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CAIIB Paper 3 ABFM Module A Unit 1 : Basics of Management (New Syllabus)
IIBF has released the New Syllabus Exam Pattern for CAIIB Exam 2023. Following the format of the current exam, CAIIB 2023 will have now four papers. The CAIIB Paper 3 (ADVANCED BUSINESS & FINANCIAL MANAGEMENT) includes an important topic called “Basics of Management”. Every candidate who are appearing for the CAIIB Certification Examination 2023 must understand each unit included in the syllabus.
In this article, we are going to cover all the necessary details of CAIIB Paper 3 (ABFM) Module A (THE MANAGEMENT PROCESS) Unit 1 : Basics of Management, Aspirants must go through this article to better understand the topic, Basics of Management and practice using our Online Mock Test Series to strengthen their knowledge of Basics of Management. Unit 1 : Basics of Management
Definition of Management
- The Cambridge Dictionary refers to Management as ‘the activity or job of being in charge of a company, organization, department, or team of employees’.
- Henri Fayol, widely acknowledged as the founder of modern management methods, was instrumental in contributing immensely to ‘formal organisation theory’. The theory propounded by Henri Fayol included the six types of organisational activities, which also included management. It also explained the various functions and principles of management.
- Frederick Winslow Taylor, introduced methods to improve the industrial efficiency. He wrote the book ‘The Principles of Scientific Management’. Scientific management, also known as ‘Taylorism’, is a management theory which was used for analysing and synthesizing workflows with the main objective of improvement of economic efficiency and labour productivity.
Functions of Management
- This involves setting of goals, determining the objectives of the organisation and selecting the future course of action required to be taken for accomplishing the objectives of the organisation.
- When you plan, you decide in advance about what needs to be done, when and where it needs to be done, how it shall be done and who would be doing it.
Organising involves taking decisions about division of work, allocation of responsibility and authority and task coordination. It also involves the following areas:
- Task Management
- The Reporting Structure
- Decision Making
- The major staffing activities include recruitment, selection, training, development and motivation of the various categories of employees and fixation of their compensation and reviewing it from time to time.
- Staffing also takes care of promotions, job rotations, job enrichment, transfers, termination and retirement activities
- Directing covers the functions of guiding and supervising the activities performed by subordinates.
- It includes Leadership, motivation, communication and supervision.
The control function deals with monitoring and measuring of performances of people and comparing them with the pre-decided standards and projections.
Controlling involves the following four steps:
- Establishing performance standards
- Measurement of actual performance
- Comparison of actual performance against the established standards
- Taking corrective actions to achieve the desired objectives.
Importance of Management
- Effective Change Management Tool
- Helps achieve group goals
- Optimum utilisation of resources
- Improved functioning of business
- Development of various resources
- Contributes towards better organization
- Proper Direction to the organization
- Integration of various interests
- Management of fluctuations
- Inculcation of team spirit
- Problem solving
- Helps Employee Growth
Management Thoughts & Approaches
Classical or Traditional School
The classical school believes in the use of technology for increasing efficiency of the employees, and lays down more emphasis on the organisation, looks at the organisation as a machine and the employees as its parts, who are important only as a means of production.
The salient features of the classical or traditional school include:
- Having an integrated and centralised system
- Greater emphasis on production
- Concentration on errors and their rectification
- Assuming employees’ continuity irrespective of organisational changes
- Based on an accounting model and
- Giving equal weightage to different types of jobs and employees.
Neoclassical or Behavioural School
This school of thought propounded the influence of human actions on the very existence of an organisation. An organisation, according to this theory, comprises of both formal and informal forms of organization, a fact which was overlooked by the Classical theorists.
This School of Thought had the following salient features:
- Focus on motivation
- Different persons get motivated diversely for satisfying their specific needs.
- For efficiency measurement, communication is a critical input.
- For organizational performance, team-work is essential
- The thought has two different perspectives, viz. Human Relations perspective and Psychological perspective.
This school of thought was also the originator of Maslow’s hierarchy of needs, Douglas McGregor’s X and Y Theory and Motivation-Hygiene Theory.
Maslow’s Heirarchy Of Needs
- Human beings have wants and desires which influence their behavior. Only unsatisfied needs influence behavior, satisfied needs do not.
- Since needs are many, they are arranged in order of importance, from the basic to the complex.
- The person advances to the next level of needs only after the lower-level need is at least minimally satisfied.
- The further the progress up the hierarchy, the more individuality, humanness and psychological health a person will exhibit.
