
time. Disadvantages High cost.
6. Laboratory Training

Barriers to Effective Training:

1. Lack of Management commitment
2. Inadequate Training budget
3. Education degrees lack skills
4. Large scale poaching of trained staff
5. Non-coordination from workers due to downsizing trends
6. Employers and B Schools operating distantly
7. Unions influence

How To Make Training Effective?

1. Management Commitment
2. Training & Business Strategies Integration
3. Comprehensive and Systematic Approach
4. Continuous and Ongoing approach
5. Promoting Learning as Fundamental Value
6. Creations of effective training evaluation system

PERFORMANCE APPRAISALS
Definition 1: Systematic Evaluation
It is a systematic evaluation of an individual with respect to performance on the job and
individuals potential for development.

Definition 2: Formal System, Reasons and Measures of future performance

It is formal, structured system of measuring, evaluating job related behaviors and
outcomes to discover reasons of performance and how to perform effectively in future so
that employee, organization and society all benefits.

Meaning of Performance Appraisals

Performance Appraisals is the assessment of individuals performance in a systematic way. It

is a developmental tool used for all round development of the employee and the
organization. The performance is measured against such factors as job knowledge, quality
and quantity of output, initiative, leadership abilities, supervision, dependability, co-
operation, judgment, versatility and health. Assessment should be confined to past as well
as potential performance also. The second definition is more focused on behaviors as a part
of assessment because behaviors do affect job results.

Performance Appraisals and Job Analysis Relationship

Job Analysis Performance Standards Performance Appraisals

Describe the work and Translate job requirements Describe the job relevant
personnel requirement of into levels of acceptable or strengths and weaknesses
a particular job. unacceptable performance of each individual.

Objectives of Performance Appraisals

Use of Performance Appraisals
1. Promotions
2. Confirmations
3. Training and Development
4. Compensation reviews
5. Competency building
6. Improve communication
7. Evaluation of HR Programs
8. Feedback & Grievances

4 Goals of Performance Appraisals

General Goals Specific Goals

Developmental Use Individual needs
Performance feedback
Transfers and Placements
Strengths and Development needs
Administrative Decisions / Uses Salary
Promotion
Retention / Termination
Recognition
Lay offs
Poor Performers identification
Organizational Maintenance HR Planning
Training Needs
Organizational Goal achievements
Goal Identification
HR Systems Evaluation
Reinforcement of organizational needs
Documentation Validation Research
For HR Decisions
Legal Requirements

Performance Appraisal Process

1. Objectives definition of appraisal
2. Job expectations establishment
3. Design an appraisal program
4. Appraise the performance
5. Performance Interviews
6. Use data for appropriate purposes
7. Identify opportunities variables
8. Using social processes, physical processes, human and computer assistance

Difference between Traditional and Modern (Systems) approach to Appraisals

Categories Traditional Appraisals Modern, Systems

Appraisals
Guiding Values Individualistic, Control Systematic,
oriented, Documentary Developmental, Problem
solving
Leadership Styles Directional, Evaluative Facilitative, Coaching
Frequency Occasional Frequent
Formalities High Low
Rewards Individualistic Grouped, Organizational

TECHNIQUES / METHODS OF PERFORMANCE APPRAISALS

Numerous methods have been devised to measure the quantity and quality of performance
appraisals. Each of the methods is effective for some purposes for some organizations only.
None should be dismissed or accepted as appropriate except as they relate to the particular
needs of the organization or an employee.

Broadly all methods of appraisals can be divided into two different categories.

Past Oriented Methods

Future Oriented Methods

Past Oriented Methods

1. Rating Scales: Rating scales consists of several numerical scales representing job
related performance criterions such as dependability, initiative, output, attendance, attitude
etc. Each scales ranges from excellent to poor. The total numerical scores are computed and
final conclusions are derived. Advantages Adaptability, easy to use, low cost, every type of
job can be evaluated, large number of employees covered, no formal training required.
Disadvantages Raters biases

2. Checklist: Under this method, checklist of statements of traits of employee in the form
of Yes or No based questions is prepared. Here the rater only does the reporting or checking
and HR department does the actual evaluation. Advantages economy, ease of
administration, limited training required, standardization. Disadvantages Raters biases,
use of improper weighs by HR, does not allow rater to give relative ratings

3. Forced Choice Method: The series of statements arranged in the blocks of two or more
are given and the rater indicates which statement is true or false. The rater is forced to
make a choice. HR department does actual assessment. Advantages Absence of personal
biases because of forced choice. Disadvantages Statements may be wrongly framed.

4. Forced Distribution Method: here employees are clustered around a high point on a
rating scale. Rater is compelled to distribute the employees on all points on the scale. It is
assumed that the performance is conformed to normal distribution. Advantages Eliminates
Disadvantages Assumption of normal distribution, unrealistic, errors of central tendency.

5. Critical Incidents Method: The approach is focused on certain critical behaviors of

employee that makes all the difference in the performance. Supervisors as and when they
occur record such incidents. Advantages Evaluations are based on actual job behaviors,
ratings are supported by descriptions, feedback is easy, reduces recency biases, chances of
subordinate improvement are high. Disadvantages Negative incidents can be prioritized,
forgetting incidents, overly close supervision; feedback may be too much and may appear to
be punishment.

6. Behaviorally Anchored Rating Scales: statements of effective and ineffective

behaviors determine the points. They are said to be behaviorally anchored. The rater is
supposed to say, which behavior describes the employee performance. Advantages helps
overcome rating errors. Disadvantages Suffers from distortions inherent in most rating
techniques.

7. Field Review Method: This is an appraisal done by someone outside employees own
department usually from corporate or HR department. Advantages Useful for managerial
level promotions, when comparable information is needed, Disadvantages Outsider is
generally not familiar with employees work environment, Observation of actual behaviors
not possible.

8. Performance Tests & Observations: This is based on the test of knowledge or skills.
The tests may be written or an actual presentation of skills. Tests must be reliable and
validated to be useful. Advantage Tests may be apt to measure potential more than actual
performance. Disadvantages Tests may suffer if costs of test development or
administration are high.

9. Confidential Records: Mostly used by government departments, however its

application in industry is not ruled out. Here the report is given in the form of Annual
Confidentiality Report (ACR) and may record ratings with respect to following items;
attendance, self expression, team work, leadership, initiative, technical ability, reasoning
ability, originality and resourcefulness etc. The system is highly secretive and confidential.
Feedback to the assessee is given only in case of an adverse entry. Disadvantage is that it is
highly subjective and ratings can be manipulated because the evaluations are linked to HR
actions like promotions etc.

10. Essay Method: In this method the rater writes down the employee description in detail
within a number of broad categories like, overall impression of performance, promoteability
of employee, existing capabilities and qualifications of performing jobs, strengths and
weaknesses and training needs of the employee. Advantage It is extremely useful in filing
information gaps about the employees that often occur in a better-structured checklist.
Disadvantages It its highly dependent upon the writing skills of rater and most of them
are not good writers. They may get confused success depends on the memory power of
raters.

11. Cost Accounting Method: Here performance is evaluated from the monetary returns
yields to his or her organization. Cost to keep employee, and benefit the organization
derives is ascertained. Hence it is more dependent upon cost and benefit analysis.
12. Comparative Evaluation Method (Ranking & Paired Comparisons): These are
collection of different methods that compare performance with that of other co-workers. The
usual techniques used may be ranking methods and paired comparison method.

Ranking Methods: Superior ranks his worker based on merit, from best to
worst. However how best and why best are not elaborated in this method. It is easy to
administer and explanation.
Paired Comparison Methods: In this method each employee is rated with
another employee in the form of pairs. The number of comparisons may be calculated with
the help of a formula as under.
N x (N-1) / 2

Future Oriented Methods

1. Management By Objectives: It means management by objectives and the

performance is rated against the achievement of objectives stated by the management.
MBO process goes as under.
Establish goals and desired outcomes for each subordinate
Setting performance standards
Comparison of actual goals with goals attained by the employee
Establish new goals and new strategies for goals not achieved in previous year.
Advantage It is more useful for managerial positions.
Disadvantages Not applicable to all jobs, allocation of merit pay may result in setting
short-term goals rather than important and long-term goals etc.

2. Psychological Appraisals: These appraisals are more directed to assess employees

potential for future performance rather than the past one. It is done in the form of in-depth
interviews, psychological tests, and discussion with supervisors and review of other
evaluations. It is more focused on employees emotional, intellectual, and motivational and
other personal characteristics affecting his performance. This approach is slow and costly
and may be useful for bright young members who may have considerable potential.
However quality of these appraisals largely depend upon the skills of psychologists who
perform the evaluation.

3. Assessment Centers: This technique was first developed in USA and UK in 1943. An
assessment center is a central location where managers may come together to have their
participation in job related exercises evaluated by trained observers. It is more focused on
observation of behaviors across a series of select exercises or work samples. Assessees are
requested to participate in in-basket exercises, work groups, computer simulations, role
playing and other similar activities which require same attributes for successful performance
in actual job. The characteristics assessed in assessment center can be assertiveness,
persuasive ability, communicating ability, planning and organizational ability, self confidence,
resistance to stress, energy level, decision making, sensitivity to feelings, administrative
ability, creativity and mental alertness etc. Disadvantages Costs of employees traveling
and lodging, psychologists, ratings strongly influenced by assessees inter-personal skills.
Solid performers may feel suffocated in simulated situations. Those who are not selected for
this also may get affected.

Advantages well-conducted assessment center can achieve better forecasts of future

performance and progress than other methods of appraisals. Also reliability, content validity
and predictive ability are said to be high in assessment centers. The tests also make sure
that the wrong people are not hired or promoted. Finally it clearly defines the criteria for
selection and promotion.

4. 360-Degree Feedback: It is a technique which is systematic collection of performance

data on an individual group, derived from a number of stakeholders like immediate
supervisors, team members, customers, peers and self. In fact anyone who has useful
information on how an employee does a job may be one of the appraisers. This technique is
highly useful in terms of broader perspective, greater self-development and multi-source
feedback is useful. 360-degree appraisals are useful to measure inter-personal skills,
customer satisfaction and team building skills. However on the negative side, receiving
feedback from multiple sources can be intimidating, threatening etc. Multiple raters may be
less adept at providing balanced and objective feedback.