Douglas Mcgregor’s X And Y Theory
Theory X stated that humans do not work without close supervision, while Theory Y propounded that humans love to work and there is no need of coercing them to work for achieving organisational goals.
Theory X Assumptions:
- The average human being is inherently lazy by nature and desires to work as little as possible. He dislikes the work and will like to avoid it, if he can.
- He avoids accepting responsibility and prefers to be led or directed by some other.
- He is self-centered and indifferent to organizational needs.
- He has little ambition, dislikes responsibility, prefers to be led but wants security.
- He is not very intelligent and lacks creativity in solving organizational problems.
- He, by nature, resists change of any type
Theory Y Assumptions:
- Work is as natural as play, provided the work environment is favourable. An average man is not really against doing work.
- People can be self-directed and creative at work if they are motivated properly.
- Self-control on the part of people is useful for achieving organizational goal. External control and threats of punishment alone do not bring out efforts towards organizational objectives.
- People have capacity to exercise imagination and creativity.
- People are not by nature passive or resistant to organizational needs. They have become so as a result of experience in organisations.
Frederick Herzberg’s two -factor theory, or intrinsic/extrinsic motivation, concludes that certain factors in the workplace result in job satisfaction, but if absent, lead to dissatisfaction.
The factors that motivate people can change over their lifetime, but “respect for me as a person” is one of the top motivating factors at any stage of life. He distinguished between:
- Motivation: (e.g., challenging work, recognition, responsibility) which give positive satisfaction, and
- Hygiene factors: (g., status, job security, salary and fringe benefits) that do not motivate if present, but, if absent, result in demotivation.
Quantitative School or Management Science
The Quantitative School of Management emphasises use of mathematical and statistical models for finding solutions to managerial problems. The scientific management techniques, laid down by Fredrick Winslow Taylor, also helped in laying down the foundations of this approach.
The main characteristics of the quantitative approach to management include:
- Creation of models, theories and hypotheses.
- Collection of empirical data.
- Development of mathematical and statistical models.
- Data analysis.
- Experimenting in controlled environment.
- Testing with changes in variables.
- Development of various instruments.
- Development of quantitative techniques.
The System School of Management
- This school of management thought was propounded by Daniel Katz, and Ludwig Von Bertalanffy, They advocated the concept of management being an open system, which is required to interact with the environment constantly for getting resources, which are both valuable and limited.
The Contingency School of Management
- It stated that there cannot be a unique way of managing an organization, which can be labelled as the best way to manage or lead a business.
- The best or the optimal way shall always depend or be contingent on the internal and external environment.
- The contingency school of management thought is criticised for being reactive and for failure to be proactive and for not providing some standard principles and procedures to be applied in specific situations.
- This approach can turn out to be expensive in terms of money and time and development of a proper theory of management principles becomes almost impossible.
The Contemporary School of Management
- Management theory continues to advance because of constant evolution of business practices and management techniques, especially in the wake of technological advancements. Further, continuous research is giving rise to new approaches to management.
- The concepts of ‘Total quality management’ and ‘Learning organization’ are quite relevant in this context.
Total Quality Management
Total Quality Management focuses on the management of an organisation for delivering high quality goods and services to its customers. The approach originated in Japan after the Second World War. The four main elements of this approach are:
- Employee involvement: A high degree of involvement of employees is instrumental in preventing quality issues, before they occur.
- Customer focus: To improve quality, an organisation needs to focus fully on the requirements of its customers, and understand their business and what they want, with the objective of delivering products and services suitable to them.
- Standardisation: It is very important to use the industry standards as benchmarks for comparison with competitors and for evaluating your own performance.
- Continuous Monitoring: There should be continuous thrust on monitoring and changing for the better, so as to achieve improvement in all the areas of an organization.
Deming, Juran and Crosby were three main contributors to the Total Quality Management approach.
William Edwards Deming considered the quality of people more important than the quality of products. He laid down the following fourteen principles of Total Quality Management:
- Consistency of purpose: A consistency of purpose should be created for improving services and products
- Adoption of the new philosophy: The Organisation should adopt the new Total Quality Management philosophy
- Ceasing dependence on inspection
- Stopping lowest bid system
- Introduction of all-round improvement
- Instituting On-the-job training
- Instituting leadership
- Driving out fear by improving two-way communication.
- Breaking down barriers between staff areas and departments
- Eliminating exhortations
- Eliminating arbitrary numerical targets
- Permitting pride of workmanship
- Encouraging education
- Action for achieving transformation
A learning organisation may be defined as an organisation where all the employees take part in identifying and solving the problems which it faces, and which permits the organisation to continuously enhance its capacity to grow and learn, so as to achieve the organisational goals.
The five disciplines of a learning organisation are:
- Personal Mastery: It involves developing a capacity to achieve personal goals by creating an environment conducive to the growth of an employee’s personal vision, which further leads to a shared vision.
- Shared vision: Business Leaders work together with employees to achieve a joint vision. They create an environment where employees feel that they are participating in the growth of the organisation and where management encourages employees to take risk.
- Mental Models: A mental model assists us in developing our understanding about the impact of the assumptions and generalisations, deeply ingrained in our minds, on our interactions with people, and the decisions taken by us.
- Team learning: According to Senge, humility is the very basis of team learning. The Team Members have to be ever willing to reflect and consider views of other people and should always be prepared to forget their personal biases for creating a collaborative work environment.
- Systems Thinking: The idea of ‘systems thinking’ envisages that everything is interrelated and interconnected. We cannot act as a disjointed set of personal silos. We need to look at the whole picture and understand how each part is connected.
Management Challenges & Opportunities
Management faces a lot of challenges for achieving the business objectives and also gets a lot of opportunities, which need to be properly evaluated in a time bound manner. Several issues which are faced by the management include:
- Which business model to adopt?
- How to manage the information explosion?
- How to manage the changes taking place every now and then?
- How to face the threat of globalisation?
- How to manage the impact of environmental sustainability?
Business models are based on the type of clients to be served, the product offerings, the revenue earning model, ways of differentiating and sustaining competitive advantages, and the manner in which products or services are provided.
Some Business Models are:
- Solution Providing or Consulting Services: IBM
- Profit Pyramid Model: Under this model, the customers are provided low-priced products initially and gradually they are moved to expensive products, where the business earns higher profits. General Motors followed this model.
- Multi-component Systems Model: Such models have been used by companies like Gillette and HP. Gillette sold the cheaper razors at no-profit no-loss basis and made money on High-end razor blades.
- Advertisement Model: These models offer the basic product free and make money through advertising. YouTube, Google etc. are live examples.
- Switchboard Model: This model allows a firm to acts as an intermediary for connecting multiple sellers with multiple buyers. eBay, Amazon, Flipkart
- Time Model: This model depends on how fast research and development happens.
- Efficiency model: A business following this model just waits for the market to mature with standardisation of the product and enters with low-cost and low-margin products with mass appeal. Wal-Mart and Dell
- Blockbuster model: This model is typically used by industries which are having the protection under patent laws, like pharma and film industry, where profits depend on a few items and are driven by star appeal.
- Profit multiplier model: This model involves developing concepts which may or may not be profitable but are used for driving other products through synergy. For example, Walt Disney used cartoon characters for developing theme parks, merchandise, and licensing opportunities, which gave them huge profits.
- Entrepreneurial model: This model deals with offering specialized products or services to clients which are not attractive to large competitors but have potential of fast growth. e.g., 1MG was acquired by Tata’s.
- De Facto industry standard model: Free products, under this model, may be offered at a very low cost to increase the market share and for saturating the market to make everybody talk about the product as a great brand and industry standard. Subsequently, the users are offered high-end and high-margin products. Microsoft indulged into this strategy.
Managing the Change
- New Products & Services
- Technological Changes
- Employee Management
Globalization and Environmental Sustainability
Impact of Globalization
- Increase in Transport of Goods
- Economic Specialisation
- Reduced Biodiversity
Impact of Environmental Sustainability
- GOAL 1: NO POVERTY
- GOAL 2: ZERO HUNGER
- GOAL 3: GOOD HEALTH AND WELL-BEING
- GOAL 4: QUALITY EDUCATION
- GOAL 5: GENDER EQUALITY
- GOAL 6: CLEAN WATER AND SANITATION
- GOAL 7: AFFORDABLE AND CLEAN ENERGY
- GOAL 8: DECENT WORK AND ECONOMIC GROWTH
- GOAL 9: INDUSTRY, INNOVATION, AND INFRASTRUCTURE
- GOAL 10: REDUCED INEQUALITIES
- GOAL 11: SUSTAINABLE CITIES AND COMMUNITIE
- GOAL 12: RESPONSIBLE CONSUMPTION AND PRODUCTION
- GOAL 13: CLIMATE ACTION
- GOAL 14: LIFE BELOW WATE
- GOAL 15: LIFE ON LAND
- GOAL 16: PEACE, JUSTICE, AND STRONG INSTITUTIONS
- GOAL 17: PARTNERSHIPS:
Strategic management is defined as the process by which a firm manages the formulation and implementation of its strategy”. Strategy combines explicit statements and implicit beliefs and understandings in and around an organization about:
- Mission: Its core purpose and how, if at all, its mission will (or must) change in future.
- Vision: An image of its future direction and what it intends to achieve.
- Clientele: its scope, meaning, thereby, its main clientele now and those in the future
- Resources: The resources and competences that create value for its clientele and how these will (or must) change to maintain and enhance the future value created.
- Present and Future: The foundations of its present competitive standing and future sustainability.
Difference Between Plan and Strategy
- Corporate strategy: It covers the overall direction followed by the company. It would spell out the general attitude of the company towards growing and managing its different business lines, products and services.
- Business strategy: It would normally be prepared at the level of the business unit or at the level of product or service and it normally highlights the improvement in the specific industry or market ranking of the business entity’s products or services produced or delivered by that business unit. A business strategy could be competitive or cooperative.
- Functional strategy: Refers to the approach adopted by functional areas for achieving the objectives of the business unit and the company by maximizing the productivity of available resources. For example, the functions of research and development and technology may turn out to be the prime contributors to the functional strategy. Another example is marketing function.
Elements of Strategic Management
Strategic management has the following four basic elements:
- Environmental Scanning: This refers to monitoring, evaluation and dissemination of information received from the internal and external environments. ‘SWOT Analysis’ is one of the easiest ways of conducting environment scanning. SWOT refers the Strengths, Weaknesses, Opportunities, and Threats, applicable to a specific organisation.
- Strategy Formulation: Strategy formulation requires, on the basis of information gathered from situation analysis, to set strategic direction through business mission and vision statements, and establish strategic objectives to reach there, and generate, evaluate and select corporate, business and functional strategies to pursue.
- Strategy Implementation: Strategy implementation is the fine art of detailing: what all is to be done, when various tasks are to be performed, where are they to be performed, how they are to be performed and who will perform. Strategy implementation is the process of executing the strategy – of taking the actions that put the strategy into effect and ensure that organizational decisions are consistent with it.
- Strategy Evaluation and Control: Strategy evaluation is a logical step to obtain feedback from strategy’s performance and taking corrective actions, if needed, in the light of constant external and internal changes.
Phases of Strategic Management
A business entity normally develops its strategy in the following four phases.
- Basic Budgetary Planning: This is an area where all managers, especially the Sales Managers, are involved for providing their views on the changes in the business environment, and propose the next year’s budget. In this exercise, normally not much analysis is conducted and the source of data is confined to internal sources, to a large extent.
- Forecast-based Planning: The usefulness of annual budgets is limited from the long-term perspective. This has prompted managers to go in for a model for a long-term. This necessitates the compilation of long-term environmental data in addition to the information available internally, so as to enable the managers to prepare plans for more than one year. Extrapolation techniques may be used here for predicting.
- Externally Oriented (Strategic) Planning: Assistance from outside consultants is sought, wherever sophistication and innovation for gathering information and for projecting future trends, is required. The approach is top-down and strategic planning is entrusted to key managers of the organization, led by top in-house planning experts.
- Integrated strategic plan/SM: The implementation, evaluation, and control of strategic plans were accorded due importance at this juncture and the plans also started factoring contingencies with the appreciation of the fact that perfect planning or forecast is not possible. So instead of an annual plan, strategic plans for longer term of five years were introduced with continuous review at shorter intervals.
Benefits of Strategic Management
The right strategy impacts a business entity’s performance positively. Strategic planning continues to attain more and more importance because of the ever-changing business environment.
The three most important benefits of strategic management are as under:
- The management gets a clearer sense of strategic vision of the business entity.
- Management is able to clearly focus on strategically important issues, faced by the entity.
- The dynamic environment can be better understood by management.
Business Environment Analysis
- A business does not operate in isolation and, to succeed, the management must understand the environment in which it operates.
- There are uncertainties, like technological changes and advancements, the ecological and social environment, the regulatory changes, political, social, cultural, and demographical changes, which can impact the performance of a business. The operating environment of a company like suppliers, customers, competitors etc. may also change. It is, therefore, imperative that a manager is able to analyse, understand and appreciate the business environment in which the organisation operates.
- A SWOT Analysis helps a lot in such situations. Effective managers must understand their external environment well and have to remain prepared for any eventualities and contingencies.
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